Intermediate Accounting: Chapter 13 Text [Weygandt]

Current Liabilities

The IASB, as part of its Conceptual Framework, defines a liability as a present obligation of the entity to
transfer an economic resource as a result of past events. In other words, a liability has three essential
characteristics:

1. It is a present obligation.

2. It requires a transfer of economic resources (cash, goods, services).

3. It arises from past events.

Current Liability is reported if one of two conditions exists:

1. The liability is expected to be settled within its normal operating cycle; or

2. The liability is expected to be settled within 12 months after the reporting date.

The operating cycle is the period of time elapsing between the acquisition of goods and services involved
in the manufacturing process and the final cash realization resulting from sales and subsequent
collections.

Here are some typical current liabilities:

1. Accounts payable. 6. Customer advances and deposits.

2. Notes payable. 7. Unearned revenues.

3. Current maturities of long-term debt. 8. Sales and value-added taxes payable.

4. Short-term obligations expected to be 9. Income taxes payable.

refinanced.
10. Employee-related liabilities.
5. Dividends payable.

Accounts payable, or trade accounts payable, are balances owed to others for goods, supplies, or

services purchased on open account. Accounts payable arise because of the time lag between the
receipt of services or acquisition of title to assets and the payment for them.

The invoice received from the creditor specifies the due date and the exact outlay in money that is
necessary to settle the account. The only calculation that may be necessary concerns the amount of cash
discount.

Notes payable are written promises to pay a certain sum of money on a specified future date. They may
arise from purchases, financing, or other transactions. Companies classify notes as short-term or long-
term, depending on the payment due date. Notes may also be interest-bearing or zero-interest-bearing.

Interest-Bearing Note Issued

Intermediate Accounting: Chapter 13 Text [Weygandt]

Example: Assume that Castle Bank agrees to lend €100,000 on March 1, 2022, to Landscape Co. if
Landscape signs a €100,000, 6 percent, four-month note. Landscape records the cash received on March
1 as follows.

March 1, 2022
Cash 100,000
Notes Payable 100,000
(To record issuance of 6%, 4-month note to Castle Bank)

If Landscape prepares financial statements semiannually, it makes the following adjusting entry to
recognize interest expense and interest payable of €2,000 (€100,000 × .06 × 4 ⁄12 ) at June 30, 2022.

June 30, 2022

Interest Expense 2,000
Interest Payable 2,000
(To accrue interest for 4 months on Castle Bank note)

If Landscape prepares financial statements monthly, its interest expense at the end of each month is
€500 (€100,000 × .06 × 1 ⁄12 ).

At maturity (July 1, 2022), Landscape must pay the face value of the note (€100,000) plus €2,000 interest
(€100,000 × .06 × 4 ⁄12 ). Landscape records payment of the note and accrued interest as follows.

July 1, 2022
Notes Payable 100,000
Interest Payable 2,000
Cash 102,000
(To record payment of Castle Bank interest-bearing note and accrued
interest at maturity)

Zero-Interest-Bearing Note Issued

A zero-interest-bearing note does not explicitly state an interest rate on the face of the note. Interest is
still charged, however. At maturity, the borrower must pay back an amount greater than the cash
received at the issuance date. In other words, the borrower receives in cash the present value of the
note. The present value equals the face value of the note at maturity minus the interest or discount
charged by the lender for the term of the note.

Example: Assume that Landscape issues a €102,000, four-month, zero-interest-bearing note to Castle
Bank on March 1, 2022. The present value of the note is €100,000. Landscape records this transaction as
follows.

March 1, 2022
Cash 100,000
Notes Payable 100,000
Intermediate Accounting: Chapter 13 Text [Weygandt]

(To record issuance of 4-month, zero-interest-bearing note to Castle

Bank)
Landscape credits the Notes Payable account for the present value of the note, which is €100,000. If
Landscape prepares financial statements semiannually, it makes the following adjusting entry to
recognize the interest expense and the increase in the note payable of €2,000 at June 30, 2022.

