0 of 63 Concepts completed True or False Question Long-term liabilities are not due in the current year (from the date of the balance sheet). True False Need help? Review these concept resources. Read About the Concept
The Correct Answer and Explanation is:
The correct answer is True.
Explanation:
Long-term liabilities are financial obligations that a company is required to pay over a period longer than one year from the date of the balance sheet. These liabilities are not due in the current year and typically have a repayment schedule that extends beyond 12 months. Examples of long-term liabilities include bonds payable, long-term loans, and pension obligations.
In financial accounting, the distinction between short-term (or current) liabilities and long-term liabilities is crucial because it helps in understanding a company’s financial health and its ability to meet obligations.
Short-Term vs. Long-Term Liabilities:
- Short-term liabilities: These are due within one year of the balance sheet date. Common examples include accounts payable, short-term loans, and accrued expenses.
- Long-term liabilities: These obligations extend beyond one year. For instance, if a company takes out a loan with a repayment period of 5 years, the loan balance will be classified as a long-term liability until the final year when it becomes due in full.
By classifying liabilities this way, companies provide stakeholders with insight into their ability to meet both short-term and long-term obligations. This distinction also impacts financial ratios, like the current ratio (current assets / current liabilities), which investors use to gauge a company’s liquidity and short-term financial health.
For long-term liabilities, the portion that is due within the next 12 months is typically reclassified as a current liability in the financial statements. This is often referred to as the current portion of long-term debt. However, until that portion becomes due, the majority of long-term liabilities remain classified under non-current liabilities.
