Managing Current Liabilities
Running head: MANAGING CURRENT LIABILITIES
Managing Current Liabilities:
The Great Balancing Act
06/26/2011
One of the most crucial steps in running a major corporation is ensuring that the balance sheet truly reflects the viability of the company. If investors feel that a firm holds too much debt reflecting in poor financial ratios, their stock price may become depressed resulting in angry shareholders. Therefore, why do companies engage in leveraging activities and worry about contingencies? There are many reasons for this and some of these reasons will be outlined in the context of this paper. This paper will attempt to address what exactly is a liability, the different forms it takes, the reasons behind using leveraging techniques, and the impact on financial statements.
As the title suggest, it is a balancing act between liabilities and the viability of a company. Too much in liability, especially in the form of debt instruments, could result in having a poor rating by one of the rating agencies that could result in higher borrowing costs. Rating agencies are unbiased firms that analyze companies’ debt and create rating systems that are “designed to indicate the risk associated with a particular security (Mayo, 1997).” In accounting, the term liability signifies an obligation due to another party. A liability is defined 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 of events” (Spiceland, Sepe, Tomassini, 2007). Generally Accepted Accounting Principles (GAAP) requires very organized and specific standards when recognizing data. In a classified balance sheet, one way liabilities are managed is by dividing them into two different groups: current and non-current liabilities.
A simple definition to describe a current liability is an obligation a company intends to
Managing Current Liabilities:
The Great Balancing Act
06/26/2011
One of the most crucial steps in running a major corporation is ensuring that the balance sheet truly reflects the viability of the company. If investors feel that a firm holds too much debt reflecting in poor financial ratios, their stock price may become depressed resulting in angry shareholders. Therefore, why do companies engage in leveraging activities and worry about contingencies? There are many reasons for this and some of these reasons will be outlined in the context of this paper. This paper will attempt to address what exactly is a liability, the different forms it takes, the reasons behind using leveraging techniques, and the impact on financial statements.
As the title suggest, it is a balancing act between liabilities and the viability of a company. Too much in liability, especially in the form of debt instruments, could result in having a poor rating by one of the rating agencies that could result in higher borrowing costs. Rating agencies are unbiased firms that analyze companies’ debt and create rating systems that are “designed to indicate the risk associated with a particular security (Mayo, 1997).” In accounting, the term liability signifies an obligation due to another party. A liability is defined 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 of events” (Spiceland, Sepe, Tomassini, 2007). Generally Accepted Accounting Principles (GAAP) requires very organized and specific standards when recognizing data. In a classified balance sheet, one way liabilities are managed is by dividing them into two different groups: current and non-current liabilities.
A simple definition to describe a current liability is an obligation a company intends to
References: (1999). Credit Research Foundation, Ratios and Formulas in Customer Financial Analysis. Retrieved from http://www.crfonline.org/orc/cro/cro-16.html Ehrhardt, M. C., & Brigham, E. F. (2008). Corporate Finance: A Focused Approach. Mason: South-Western Cengage Learning . Investopedia. (2011). Retrieved from http://www.investopedia.com/terms/l/libor.asp Mayo, H Pimlott, D. (2008). USA economy: Fed to start buying commercial paper. The Economist Intelligence Unit. Sepe, Spiceland, Tomassini. (2007). Elements of the Financial Statements. Online Learning Center: Intermediate Accounting Spiceland, D. J., Sepe, J. F., & Nelson, M. W. (2011). Intermediate Accounting, 6th Edition. New York,NY: McGaw-Hill Irwin .