Course 302: The Balance Sheet
Current Liabilities
In this course
1 Introduction
2 Assets, Liabilities, and Equity--It All Equals Out
3 Current Assets
4 Noncurrent Assets
5 Current Liabilities
6 Noncurrent Liabilities
7 Equity
8 The Bottom Line

Now that we're more familiar with what a company owns, let's move to the other side of the balance sheet, what it owes. Similar to assets, there are two main categories of liabilities: current liabilities and noncurrent liabilities.

Obligations the firm must pay within a year are known as current liabilities. The main line items you should be concerned with in this category are short-term debt and accounts payable.

Short-Term Debt. This refers to money the company has borrowed for a term of less than one year. It's often in the form of a line of credit that may be drawn down at the company's discretion. Typically, the proceeds are used for short-term needs. Often, the amount of long-term debt that must be paid back within one year is also lumped into this line item. The amount of short-term borrowings is an important figure, especially if a company is in financial distress or pays a high dividend, because the entire amount must be paid back relatively quickly, leaving little wiggle room.

Accounts Payable. Accounts payable represents bills the company owes for goods or services it hasn't paid for yet. It is the opposite of accounts receivable, and generally speaking, investors like to see the opposite trends for the two line items. For example, with receivables, we'd prefer a company to collect what it's owed as soon as possible. However, if a company can postpone paying what it owes for a longer period of time--without getting in trouble--it will hold on to its cash for a longer period of time, a plus for cash flow.

Next: Noncurrent Liabilities >>

Print Lesson |Feedback | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2010 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.