Current Liabilities | Intermediate Accounting | CPA Exam FAR | Ch 13 P 1

Current Liabilities | Intermediate Accounting | CPA Exam FAR | Ch 13 P 1

















Current Liabilities | Intermediate Accounting | CPA Exam FAR | Ch 13 P 1





liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”3“Elements of Financial Statements of Business Enterprises,” Statement of Financial Accounting Concepts No. 6 (Stamford, Conn.: FASB, 1980). In other words, a liability has three essential characteristics:
1.It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
2.It is an unavoidable obligation.
3.The transaction or other event creating the obligation has already occurred.
Because liabilities involve future disbursements of assets or services, one of their most important features is the date on which they are payable. A company must satisfy currently maturing obligations in the ordinary course of business to continue operating. Liabilities with a more distant due date do not, as a rule, represent a claim on the company’s current resources. They are therefore in a slightly different category. This feature gives rise to the basic division of liabilities into (1) current liabilities and (2) long-term debt.

Recall that current assets are cash or other assets that companies reasonably expect to convert into cash, sell, or consume in operations within a single operating cycle or within a year (if completing more than one cycle each year). Current liabilities are “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.” [2] This definition has gained wide acceptance because it recognizes operating cycles of varying lengths in different industries. This definition also considers the important relationship between current assets and current liabilities. [3]

The operating cycle is the period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections. Industries that manufacture products requiring an aging process, and certain capital-intensive industries, have an operating cycle of considerably more than one year. On the other hand, most retail and service establishments have several operating cycles within a year.

Here are some typical current liabilities:
1.Accounts payable.
2.Notes payable.
3.Dividends payable.
4.Customer advances and deposits.
5.Unearned revenues.
6.Sales taxes payable.
7.Income taxes payable.
8.Employee-related liabilities.
9.Current maturities of long-term debt.
10.Short-term obligations expected to be refinanced.