June 30, 2022

Interest Expense 2,000
Interest Payable 2,000
(To accrue interest for 4 months on Castle Bank note)
At maturity (July 1, 2022), Landscape must pay the face value of the note, as follows.

July 1, 2022
Notes Payable 102,000
Cash 102,000
(To record payment of Castle Bank zero-interest-bearing at maturity)
In this case, the amount of interest expense recorded and the total cash outlay are exactly the same
whether Landscape signed a loan agreement with a stated interest rate or used the zero-interest-rate
approach. This circumstance rarely happens, because often the borrower on an interest-bearing note will
have to make monthly cash payments for interest during the term of the note.

Current Maturities of Long-Term Debt

Exclude currently maturing long-term debts from current liabilities if they are to be:

1. Refinanced, or retired from the proceeds of a new long-term debt issue (discussed in the next
section); or,

2. Converted into ordinary shares.

When only a part of a long-term debt is to be paid within the next 12 months, as in the case of serial
bonds that a company retires through a series of annual installments, a company reports the maturing
portion of long-term debt as a current liability and the remaining portion as a long-term debt.

A company should classify as current any liability that is:

1. Due on demand (callable by the creditor), or will be due on demand within one year (or
operating cycle, if longer).
2. Callable by the creditor when there is a violation of the debt agreement. (Breach of
Contract/Covenant)
a. Provide a grace period for the breach of the agreement before the end of the operating
cycle (Non-current Liability)
b. Agreement is not finalized by the end of the operating cycle, classify as a current liability.

Short-Term Obligations Expected to Be Refinanced

Short-term obligations are debts scheduled to mature within one year after the date of a company’s
statement of financial position or within its normal operating cycle. (Based solely on management’s
intent)
Intermediate Accounting: Chapter 13 Text [Weygandt]

Refinancing Criteria: A company can exclude a short-term obligation from current liabilities if, at the
financial statement date, it has the right to defer settlement of the liability for at least 12 months after
the reporting date. A common scenario for deferral is a refinancing.

Refinancing a liability after the statement of financial position date does not affect the liquidity
or solvency at statement of financial position, the reporting of which should reflect contractual
agreements in force only up to the financial statement sheet date.

Dividends Payable

A cash dividend payable is an amount owed by a company to its shareholders as a result of the board of
directors’ authorization (or in other cases, vote of shareholders). At the date of declaration, the company
assumes a liability that places the shareholders in the position of creditors in the amount of dividends
declared. Because companies always pay cash dividends within one year of declaration (generally within
three months), they classify them as current liabilities.

On the other hand, companies do not recognize accumulated but undeclared dividends on cumulative
preference shares as a liability. Why? Because preference dividends in arrears are not an obligation until
the board of directors authorizes the payment. Nevertheless, companies should disclose the amount of
cumulative dividends unpaid in a note, or show it parenthetically in the share capital section.

Dividends payable in the form of additional shares are not recognized as a liability. Such share dividends
do not require future outlays of assets or services. Companies generally report such undistributed share
dividends in the equity section because they represent retained earnings in the process of transfer to
share capital.

Unearned Revenues

When to account unearned revenues:

1. When a company receives an advance payment, it debits Cash and credits a current liability account
identifying the source of the unearned revenue.

2. When a company recognizes revenue, it debits the unearned revenue account and credits a revenue
account.

Sales and Value-Added Taxes Payable

The purpose of these taxes is to generate revenue for the government similar to the company or
personal income tax. These two taxes accomplish the same objective—to tax the final consumer of the
good or service. However, the two systems use different methods to accomplish this objective.

Sales Taxes Payable

Intermediate Accounting: Chapter 13 Text [Weygandt]

Sometimes, the sales tax collections credited to the liability account are not equal to the liability as
computed by the governmental formula. In such a case, companies make an adjustment of the liability
account by recognizing a gain or a loss on sales tax collections.

Value-Added Taxes Payable

Value-added taxes (VAT) are used by tax authorities more than sales taxes (over 100 countries require
that companies collect a value-added tax).

