Xacc/280 Week 4 Mini Case

1) a. current liability: Money that a business owner must pay to a creditor within 12 months of the balance sheet date is a current liability. Ideally, short-term assets, such as cash and accounts receivable, should more than offset short-term liabilities, such as accounts payable, notes payable and payroll. If they do, the company 's short-term liquidity position is positive, which suggests the company will likely meet its cash-flow needs and remain a going concern. It is wise for a business owner to remain alert to his company 's current liabilities and the cash and assets that will be turned to cash within one year to meet these obligations.

1) b. Long-term liabilities are due more than a year after the balance sheet date. These

current liabilities are those with an expected life of less than 12 months. non current liabiities are those with lives expected to extend beyond the next year.

3) Stockholder equity and liability are the sole sources of funds in a firm. The ratio between equity and liability is critical, since it influences the firm 's long-term viability. Firms with excessive liabilities may run into severe trouble, even if they are otherwise successful entities.

In finance, the term leverage refers to the ration between the firm 's liabilities and equity and is calculated by dividing total liability by shareholder equity. Note that some analysts prefer to use only long-term liabilities, which are payment obligations coming due in one year or more, when calculating leverage. The more common leverage formula, however, incorporates all liabilities. If stockholder equity is less than total liability, the firm 's leverage ratio will be greater than 1. While there is no magical cutoff for leverage, a ratio exceeding 1 generally means that the firm has a lot of debt. At what point the debt level gets dangerously high depends on the industry the firm operates in, when exactly the debt comes due and the firm 's ability to generate cash from its operations to pay its