66. Current Liabilities. Текущие обязательства.

Current liabilities are defined as short-term obligations that will be paid within the current operating cycle of the business or within one year of the balance sheet date, whichever is longer. Analysts say that a company has liquidity if it has the ability to meet its current obligations. A number of financial ratios are useful in evaluating liquidity, including the current ratio and the quick ratio. The quick ratio is a conservative measure of liquidity, comparing only the most liquid assets (cash, marketable securities, and receivables) to current liabilities. In contrast, the current ratio includes all current assets in the numerator of the ratio.

Accounts Payable

Most companies do not produce all the goods and services that they use in their basic operating activities. Instead, they purchase some goods and services from other businesses. Typically, these transactions are made on credit with cash payments made after the goods and services have been provided. As a result, these transactions create accounts payable

Accrued Liabilities:

In many situations, a business incurs an expense in one accounting period and makes the cash payment in another period. Accrued liabilities are expenses that have been incurred before the end of an accounting period but have not been paid. These expenses include items such as property taxes, electricity, and salaries. Accrued liabilities are recorded as adjusting entries at year-end.

Notes Payable

When a company borrows money, a formal written contract is usually prepared. Obligations supported by these contracts are called notes payable. A note payable specifies the amount borrowed, the date by which it must be repaid, and the interest rate associated with the borrowing.

Current Portion of Long-Term Debt

The distinction between current and long-term debt is important for both managers and analysts. Because current debt must be paid within the next year, companies must have sufficient cash to repay it. To provide accurate information on its current liabilities, a company must reclassify its long-term debt as a current liability within a year of its maturity date.

Deferred Revenues

When a company collects cash before the related revenue has been earned, the cash is called deferred revenues. The advantage for the customer is convenience at the point of sale. Under the revenue principle, revenue cannot be recorded until it has been earned. Deferred revenues are reported as a liability because cash has been collected but the related revenue has not been earned by the end of the accounting period. The obligation to provide services or goods in the future still exists. These obligations are classified as current or long-term, depending on when they must be satisfied.

Working Capital Management

Working capital is the dollar difference between total current assets and total current liabilities.

67. Long Term Liabilities. Долгосрочные обязательства.

Long-term liabilities include all obligations that are not classified as current liabilities, such as long-term notes payable and bonds payable. Typically, a long-term liability will require payment more than one year in the future. Borrowing money may create these obligations, or they may result from other activities. Most companies borrow money on a long-term basis in order to purchase operational assets. To reduce risk for creditors, some companies agree to use specific assets as security. If the liability is not satisfied, the creditor may take ownership of the asset. A liability supported by this type of agreement is called a secured debt. An unsecured debt is one for which the creditor relies primarily on the borrower’s integrity and general earning power.

Long-Term Notes Payable and Bonds

Companies can raise long-term debt capital directly from a number of financial service organizations including banks, insurance companies, and pension plans. Raising debt from one of these organizations is known as private placement. This type of debt is often called a note payable, which is a written promise to pay a stated sum at one or more specified future dates called the maturity date(s).

In many cases, a company’s need for debt capital exceeds the financial ability of any single creditor. In these situations, the company may issue publicly traded debt called bonds. The opportunity to sell a bond in established markets provides bondholders with an important benefit. Because bonds provide liquidity to investors, they are more likely to lend money to a company.

Accounting for long-term debt is based on the same concepts used in accounting for short-term notes payable. A liability is recorded when the debt is incurred and interest expense is recorded with the passage of time.

Lease Liabilities

When a company leases an asset on a short-term basis, the agreement is called an operating lease. No liability is recorded when an operating lease is created. Instead, a company records rent expense as it uses the asset. For a number of reasons, a company may prefer to lease an asset on a long-term basis rather than purchase it. This type of lease is called a capital lease. In essence, a capital lease contract represents the purchase and financing of an asset even though it is legally a lease agreement. Unlike an operating lease, capital leases are accounted for as if an asset had been purchased by recording an asset and a liability. It is considered a capital lease:

• The lease term is 75 percent or more of the asset’s expected economic life.

• Ownership of the asset is transferred to the lessee at the end of the lease term.

• The lease contract permits the lessee to purchase the asset at a price that is lower than its fair market value.

• The present value of the lease payments is 90 percent or more of the fair market value of the asset when the lease is signed.

Deferred Taxes

Most companies report a large long-term liability called deferred taxes. The deferred tax liability is reported in the notes to its financial statements. Because separate rules govern the preparation of financial statements (GAAP) and tax returns (Internal Revenue Code), income tax expense and current taxes payable often differ in amount. To reflect this difference, companies establish a separate account called Deferred Taxes. In practice, deferred taxes can be either assets (such as taxes related to cash collected in advance from a customer, which is taxable before it is reported as a revenue on the income statement) or liabilities (such as taxes related to depreciation, which is reported on the tax return before it is reported on the income statement). When a deferred tax liability reverses, the deferred tax amount is reduced, and the company pays more taxes to the IRS than the amount of income tax expense reported on the income statement.