Chapter 10 Reporting and Interpreting Current Liabilities

Chapter 10 Reporting and Interpreting Current Liabilities -...

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Chapter 10: Reporting and Interpreting Current Liabilities November 21, 2013 5:47 PM LIABILITIES DEFINED AND CLASSIFIED Interest payable in the future not included in the amount of the liability b/c it accrues and becomes a liability within time Current liabilities: short-term obligations that will be paid within the normal operating cycle or one year, whichever is longer A company has liquidity if it has ability to pay current obligations Current Ratio (RATIO) Current ratio = _current assets_ current liabilities High ratio suggests good liquidity TOO high = inefficient use of resources Old: companies should have b/w 1 and 2 Now: below 1 May be misleading if significant funds tied up in assets that are not easily converted into cash High ratio company may still have liquidity problems if majority of current assets are slow- moving inventory Working capital: difference b/w current assets and current liabilities o Too little = risk of not being able to meet obligations to creditors o Too much = tie up resources in unproductive assets and incur additional costs Liabilities affect future cash flows and risk characteristics Current liabilities grouped according to type of creditor Other liabilities wont know exact amount with certainty until future event, but must be estimated and recorded o Liability for product warranty CURRENT LIABILITIES Trade Payables
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  • Fall '08
  • Current Liabilities, Generally Accepted Accounting Principles

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