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    the following items appear on the balance sheet of a company with a one-year operating cycle. identify each item as a current liability, a long-term liability, or not a liability.

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    The following items appear on the balance sheet of a company with a two

    Answer to: The following items appear on the balance sheet of a company with a two-month operating cycle. Identify the proper classification of...

    Question:

    The following items appear on the balance sheet of a company with a two-month operating cycle. Identify the proper classification of each item as follows: Cif it is a current liability, Lif it is a long-term liability or Nif it is not a liability.

    1. Sales taxes payable.

    2. Notes payable (due in 6 to 12 months).

    3. FUTA taxes payable.

    4. Notes payable (due in 120 days).

    5. Accounts receivable.

    6. Current portion of long-term debt.

    7. Accrued payroll payable.

    8. Notes payable (mature in five years).

    9. Wages payable.

    10. Notes payable (due in 13 to 24 months)

    Liabilities:

    Liabilities are financial obligations which aroused from past transactions of the company. Liabilities could either be short-term or long-term, depending on the due dates.

    Answer and Explanation: 1

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    Cif 1. Sales taxes payable.

    _Lif 2. Notes payable (due in 6 to 12 months).

    Cif 3. FUTA taxes payable.

    Cif 4. Notes payable (due in 120 days).

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    The following items appear on the balance sheet of a company with a two

    Source : study.com

    Current Liabilities Definition

    Current liabilities are a company's debts or obligations that are due to be paid to creditors within one year.

    What Are Current Liabilities?

    Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. An operating cycle, also referred to as the cash conversion cycle, is the time it takes a company to purchase inventory and convert it to cash from sales. An example of a current liability is money owed to suppliers in the form of accounts payable.

    Key Takeaways

    Current Liabilities

    Understanding Current Liabilities

    Current liabilities are typically settled using current assets, which are assets that are used up within one year. Current assets include cash or accounts receivables, which is money owed by customers for sales. The ratio of current assets to current liabilities is an important one in determining a company's ongoing ability to pay its debts as they are due.

    Accounts payable is typically one of the largest current liability accounts on a company's financial statements, and it represents unpaid supplier invoices. Companies try to match payment dates so that their accounts receivables are collected before the accounts payables are due to suppliers.

    For example, a company might have 60-day terms for money owed to their supplier, which results in requiring their customers to pay within a 30-day term. Current liabilities can also be settled by creating a new current liability, such as a new short-term debt obligation.

    Below is a list of the most common current liabilities that are found on the balance sheet:

    Sometimes, companies use an account called "other current liabilities" as a catch-all line item on their balance sheets to include all other liabilities due within a year that are not classified elsewhere. Current liability accounts can vary by industry or according to various government regulations.

    Analysts and creditors often use the current ratio. The current ratio measures a company's ability to pay its short-term financial debts or obligations. The ratio, which is calculated by dividing current assets by current liabilities, shows how well a company manages its balance sheet to pay off its short-term debts and payables. It shows investors and analysts whether a company has enough current assets on its balance sheet to satisfy or pay off its current debt and other payables.

    The quick ratio is the same formula as the current ratio, except it subtracts the value of total inventories beforehand. The quick ratio is a more conservative measure for liquidity since it only includes the current assets that can quickly be converted to cash to pay off current liabilities.

    A number higher than one is ideal for both the current and quick ratios since it demonstrates there are more current assets to pay current short-term debts. However, if the number is too high, it could mean the company is not leveraging its assets as well as it otherwise could be.

    Although the current and quick ratios show how well a company converts its current assets to pay current liabilities, it's critical to compare the ratios to companies within the same industry.

    The analysis of current liabilities is important to investors and creditors. Banks, for example, want to know before extending credit whether a company is collecting—or getting paid—for its accounts receivables in a timely manner. On the other hand, on-time payment of the company's payables is important as well. Both the current and quick ratios help with the analysis of a company's financial solvency and management of its current liabilities.

    Accounting for Current Liabilities

    When a company determines it received an economic benefit that must be paid within a year, it must immediately record a credit entry for a current liability. Depending on the nature of the received benefit, the company's accountants classify it as either an asset or expense, which will receive the debit entry.

    For example, a large car manufacturer receives a shipment of exhaust systems from its vendors, with whom it must pay $10 million within the next 90 days. Because these materials are not immediately placed into production, the company's accountants record a credit entry to accounts payable and a debit entry to inventory, an asset account, for $10 million. When the company pays its balance due to suppliers, it debits accounts payable and credits cash for $10 million.

    Suppose a company receives tax preparation services from its external auditor, with whom it must pay $1 million within the next 60 days. The company's accountants record a $1 million debit entry to the audit expense account and a $1 million credit entry to the other current liabilities account. When a payment of $1 million is made, the company's accountant makes a $1 million debit entry to the other current liabilities account and a $1 million credit to the cash account.

    Example of Current Liabilities

    Below is a current liabilities example using the consolidated balance sheet of Macy's Inc. (M) from the company's 10Q report reported on Aug. 03, 2019.1

    Image

    Why Do Investors Care About Current Liabilities?

    The analysis of current liabilities is important to investors and creditors. Banks, for example, want to know before extending credit whether a company is collecting—or getting paid—for its accounts receivables in a timely manner. On the other hand, on-time payment of the company's payables is important as well. Both the current and quick ratios help with the analysis of a company's financial solvency and management of its current liabilities.

    What Are Some Current Liabilities Listed on a Balance Sheet?