A sales tax is collected only once at the consumer’s point of purchase. No one else in the production or
supply chain is involved in the collection of the tax. In a VAT taxation system, the VAT is collected every
time a business purchases products from another business in the product’s supply chain.

An advantage of a VAT is that it is easier to collect than a sales tax because it has a self-correcting
mechanism built into the tax system. A sales tax does not have this self-correcting mechanism and is thus
easier to avoid.

Income Taxes Payable

A business must prepare an income tax return and compute the income taxes payable resulting from the
operations of the current period. Companies should classify as a current liability the taxes payable on net
income, as computed per the tax return.

Most companies must make periodic tax payments throughout the year to the appropriate government
agency. These payments are based upon estimates of the total annual tax liability. As the estimated total
tax liability changes, the periodic payments also change. If, in a later year, the taxing authority assesses
an additional tax on the income of an earlier year, the company should credit Income Taxes Payable and
charge the related debit to current operations.

Employee-Related Liabilities (Read again sa book)

Companies also report as a current liability amounts owed to employees for salaries or wages at the end
of an accounting period. In addition, they often also report as current liabilities the following items
related to employee compensation.

1. Payroll deductions.

2. Compensated absences.

3. Bonuses.

Payroll Deductions

The most common types of payroll deductions are taxes, insurance premiums, employee savings, and
union dues. To the extent that a company has not remitted the amounts deducted to the proper
authority at the end of the accounting period, it should recognize them as current liabilities.
Intermediate Accounting: Chapter 13 Text [Weygandt]

Social Security Taxes

These taxes are often referred to as Social Security taxes or Social Welfare taxes. Employers collect the
employee’s share of this tax by deducting it from the employee’s gross pay, and remit it to the
government along with their share. The government often taxes both the employer and the employee at
the same rate. Companies should report the amount of unremitted employee and employer Social
Security tax on gross wages paid as a current liability.

Income Tax Withholding

Income tax laws generally require employers to withhold from each employee’s pay the applicable
income tax due on those wages. The employer computes the amount of income tax to withhold
according to a government-prescribed formula or withholding tax table. That amount depends on the
length of the pay period and each employee’s taxable wages, marital status, and claimed dependents.

The employer must remit to the government its share of Social Security tax along with the amount of
Social Security tax deducted from each employee’s gross compensation. It should record all unremitted
employer Social Security taxes as payroll tax expense and payroll tax payable.

Compensated Absences

Compensated absences are paid absences from employment—such as vacation, illness, and maternity,
paternity, and jury leaves. The following considerations are relevant to the accounting for compensated
absences.

Vested rights exist when an employer has an obligation to make payment to an employee even after
terminating his or her employment. Thus, vested rights are not contingent on an employee’s future
service.

Accumulated rights are those that employees can carry forward to future periods if not used in the
period in which earned.

Non-accumulating rights do not carry forward; they lapse if not used. As a result, a company does not
recognize a liability or expense until the time of absence (benefit). Thus, if an employee takes a vacation
day during a month and it is non-accumulating, the vacation day is an expense in that month. Similarly, a
benefit such as a maternity or paternity leave is contingent upon a future event and does not
accumulate. Therefore, these costs are recognized only when the absence commences.

A modification of the general rules relates to the issue of sick pay. If sick pay benefits vest, a company
must accrue them. If sick pay benefits accumulate but do not vest, a company may choose whether to
accrue them.

Companies should recognize the expense and related liability for compensated absences in the year
earned by employees.

Profit-Sharing and Bonus Plans

A company may consider bonus payments to employees as additional salaries and wages and should
include them as a deduction in determining the net income for the year.
Intermediate Accounting: Chapter 13 Text [Weygandt]

The liability, Salaries and Wages Payable, is usually payable within a short period of time. Companies
should include it as a current liability in the statement of financial position. An obligation under a profit-
sharing or bonus plan must be accounted for as an expense and not a distribution of profit, since it
results from employee service and not a transaction with owners.

