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