Understanding of Current and Long-Term Liabilities
Week Five Reflection Paper Team B will reflect on why it is important for management as well as investors and creditors to understand the current and long-term liabilities. What makes it important to disclose contingencies as well as how do operating and capital leases relate to liabilities. It is important for managers to know what the company has as current or long-term liabilities because if they are not aware of what the funds look like they cannot affectively run the company. This knowledge helps a manager be more effective at planning and organizing what the companies priority are.
Without taking time to learn this, managers could overdraft a company’s bank account just trying to order supplies. External vendors would want to obtain this kind of information for a few reasons. One, investors who want to invest in your company they want to make sure they are making a very sound decision on their investment. Investors would not invest in a company if it was on the verge of filing for bankruptcy or going out of business. Creditor will also look at a company’s current and long-term liabilities.
If a business has too much or too little debit this could be a sign of not being stable. So for a creditor this would also a high risk if they did not take the time to do some research and crunching of the numbers to see where the business or individual stands. The importance of disclosing any contingencies is really to keep companies honest about how their business is doing. Per FASB disclosing of this information gives financial statement users the ability to understand the nature of a loss contingency, potential magnitude as well as if known the potential timing.
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With a capital lease the liability relation would be equal, as you would list this lease on all financial statements, balance sheet, income statement as well as the cash flow statement. With operating leases the effect would be listed on the income statement and the cash flow statement but not the balance sheet. So team B has briefly reflected on the understanding of current and long-term liabilities, why is it important to disclose contingencies as well as how does operating and capital leases related to liabilities.
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