Similar to bonus agreements are contractual agreements for conditional expenses. Examples would be
agreements covering rents or royalty payments conditional on the amount of revenues recognized or the
quantity of product produced or extracted. Conditional expenses based on revenues or units produced
are usually less difficult to compute than bonus arrangements.

Provisions

A provision is a liability of uncertain timing or amount (sometimes referred to as an estimated liability).

The difference between a provision and other liabilities (such as accounts or notes payable, salaries
payable, and dividends payable) is that a provision has greater uncertainty about the timing or amount
of the future expenditure required to settle the obligation.

Recognition of a Provision

Companies accrue an expense and related liability for a provision only if the following three conditions
are met.

1. A company has a present obligation (legal or constructive) as a result of a past event;

2. It is probable (‘more likely than not to occur’ probability of occurrence is greater than 50 percent) that
an outflow of resources embodying economic benefits will be required to settle the obligation; and

3. A reliable estimate can be made of the amount of the obligation.

If these three conditions are not met, no provision is recognized.

Recognition of a Provision—Warranty

A company has a legal obligation to honor its warranties. A legal obligation generally results from a
contract or legislation.

• The warranty is a present obligation as a result of a past obligating event—the past obligating
event is the sale of the product with a warranty, which gives rise to a legal obligation.
• The warranty results in the outflow of resources embodying benefits in settlement—it is
probable that there will be some claims related to these warranties. Santos should recognize the
provision based on past experience.

A constructive obligation is an obligation that derives from a company’s actions where:

1. By an established pattern of past practice, published policies, or a sufficiently specific current

statement, the company has indicated to other parties that it will accept certain responsibilities; and

2. As a result, the company has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.
Intermediate Accounting: Chapter 13 Text [Weygandt]

Recognition of a Provision—Refunds

• The refunds are a present obligation as a result of a past obligating event—the sale of the
product. This sale gives rise to a constructive obligation because the conduct of the company has
created a valid expectation on the part of its customers that it will refund purchases.
• The refunds result in the outflow of resources in settlement—it is probable that a proportion of
goods will be returned for refund. A provision is recognized for the best estimate of the costs of
refunds.

Recognition of a Provision—Lawsuit

• Although a past obligating event has occurred (the injury leading to the filing of the lawsuit), it is
not probable (more likely than not) that Morrison will have to pay any damages. (…Morrison’s
lawyers believe that Morrison will not lose the lawsuit, putting the probability of future
payments at less than 50 percent) Morrison therefore does not need to record a provision. If, on
the other hand, Morrison’s lawyer determined that it is probable that the company will lose the
lawsuit, then Morrison should recognize a provision at December 31, 2022.

Measurement of Provisions

The amount recognized should be the best estimate of the expenditure required to settle the present
obligation. Best estimate represents the amount that a company would pay to settle the obligation at the
statement of financial position date. In determining the best estimate, the management of a company
must use judgment, based on past or similar transactions, discussions with experts, and any other
pertinent information.

Common Types of Provisions

1. Lawsuits

2. Warranties

3. Consideration payable

4. Environmental

5. Onerous contracts

6. Restructuring

Litigation Provisions

Companies must consider the following factors, among others, in determining whether to record a
liability with respect to pending or threatened litigation and actual or possible claims and assessments.

1. The time period in which the underlying cause of action occurred.

2. The probability of an unfavorable outcome.

3. The ability to make a reasonable estimate of the amount of loss.

Intermediate Accounting: Chapter 13 Text [Weygandt]

To report a loss and a liability in the financial statements, the cause for litigation must have occurred on
or before the date of the financial statements.

With respect to unfiled suits and unasserted claims and assessments, a company must determine

(1) the degree of probability that a suit may be filed or a claim or assessment may be asserted, and

(2) the probability of an unfavorable outcome.

Warranty Provisions

A warranty (product guarantee) is a promise made by a seller to a buyer to make good on a deficiency of
quantity, quality, or performance in a product. Manufacturers commonly use it as a sales promotion
technique.

