BU227 Lecture : Chapter 10
Document Summary
Liabilities: debts/obligations arising from past transactions that will be paid with assets or services. When a liability is first recorded, it is measured in terms of its current cash equivalent, which is the cash amount that a creditor would accept to settle the liability immediately. Interest payable in the future is not included in the amount of the liability because it accrues and becomes a liability. Current liabilities: st obligations paid within the normal operating cycle or 1 year (longer) Because most companies have an operating cycle that is shorter than one year, current liabilities usually are due within one year. Liquidity is the ability to pay current obligations. Current ratio = current assets current liabilities. A high ratio normally suggests good liquidity, but too high a ratio suggests inefficient use of indicator of the amount of current assets available to satisfy current liabilities resources. An old guideline was between 1 and 2.
