Question

Define the difference between current and long term liabilities. Creditors use several measures to assess a company's creditworthiness, such as working capital, current ratio, payables turnover, and days' payable. Discuss what these measures are and why it's important to carefully measure cash flows related to current liabilities.

Answer 1

difference between current and long term liabilities

Current Liabilities	Long-Term Liabilities
Liabilities that business owners must settle within twelve months or one operating cycle of the balance sheet date	Payables that are due beyond twelve months or one operating cycle; also called “non-current liabilities” or “long term debt”
Examples Accounts payable (owed to vendors) Notes payable Deferred revenues (goods that have been paid for but not delivered) Wages and salaries Property taxes Insurance Interest Dividends Utilities Employee benefits Short-term bank loans	Examples Leases A mortgage Bonds payable Bank notes Bank loans Pension obligations Deferred taxes Post-employment benefits Car payments Other loans for equipment, land, or machinery
Recorded in the balance sheet in the order of their due dates	Written in separate formal documents that include the important details such as principal amount, interest, and due date

How Cash flow Related to Current Liabilitues?

Current liability coverage ratio. Calculated as cash flows from operations divided by current liabilities. If this ratio is less than 1:1, a business is not generating enough cash to pay for its immediate obligations, and so may be at significant risk of bankruptcy.