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How are current liabilities related to a company's operating cycle?
Wiki User
∙ 13y ago
Current Assets and Current Liabilities are critical to a company's operating cycle. Lets take a look at 2 formulas that you can use to determine the strength of a company's operating cycle (monies).
1. Take Current assets - current liabilities. If the number is negative this means the you have more (short term) debt that is due to your creditors within the next 12 months than you have cash to pay them.
2. To look at the same operating cycle as a ratio formula take Current assets / current liabilities. For each industry the acceptable ratio is different, but as a rule of thumb you would like to see 2:1 minimum. This means that you have $2.00 in your CA that will be needed to cover every $1.00 in CL. Your in good shape. IF the ratio is below 1:1 then you don't have enough cash to cover short term monies owed. For example if the ratio was .67 : 1 that means you have 67 cents in your (short term possession) for every dollar that you owe. Watch these carefully and you will make calculated business decisions.
Wiki User
∙ 13y ago
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What is the difference between long term liabilities and current liabilities?
Long-term liabilities are generally considered to be those debts that will not mature (or come due) for over a year. Current liabilities are generally considered to be those obligations that come due within the year. Current liabilities do; however, include more than just debt. Generally current liabilities will include anything that must be paid within the next year that is not directly related to the costs of production (because the company could stop producing widgets, but would still have to make lease payments, etc.). Companies with long-term liabilities whose payments include principal will occasionally show the principal portion of the long-term liabilities that will be paid in the current year within the current liabilities (and remove those principal payments from the long-term liabilities).
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What is the difference between long term liabilities and current liabilities?
Long-term liabilities are generally considered to be those debts that will not mature (or come due) for over a year. Current liabilities are generally considered to be those obligations that come due within the year. Current liabilities do; however, include more than just debt. Generally current liabilities will include anything that must be paid within the next year that is not directly related to the costs of production (because the company could stop producing widgets, but would still have to make lease payments, etc.). Companies with long-term liabilities whose payments include principal will occasionally show the principal portion of the long-term liabilities that will be paid in the current year within the current liabilities (and remove those principal payments from the long-term liabilities).
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