Companies often provide one of two types of warranties to customers:

1. Warranty that the product meets agreed-upon specifications in the contract at the time the product is
sold. This type of warranty is included in the sales price of a company’s product and is often referred to
as an assurance-type warranty.

2. Warranty that provides an additional service beyond the assurance-type warranty. This warranty is not
included in the sales price of the product and is referred to as a service-type warranty. As a result, it is
recorded as a separate performance obligation.

Assurance-Type Warranty

This type of warranty is nothing more than a quality guarantee that the good or service is free from
defects at the point of sale. These types of obligations should be expensed in the period the goods are
provided or services performed. In addition, the company should record a warranty liability. The
estimated amount of the liability includes all the costs that the company will incur after sale due to the
correction of defects or deficiencies required under the warranty provisions.

Service-Type Warranty

Companies record a service-type warranty as a separate performance obligation. The sale of the service-
type warranty is usually recorded in an Unearned Warranty Revenue account. Companies then recognize
revenue on a straight-line basis over the period the service-type warranty is in effect. Companies only
defer and amortize costs that vary with and are directly related to the sale of the contracts (mainly
commissions). Companies expense employees’ salaries and wages, advertising, and general and
administrative expenses because these costs occur even if the company did not sell the service-type
warranty.

Consideration Payable (Premium)

Companies often make payments (provide consideration) to their customers as part of a revenue
arrangement. Consideration paid or payable may include discounts, volume rebates, free products, or
services.
Intermediate Accounting: Chapter 13 Text [Weygandt]

Premiums and coupons are loss contingencies that satisfy the conditions necessary for a liability.
Regarding the income statement, the expense recognition principle requires that companies report the
related expense in the period in which the sale occurs.

(1072 pg.) Companies offer premiums, coupon offers, and rebates to stimulate sales. And to the extent
that the premiums reflect a material right promised to the customer, a performance obligation exists and
should be recorded as a liability. However, the period that benefits is not necessarily the period in which
the company pays the premium. At the end of the accounting period, many premium offers may be
outstanding and must be redeemed when presented in subsequent periods. In order to reflect the
existing current liability, the company estimates the number of outstanding premium offers that
customers will present for redemption. The company then charges the cost of premium offers to
Premium Expense. It credits the outstanding obligations to an account titled Premium Liability.

Environmental Provisions

Estimates to clean up existing toxic waste sites are substantial. In addition, cost estimates of cleaning up
our air and preventing future deterioration of the environment run even higher.

Accounting Recognition of Environmental Liabilities

As with other provisions, a company must recognize an environmental liability when it has an existing
legal obligation associated with the retirement of a long-lived asset and when it can reasonably estimate
the amount of the liability.

Obligating events. Examples of existing legal obligations that require recognition of a liability include but
are not limited to:

• Decommissioning nuclear facilities.

• Dismantling, restoring, and reclamation of oil and gas properties.
• Certain closure, reclamation, and removal costs of mining facilities.
• Closure and postclosure costs of landfills.

In order to capture the benefits of these long-lived assets, the company is generally legally obligated for
the costs associated with retirement of the asset, whether the company hires another party to perform
the retirement activities or performs the activities with its own workforce and equipment.

Measurement.

A company initially measures an environmental liability at the best estimate of its future costs. The
estimate should reflect the amount a company would pay in an active market to settle its obligation
(essentially fair value).

Recognition and allocation.

To record an environmental liability in the financial statements, a company includes the cost associated
with the environmental liability in the carrying amount of the related long-lived asset, and records a
liability for the same amount. It records the environmental costs as part of the related asset because
these costs are tied to operating the asset and are necessary to prepare the asset for its intended use.
Intermediate Accounting: Chapter 13 Text [Weygandt]

Companies should not record the capitalized environmental costs in a separate account because there is
no future economic benefit that can be associated with these costs alone.

In subsequent periods, companies allocate the cost of the asset to expense over the period of the
related asset’s useful life. Companies may use the straight-line method for this allocation, as well as
other systematic and rational allocations.

