This article is the fourth week’s lesson in theÂ ModernGraham AcademyÂ beginner’s course, An Introduction the the Balance Sheet.Â The ModernGraham Academy is a place to learn about the basics of investing, with an emphasis on the ModernGraham approach.
This course will be a detailed look at the balance sheet, starting with a basic overview, then a look at each part of the statement individually, and finishing up with a review and some final comments.
An assignment is given each week; if the assignment is completed before the next week’s lesson and emailed to ben AT moderngraham.com (replace the “AT” with @), feedback will be provided.
What are Current Liabilities?
Current Liabilities are the debts a company owes that are due within one year. Â These are the things a company must be able to repay in the very near future and can have a direct impact on the cash available for reinvestment.
Here are some of the main types of current liabilities, and some things to consider about each type.
- Accounts PayableÂ – Accounts payable are debts owed in the 30 to 60 day time frame, and typically include payments for things purchased from vendors.
- Current Payments Due on Long-term DebtÂ – Clearly, this includes any payments due on a long-term debt obligation. Â For example, if a company borrows $100,000 at 8% interest, then the $8,000 interest payment will appear as a current liability.
- Dividends PayableÂ – If the company has declared a dividend, then the amount of cash needed to supply the dividend will appear as a current liability, because it is then money owed to shareholders.
- Income Tax Payable – This one is self-explanatory, but it is the amount of income tax the company must pay in the next twelve months.
- Payroll LiabilitiesÂ – Assuming a company operates using the accrual accounting method (almost all of them do), then any payroll obligations that have accrued but have not yet been paid will appear as a current liability.
- Short-term NotesÂ – If a company has a cash flow issue, it may need to take out a short-term borrowing obligation. Â This is also called a working capital loan.
- Unearned Revenue – Another product of the accrual-based accounting method, this category of current liabilities consists of revenue that has been paid to the company but has not yet been earned. Â Since the company hasn’t earned the money, it is considered a liability rather than an asset.
This week, please discuss the following question with a one paragraph response in a comment to this post:Â How could a large amount of current liabilities affect a company’s ability to earn a profit?
An Introduction to the Balance Sheet Course Overview
- Week 1:Â What is it, Why is it important, and Where can it be found?
- Week 2:Â Current Assets
- Week 3: Non-current Assets
- Week 4: Current Liabilities
- Week 5: Non-current Liabilities
- Week 6: Equity
- Week 7: Key Issues and Review
- Week 8: Final Comments
Photo provided byÂ iBoy_Daniel