Current liabilities are obligations to the firm which must be settled within the greater of one year or an operating cycle.
Typical current liabilities include accounts payable (also called trade payables), current portion of long-term debt, and taxes (income, sales, payroll) payable.
Current liabilities are presented on the balance sheet before long-term liabilities.
Current liabilities are important to creditors, who are concerned with the firm’s ability to satisfy its current liabilities out of current assets and operating cash flow. Creditors often monitor current liabilities as a percentage of current assets. All else equal, the higher the ratio of current liabilities to current assets, the lower the firm’s credit quality. Conversely, creditors prefer to see a high ratio of current assets to current liabilities (the ratio of current assets to current liabilities is simply the inverse of the ratio of current liabilities to current assets). Creditors calculate and review various credit ratios involving current liabilities.
Like current assets, current liabilities can be broken into operating current liabilities and financial current liabilities. Operating current liabilities are those current liabilities that correspond to the firm’s operating activities. The most common operating liabilities are trade payables and accrued expenses. Financing current liabilities are those liabilities that correspond to the firm’s financing activities. Common financing current liabilities include short term debt and the current portion of long-term debt.
