Current Liabilities | CFA Level I FSA

PREREQUISITE LESSON

This lesson is a prerequisite for the course. While you won’t be directly tested on its content in the exam, it’s assumed you’ve gained this knowledge or skill during your university studies. We strongly recommend reviewing this lesson, as its content may be essential for understanding subsequent parts of the curriculum.

Welcome back, and let’s head on to current liabilities.

Understanding Current Liabilities

Current liabilities are obligations that will be satisfied within one year or one operating cycle, whichever is greater.

• Accounts payable, or trade payables, are amounts the firm owes to suppliers for goods or services purchased on credit. When the firm receives the goods before making payment, the amount owed is recorded as an accounts payable under liabilities.
• Notes payable are short-term obligations in the form of promissory notes owed to creditors and lenders.
• Accrued liabilities are expenses that have been recognized in the income statement but have not yet been paid as of the balance sheet date.
• Unearned revenue is cash collected in advance of providing goods and services.

Accounts Payable

When the amount owed is paid, cash is reduced, and the accounts payable is reduced by the corresponding amount. Analyzing payables relative to purchases can signal credit problems with suppliers.

Notes Payable and Current Portion of Long-term Debt

Notes payable and current portion of long-term debt that mature within one year are considered current liabilities. Notes and long-term debt that have maturity past this 1-year mark are considered non-current liabilities.

Accrued Liabilities

Examples of accrued liabilities include income taxes payable, accrued interest payable, accrued warranty costs, and wages payable.

Unearned Revenue

As in this case, a customer makes payment first before the actual delivery of the goods. Cash and unearned revenue increase by the same amount. When the goods are delivered, the firm recognizes revenue in the income statement and reduces the unearned revenue liability by the same amount.

And that’s all for current liabilities. In the next lesson, we shall move on to non-current assets, followed by non-current liabilities.