Short- term deferrals (prepaids and unearned revenues) are classified as current assets and current liabilities. As such, they are included in working capital.

Required:
a. Some argue that prepaids will not generate cash and hence are not liquid assets.
i. Why do accountants include short-term prepaids as current assets? Do they meet the definition of assets found in the conceptual framework? Do they provide working capital? Explain.
ii. Present arguments for excluding prepaids from current assets. Do they provide liquidity? Explain.
b. Some argue that deferred liabilities will not be “paid.” Why do accountants include short- term unearned revenues as current liabilities? Do they meet the definition of liabilities found in the conceptual framework? Do they affect working capital? Explain.
c. Present arguments for excluding unearned revenues from current liabilities. Do they affect liquidity? Explain.