Chapter 10.docx

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Financial Accounting
G.Quan Fun

MGTB06 Chapter 10: Reporting and Interpreting Current Liabilities Liabilities: debts or 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. Current Liability: short-term obligations that will be paid within the normal operating cycle or one year, whichever is longer Liquidity: the ability to pay current obligations Current Ratio = Current Assets / Current Liabilities Working capital = Current Assets – Current Liabilities The working capital accounts are actively managed to achieve a balance between costs and benefits. If a business has too little working capital, it runs the risk of not being able to meet its obligations to creditors. Too much working capital may tie up resources in unproductive assets and incur additional costs. Excess inventory ties up funds that could be invested more profitably elsewhere in the business incur additional costs associated with storage and deterioration Liabilities are very important from an analytical perspective because they affect a company’s future cash flows and risk characteristics. Current liabilities are grouped according to type of creditor, separating liabilities owed to suppliers and other trade creditors form those owed to banks, providers of services, governments, and others. Most of these liabilities are recorded as they occur during the accounting period, as in the case of trade payables for merchandise purchases, loans from banks, and notes payable to creditors. Trade credit is a relatively inexpensi
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