    The most common current liabilities found on the balance sheet include accounts payable, short-term debt such as bank loans or commercial paper issued to fund operations, dividends payable. notes payable—the principal portion of outstanding debt, current portion of deferred revenue, such as prepayments by customers for work not completed or earned yet, current maturities of long-term debt, interest payable on outstanding debts, including long-term obligations, and income taxes owed within the next year. Sometimes, companies use an account called "other current liabilities" as a catch-all line item on their balance sheets to include all other liabilities due within a year that are not classified elsewhere.

    What Is Current Ratio?

    Analysts and creditors often use the current ratio which measures a company's ability to pay its short-term financial debts or obligations. The ratio, which is calculated by dividing current assets by current liabilities, shows how well a company manages its balance sheet to pay off its short-term debts and payables. It shows investors and analysts whether a company has enough current assets on its balance sheet to satisfy or pay off its current debt and other payables.

    What Are Current Assets?

    Current assets represent all the assets of a company that are expected to be conveniently sold, consumed, used, or exhausted through standard business operations with one year. Current assets appear on a company's balance sheet and include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. Current liabilities are typically settled using current assets.

    Current Liabilities Definition

    Source : www.investopedia.com

    accounting

    accounting - accounting - The balance sheet: A balance sheet describes the resources that are under a company’s control on a specified date and indicates where these resources have come from. As an overview of the company’s financial position, the balance sheet consists of three major sections: (1) the assets, which are probable future economic benefits owned or controlled by the entity; (2) the liabilities, which are probable future sacrifices of economic benefits; and (3) the owners’ equity, calculated as the residual interest in the assets of an entity after deducting liabilities. The list of assets shows the forms in which the company’s resources are lodged; the

    The statement of cash flows

    Companies also prepare a third financial statement, the statement of cash flows. Cash flows result from three major aspects of the business: (1) operating activities, (2) investing activities, and (3) financing activities. These three categories are illustrated in Table 3.

    The cash flow statement is distinct from an income statement, but the two statements are similar in that they summarize activities over a period of time. In the accompanying example, cash amounting to $19 was received from the sale of the investment; the income statement included only the $5 gain—the difference between the sale proceeds and $14, the amount at which the investment had been shown in the balance sheet before it was sold. Since net income, the top lines in Table 3, included the $5 gain, the company could not include the full net income and the full cash proceeds from the sale of the investment, because that would have counted the $5 twice. Instead, Any Company, Inc., subtracted the $5 from net income (line 5 in the table) and reported the full $19 below, under cash from investing activities.

    The income statement differs from the cash flow statement in other ways, too. Cash was received from the issuance of bonds and was paid to shareowners as dividends; neither of those figured in the income statement. Cash was also paid to purchase equipment; this added to the plant and equipment assets but was not subtracted from current revenues because it would be used for many years, not just this one.

    Cash from operations is not the same as net income (revenues minus expenses). For one thing, not all revenues are collected in cash. Revenue is usually recorded when a customer receives merchandise and either pays for it or promises to pay the company in the future (in which case the revenue is recorded in accounts receivable). Cash from operating activities, on the other hand, reflects the actual cash collected, not the inflow of accounts receivable. Similarly, an expense may be recorded without an actual cash payment.

    Table 3 adds items not requiring immediate cash payment to income (e.g., depreciation) and subtracts items that appear in the income statement but are not part of the results of operations (e.g., the gain on the sale of a long-term investment). The bottom line shows that the company’s stock of cash and marketable securities increased by $35 during the year.

    The purpose of the statement of cash flows is to throw light on management’s use of the financial resources available to it and to help the users of the statements to evaluate the company’s liquidity—its ability to pay its bills when they come due.

    Consolidated statements

    Most large corporations in the United States and in other industrialized countries own other companies. Their primary financial statements are consolidated statements, reflecting the total assets, liabilities, owners’ equity, net income, and cash flows of all the corporations in the group. Thus, for example, the consolidated balance sheet of the parent corporation (the corporation that owns the others) does not list its investments in its subsidiaries (the companies it owns) as assets; instead, it includes their assets and liabilities with its own.

    Some subsidiary corporations are not wholly owned by the parent; that is, some shares of their common stock are owned by others. The equity of these minority shareholders in the subsidiary companies is shown separately on the balance sheet. For example, if Any Company, Inc., had minority shareholders in one or more subsidiaries, the owners’ equity section of its December 31, 20__, balance sheet might appear as follows:

    Example calculations.

    The consolidated income statement also must show the minority owners’ equity in the earnings of a subsidiary as a deduction in the determination of net income. For example:

    Example calculations.

    Disclosure and auditing requirements

    A corporation’s obligations to issue financial statements are prescribed in the company’s own statutes or bylaws and in public laws and regulations. The financial statements of most large and medium-size companies in the United States fall primarily within the jurisdiction of the SEC. The SEC has a good deal of authority to prescribe the content and structure of the financial statements that are submitted to it. Similar authority is vested in provincial regulatory bodies and in the stock exchanges in Canada; disclosure in the United Kingdom is governed by the provisions of the Companies Act. In Japan financial accounting is guided by three laws: the Commercial Code of Japan, the Securities and Exchange law, and the Corporate Income Tax law.

    A company’s financial statements are ordinarily prepared initially by its own accountants. Outsiders review, or audit, the statements and the systems the company used to accumulate the data from which the statements were prepared. In most countries, including the United States, these outside auditors are selected by the company’s shareholders. The audit of a company’s statements is ordinarily performed by professionally qualified, independent accountants who bear the title of certified public accountant (CPA) in the United States and chartered accountant (CA) in the United Kingdom and many other countries with British-based accounting traditions. Their primary task is to investigate the company’s accounting data and methods carefully enough to permit them to give their opinion that the financial statements present fairly the company’s position, results, and cash flows.

    accounting

    Source : www.britannica.com

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