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Unformatted text preview: Ch. 11: Long-term Liabilities 1 Chapter 11 Long-term Liabilities In this chapter you will learn how long-term liabilities affect businesses, how they are controlled, accounted for, and reported in financial statements. What Are Long-term Liabilities? As discussed in Chapter 10, when companies obtain resources by borrowing 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, 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. Repeating the Chapter 10 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, long-term 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 Notes Payable (10) Accounts Payable (10) Taxes Payable (10) Current Portion of Long-term Debt (10) Long-term Liabilities (11) + Stockholders' Equity Revenues Sales (7) Sales Returns & Allowances (7) Cost of Goods Sold (8) Operating Expenses Uncollectible Accts. Expense (7) Depreciation Exp. (9) Salary & Wages Expense (10) Payroll Taxes Expense (10) Bank Service Exp. (6) Other Revenues & Expenses Interest Revenue (6) Interest Expense (6) Gain or Loss on Disposal of Prop., Plt., & Eq. (9) Income Taxes Expense (10) Exhibit 11-1 presents long-term liabilities for three merchandising companies and compares them to the companies' total assets. As the data show, there are many differences among the companies. For example, Wal-Mart's long- term liabilities were approximately $36 billion while Federated Department Stores' were approximately $11 billion. The data also show long-term 2 Ch. 11: Long-term Liabilities liabilities are the sources of approximately 30% of the resources (assets) of the three companies. Since the companies obtained 30% of their assets through long-term liabilities, the other 70% must have come from current liabilities, owners' investments, or management operations (net income). Current liabilities were examined in Chapter 10. Owners' investments and management operations will...
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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