Consider three different businesses:
1. A bank
2. A magazine publisher
3. A department store
For each business, list all of its liabilities – both current and long-term. Then compare the three lists to identify the liabilities that the three business have in common. Also, identify the liabilities that are unique to each type of business.
Short-term liabilities or current liabilities do not differ greatly between industries when viewed from a balance sheet perspective, at least not at first glance. Short-term liabilities are obligations due within twelve months and may include items such as short-term loans from banks including lines of credit, accounts payable balances, dividends and interest payable, bond maturity proceeds payable, consumer deposits, and reserves for taxes. Long-term liabilities are obligations due outside of the twelve month window or the companies operating cycle should it happen to be longer than twelve months, these liabilities might include items such as debentures, loans, deferred tax liabilities and pension obligations.
Below we can clearly see both similarities and differences between short-term (current) and long-term liabilities by sector.
- All three balance sheets represent both current (short-term) and long-term liabilities.
- Macy’s and Time, Inc. list “Accounts payable and accrued liabilities” as their largest current (short-term) liability while Wells Fargo (a bank) shows deposits and borrowing (aka loans) as its largest short-term (current) liability.
- On the Macy’s balance sheet we see “Merchandise accounts payable” as a current (short-term) liability which represents Macy’s cost of inventory (i.e. – liability to vendors).
- On the Time, Inc. balance sheet we see “Deferred revenue” which likely represents pre-paid magazine subscriptions where Time, Inc. has collected money from the customer but has yet to ship magazines to the customer. Time, Inc. would recognize this revenue over the next N months as they ship magazines to customers.
- Both Macy’s and Time, Inc. show deferred tax liability which is triggered when the business’s taxable income differ from the net income on the financial statements. This is typically triggered by the differences between financial accounting and tax accounting; deferred tax liabilities indicate future cash outflows.
- All three balance sheets represent long-term debt which could be long-term loans, capital leases, pension liabilities, post-retirement healthcare liabilities, deferred compensation, deferred revenues, deferred income taxes, derivative liabilities, etc…
- The Wells Fargo consolidated balance sheet shows a single line item for long-term debt but it is possible that this line item includes deferred revenue and/or income taxes.
Response to follow-up question