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Unformatted text preview: Ch. 10: Current Liabilities 1 Chapter 10 Current Liabilities In this chapter you will learn how current liabilities affect businesses, how they are controlled, accounted for, and reported in financial statements. What Are Current Liabilities? As you remember from previous chapters, one way in which companies obtain resources is to borrow them. The resources are called assets and the sources of the resources are called liabilities. If the dollar amount of the borrowed resources must be paid within one year to the company or person from whom the resources were obtained, the liabilities are considered to be current liabilities. If, on the other hand, the resources do not have to be paid for within a year, the liabilities are considered long-term liabilities. For example, if a company borrows $100,000 from a bank on January 15, the result could be an increase in resources (cash) and an increase in liabilities (notes payable). If the cash must be repaid to the bank by July 15, six months after it was borrowed, the notes payable would be considered current liabilities. If the cash must be repaid to the bank by July 15, 18 months after it was borrowed, the notes payable would be considered long- term liabilities. In terms of the accounting equation, current liabilities are obviously liabilities, as shown below. The numbers in parentheses refer to the chapters in which the items are discussed. Assets Current Assets Cash and Cash Equivalents (6) Accts. Receivable (7) Allow. for Uncoll. Accounts (7) Merchandise Inventory (8) Property, Plant, & Equipment Land (9) Buildings (9) Accum. Depr., Buildings (9) Equipment (9) Accum. Depr., Equipment (9) Autos & Trucks (9) Accum. Depr., Autos & Trucks (9) = Liabilities Current Liabilities (10) + Stockholders' Equity Revenues Sales (7) Sales Returns & Allowances (7) Cost of Goods Sold (8) Operating Expenses Uncollectible Accts. Expense (7) Depreciation Exp. (9) Bank Service Exp. (6) Other Revenues & Expenses Interest Revenue (6) Interest Expense (6) Gain or Loss on Disposal of Prop., Plt., & Eq. (9) The dollar amount of current liabilities differs from company to company. Exhibit 10-1 presents current liabilities for three merchandising companies and compares them to the companies' total assets. As Exhibit 10-1 shows, there are many differences among the companies. For 2 Ch. 10: Current Liabilities example, on January, 31, 2007, Wal-Mart's current liabilities were approximately $52 billion while Federated Department Stores’ were approximately $6 billion. The data show current liabilities are sources of approximately 30% of the resources (assets) of the three companies. Since 30% of the assets of the companies were obtained through current liabilities, the other 70% must have come from long-term liabilities, owners' investments, or management operations (net income). These other sources of resources will be examined in following chapters....
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This note was uploaded on 10/09/2011 for the course ACCT 60.201 taught by Professor Monty during the Spring '11 term at UMass Lowell.
- Spring '11
- Financial Accounting