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Current Liabilities

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Current Liabilities are obligations of a company that a company is required to settle within one year or expected to settle within its normal operating cycle. Current liabilities are short-term liabilities.

Liabilities are financial obligation which requires transfer assets (such as cash) for settlement. The liabilities are mainly classified into current and non-current liabilities based on the case of the liabilities for their settlement. The current assets and current liabilities are segregated to help to evaluate a company’s liquidity position by creditors, debt-holders, and investors.

The some common type of current liabilities are:

  • Account payable
  • Salaries payable
  • Short – term debt payable
  • Short – term note payable
  • Current tax payable
  • Accrued expenses
  • Dividends payable

The current type of liabilities is expected to pay off within a normal operating cycle. Account payable Salaries payable, current tax payable, Accrued expenses are expected to pay off within normal operating cycle. Short-term debt payable, short-term notes payables, and current lease liability represent that portion of the relevant long term liability which are due within next month. Dividend payable is a current liability because corporate laws normally require them to be paid within a certain period after the declaration date.

Example of current liabilities

  • Trade payables are $110 million (of which US$10 million should be due on October 15, 2017)
  • Salary payable of $45 million
  • Pension liabilities of $550 million (of which $10 million will be paid in the next 12 months)
  • Current tax payable 12 million
  • Net deferred tax liabilities of $22 million
  • The total lease liability is $25 million (of which $4 million is the current portion of the financial lease, and $3 million is related to operating leases payable within 12 months)
  • On August 14, 2019, it announced that it would pay a dividend of $15 million and paid it on September 14, 2019.
  • The long-term loan payable to the bank is $500 million (of which $120 million will expire in the next 12 months and the company cannot reschedule on its own)
  • Notes payable $40 million (USD 10 million, due within 12 months)

Assuming that total assets and non-current assets are $2000 million and $1500 million, show the information about current liabilities to assess liquidity and solvency of a company.

Solution:

Amounts are in USDs in million

ItemTotal LiabilitiesCurrent LiabilitiesNon-Current LiabilitiesExplanation
a1101100Trade payable also current liability even if payable after 12 months.
b45450Salaries are paid during normal operating activities.
c55010540Non – current liability includes pension payable excluding the current parts.
d12120Current tax is payable within normal operating cycle
e22022Deferred tax liability are classified as non- current as per IFRS.
f25718Finance lease plus operation lease includes current portion
g15150Dividends are expected to be paid within 12 months
h500120380$120 million is the current portion because it is ‘unconditionally’ due within 12 months.
i401030The amount due within 12 months is classified as current.
Total1319329990 

Therefore, current asset = total assets – non -current assets = $2000-$1500= $500

Since current liabilities are $439 million and current assets are $500 million, the current ratio is 1.13. This means that the company has enough current assets (that is, assets that will be converted into cash within the next 12 months) to repay its short-term debt.

Solvency is assessed by the debt ratio, which compares total assets to total liabilities. Debt ratio is 0.75 (= $ 1,319 / $ 1,910), which indicates that 69% of the company’s assets are financed by debt, so the total assets are sufficient to meet the debt in crisis.

Information about the timing of cash inflows and cash outflows is very important, especially in the short-term, which is why liabilities and assets are classified into current and non-current components to assess short-term and long-term financial conditions.

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