Which of the Following is Not a Current Liability?
Which of the Following is Not a Current Liability?
Current liabilities are debts or obligations that are due within one year or one operating cycle, whichever is longer. They are typically listed in the current liabilities section of a company's balance sheet. This liabilities section will provide information that can greatly improve cash flow. Cash flow is extremely important to businesses. Without proper cash flow, businesses can fail. The following are some common examples of current liabilities:
- Accounts payable
- Short-term debt
- Accrued expenses
- Unearned revenue
- Current portion of long-term debt
Which of the following is not a current liability?
(A) Accounts payable
(B) Long-term debt
(C) Accrued expenses
(D) Unearned revenue
Answer: (B) Long-term debt
| Current Liability | Definition | Example |
|---|---|---|
| Accounts payable | Amounts owed to suppliers for goods or services purchased on credit | $100,000 |
| Short-term debt | Loans or lines of credit that are due within one year | $50,000 |
| Accrued expenses | Expenses that have been incurred but not yet paid | $25,000 |
| Unearned revenue | Revenue that has been received but not yet earned | $10,000 |
| Non-Current Liability | Definition | Example |
|---|---|---|
| Long-term debt | Loans or lines of credit that are due in more than one year | $200,000 |
Why is it important to distinguish between current and non-current liabilities?
It is important to distinguish between current and non-current liabilities because current liabilities must be paid within one year, while non-current liabilities do not. This distinction is important for several reasons:
- Financial planning: Companies need to be able to plan for their future cash flows. Knowing which liabilities are due within one year and which are not helps companies to plan for their short-term and long-term financial needs.
- Creditworthiness: Lenders and investors use a company's financial statements to assess its creditworthiness. A company with a high level of current liabilities relative to its assets may be seen as a risky investment.
- Financial ratios: Many financial ratios use current liabilities to measure a company's liquidity and solvency. These ratios can help investors to compare companies and to identify potential risks.
Conclusion
Understanding the difference between current and non-current liabilities is essential for businesses of all sizes. By properly classifying its liabilities, a company can improve its financial planning, creditworthiness, and financial ratios.
Success Stories
- Company A: By implementing a strict accounts payable policy, Company A was able to reduce its current liabilities by $1 million. This freed up cash flow and allowed the company to invest in new growth opportunities.
- Company B: By negotiating longer payment terms with its suppliers, Company B was able to extend its operating cycle and reduce its current liabilities by $500,000. This gave the company more time to generate revenue and improve its profitability.
- Company C: By issuing long-term debt to refinance its short-term debt, Company C was able to reduce its interest expense and improve its cash flow. This allowed the company to expand its operations and increase its market share.
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