Page 133 - Bus101FlipBook

CH 7] Business 101 7-13

The fully automated
equipment that packages
Reynolds Metals Company's
aluminum foil is one of the
firm's working assets, while
the completed product that is
ready to be shipped to
retailers is a current asset. An
intangible asset is the
well-known Reynolds Wrap
brand name.

Source: Courtesy of Reynolds Metals Company.

scrap or book value of the asset in replacement. Unfortunately, there is never enough
money to cover the replacement cost of an asset because inflation generally will
outpace the deprecation accumulated.

Liabilities
Any debt owed by the firm to someone else is a financial obligation categorized
under liabilities. As with assets, liabilities are recorded in order of their liquidity,
though here it is accurately when they will come due. They are classified as current
working or fixed liabilities.
7
Current Liabilities. Those claims that will be repaid within a six to 18 months may
be classified as current liabilities. For Sierra Quality Canner ($69,000), current
liabilities include accounts payable, current installments of long‑term debt, accrued
expenses, and income taxes payable.
Accounts payable can represent wages and salaries due and not yet paid, credit
purchases by the firm that must be repaid in a six to 18-month period.
current liabilities
Working liabilities are generally due in 12 months to 7 years and are often called Claims of creditors that are
notes payable. Notes payable are loans represented by a written and signed document to be repaid within one year.
specifying the amount to be repaid and the time and place of repayment.

Comparing Current Assets and Current Liabilities. Because they will require
repayment within the next year, current liabilities can quickly provide a cash crisis for Working liability
Debt against working
a business with inadequate reserves of cash or other liquid assets that can be converted assets. Due in 12 months to
to cash. Consequently, most firms closely monitor the relationship between current 7 years.
assets and current liabilities. The term working capital refers to the difference
between current assets and current liabilities. It reflects the ability of the firm to meet
its short‑term payment commitments. Any excess of current assets over current
liabilities can provide a cushion against unexpected reductions in assets or increases in working capital
liabilities and serve as the means of financing such decisions as increasing inventory Difference between current
or credit sales to take advantage of unexpected situations. assets and current liabilities.

Fixed Liabilities. All debts that are for five or more years and are for such debts

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