AFM 101 Chapter 10 Notes - AFM 101 Chapter 10 Liabilities...

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AFM 101 Chapter 10 Liabilities Defined and Classified They are obligations or debts resulting from past transactions - Current liabilities are due within one year - All others are long term - Separated into groups like trades payable, notes etc - Some are updated during the period, others adjusted at the end - Some liability values are uncertain and must b estimated, like warrantees o You must wait until the service is performed to find the exact value - Liquidity can be defined as the ability to pay current obligations Current Ratio Answers: Does the company currently have the resources to pay its short term debt? Current Ratio = - A high ratio suggests good liquidity but too high means that the company is not using its resources efficiently - A good range is between 1 and 2 Cautions - Current ratio could be misleading because some current assets may still take some time before it is converted to cash - Company may have slow moving inventory so their ratio is high Working capital: difference between current asset and liabilities - You should have some to make sure you can pay off unexpected needs and creditors - Too much is bad because it can be used for something else such as investing - Good measure for liquidity Current Liabilities Trades Payable: used when a company purchases goods and services for their operations from a supplier. These transactions are usually done on credit
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  • Fall '08
  • KENNEDY
  • Balance Sheet, Current Liabilities, Generally Accepted Accounting Principles, long term debt

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