long-term liabilities

Examples of long-term liabilities in the following topics:

• Reporting Long-Term Liabilities

  • Debts that become due more than one year into the future are reported as long-term liabilities on the balance sheet.
  • This is an example of a long-term liability.
  • "Notes Payable" and "Bonds Payable" are also examples of long-term liabilities, and they often introduce an interesting distinction between current liabilities and long-term liabilities presented on a classified balance sheet.
  • What this example presents is the distinction between current liabilities and long-term liabilities.
  • Despite a Note Payable, Bonds Payable, etc., starting out as a long-term liability, the portion of that debt that is due within a year has to be backed out of the long-term liability and reported as a current liability.

• Current Maturities of Long-Term Debt

  • The portion of long-term liabilities that must be paid in the coming 12-month period are classified as current liabilities.
  • Long-term liabilities are liabilities with a due date that extends over one year, such as a notes payable that matures in 2 years.
  • Examples of long-term liabilities are debentures, bonds, mortgage loans and other bank loans (it should be noted that not all bank loans are long term since not all are paid over a period greater than one year. ) Also long-term liabilities are a way for a company to show the existence of debt that can be paid in a time period longer than one year, a sign that the company is able to obtain long-term financing .
  • The portion of long-term liabilities that must be paid in the coming 12-month period are classified as current liabilities.
  • The portion of the liability considered "current" is moved from the long-term liabilities section to the current liabilities section.

• Analyzing Long-Term Liabilities

  • Analyzing long-term liabilities combines debt ratio analysis, credit analysis and market analysis to assess a company's financial strength.
  • Long-term liabilities are obligations that are due at least one year into the future, and include debt instruments such as bonds and mortgages.
  • Analyzing long-term liabilities is done for assessing the likelihood the long-term liability's terms will be met by the borrower.
  • After analyzing long-term liabilities, an analyst should have a reasonable basis for a determining a company's financial strength.
  • Analyzing long-term liabilities is necessary to avoid buying the bonds of, or lending to, a company that may potentially become insolvent.

• Reporting Current Liabilities

  • Liabilities are disclosed in a separate section that distinguishes between short-term and long-term liabilities.
  • Short-term, or current liabilities, are listed first in the liability section of the statement because they have first claim on company assets.
  • In addition to current liabilities, long-term liabilities are listed in a separate section after current debt.
  • Long-term liabilities can include bonds, mortgages, and loans that are payable over a term exceeding one year.
  • However, for all long-term liabilities, any amounts due in the current fiscal year are reported under the current liability section.

• Classifying Liabilities

  • The two main categories of these are current liabilities and long-term liabilities.
  • Other long-term obligations, such as bonds, can be classified as current because they are callable by the creditor.
  • Long-term liabilities are reasonably expected not to be liquidated or paid off within the span of a single year.
  • These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.
  • Contingent liabilities can be current or long-term.

• Debt-to-Equity Ratio

  • Debt is typically a long-term liability that represents a company's obligation to pay both principal and interest to purchasers of that debt.
  • Equity represents ownership of a company, and does not include any agreed upon repayment terms.
  • Returns to purchasers of debt are limited to agreed- upon terms (i.e., interest rates), however, they have greater legal protection in the event of a bankruptcy.
  • When used to calculate a company's financial leverage , the debt-to-equity ratio includes only long-term liabilities in the numerator and can even go a step further to exclude the current portion of the long-term liabilities.
  • This means that other short-term liabilities, such as accounts payable, are excluded when calculating the debt-to-equity ratio.

• Reporting Contingencies

  • Contingencies are reported as liabilities if it is probable they will incur a loss, and their amounts can be reasonably estimated.
  • The amount for repairs occurring in year one is reported in the current liability section of the balance sheet; the portion relating to major repairs in three years is disclosed as long-term liability.
  • As the warranty claims are made, the liability account is debited and cash is credited for the cost of the repair.
  • The long-term liability warranty provision is moved to the current liability section in the accounting period occurring three years after the product sale.
  • Such contingent liabilities can be estimated reliably based on historical cost and readily available information.

• Defining Liabilities

  • A liability is defined as an obligation of an entity arising from past transactions/events and settled through the transfer of assets.
  • A liability is defined by the following characteristics:
  • Any type of borrowing from persons or banks for improving a business or personal income that is payable in the current or long term.
  • Types of liabilities found on a company's balance sheet include: current liabilities like notes payable, accounts payable, interest payable, and salaries payable.
  • Long-term liabilities have maturity dates that extend past one year, such as bonds payable and pension obligations.

• Acid Test Ratio

  • The acid-test, or quick ratio, measures the ability of a company to use its near cash or quick assets to pay off its current liabilities.
  • In contrast, if the business has negotiated fast payment terms with customers and long payment terms from suppliers, it may have a very low quick ratio yet good liquidity .
  • The sum is then divided by current liabilities.
  • Note that the calculation omits inventory and a different version of the formula involves subtracting inventory from current assets and dividing by current liabilities.
  • A company with a quick ratio of less than 1 cannot currently pay back its short-term liabilities.

• Defining Current Liabilities

  • Liabilities are reported on the balance sheet, along with assets and owner's equity.
  • A liability is defined by one of the following characteristics:
  • A borrowing of funds from individuals or banks for improving a business or personal income that is payable during a short or long time period.
  • A current liability can be defined in one of two ways: (1) all liabilities of the business that are to be settled in cash within a firm's fiscal year or operating cycle, whichever period is longer or (2) all liabilities of the business that are to be settled by current assets or by the creation of new current liabilities.
  • A current liability, such as a credit purchase, can be documented with an invoice.