Onerous Contract Provisions

These contracts are ones in which “the unavoidable costs of meeting the obligations exceed the
economic benefits expected to be received.” The expected costs should reflect the least net cost of
exiting from the contract, which is the lower of (1) the cost of fulfilling the contract, or (2) the
compensation or penalties arising from failure to fulfill the contract.

Restructuring Provisions

Restructurings are defined as a “program that is planned and controlled by management and materially
changes either (1) the scope of a business undertaken by the company; or (2) the manner in which that
business is conducted.”

For a company to record restructuring costs and a related liability, it must meet the general requirements
for recording provisions discussed earlier. In addition, to assure that the restructuring is valid, companies
are required to have a detailed formal plan for the restructuring and to have raised a valid expectation to
those affected by implementation or announcement of the plan.

Costs Included (direct, incremental) Costs Excluded

• Employee termination costs related • Investment in new systems.
directly to the restructuring.
• Contract termination costs, such as lease • Lower utilization of facilities.
termination penalties.
• Onerous contract provisions. • Costs of training or relocating staff.
• Costs of moving assets or operations.
• Administration or marketing costs.
• Allocations of company overhead.
• Expected future operating costs or
expected operating losses unless they
relate to an onerous contract.

Self-Insurance

Self-insurance is not insurance but risk assumption. Any company that assumes its own risks puts itself in
the position of incurring expenses or losses as they occur. There is little theoretical justification for the
establishment of a liability based on a hypothetical charge to insurance expense. Exposure to risks of loss
resulting from uninsured past injury to others, however, is an existing condition involving uncertainty
about the amount and timing of losses that may develop. However, it should not establish a liability for
expected future injury to others or damage to the property of others, even if it can reasonably estimate
the amount of losses.
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Disclosures Related to Provisions

The disclosures related to provisions are extensive. A company must provide a reconciliation of its
beginning to ending balance for each major class of provisions, identifying what caused the change
during the period. In addition, the provision must be described and the expected timing of any outflows
disclosed. Also, disclosure about uncertainties related to expected outflows as well as expected
reimbursements should be provided.

Contingencies

In a general sense, all provisions are contingent because they are uncertain in timing or amount.
However, IFRS uses the term “contingent” for liabilities and assets that are not recognized in the financial
statements.

Contingent liabilities are not recognized in the financial statements because they are

(1) a possible obligation (not yet confirmed as a present obligation),

(2) a present obligation for which it is not probable that payment will be made, or

(3) a present obligation for which a reliable estimate of the obligation cannot be made.

Examples of contingent liabilities are:

• A lawsuit in which it is only possible that the company might lose.

• A guarantee related to collectibility of a receivable.

General Rules related to Contingent Liability

Outcome Probability* Accounting Treatment

Virtually certain At least 90% Report as liability (provision).
Probable (more likely than not) 51–89% probable Report as liability (provision).
Possible but not probable 5–50% Disclosure required.
Remote Less than 5% No disclosure required.
*In practice, the percentages for virtually certain and remote may
deviate from those presented here.

Unless the possibility of any outflow in settlement is remote, companies should disclose the contingent
liability at the end of the reporting period, providing a brief description of the nature of the contingent
liability and, where practicable:

1. An estimate of its financial effect;

2. An indication of the uncertainties relating to the amount or timing of any outflow; and

3. The possibility of any reimbursement.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed
by the occurrence or non-occurrence of uncertain future events not wholly within the control of the
company. Typical contingent assets are:
Intermediate Accounting: Chapter 13 Text [Weygandt]

1. Possible receipts of monies from gifts, donations, and bonuses.

2. Possible refunds from the government in tax disputes.

3. Pending court cases with a probable favorable outcome.

Contingent assets are not recognized on the statement of financial position. If realization of the
contingent asset is virtually certain, it is no longer considered a contingent asset and is recognized as an
asset. Virtually certain is generally interpreted to be at least a probability of 90 percent or more.

General Rules related to Contingent Asset

Outcome Probability* Accounting Treatment

Virtually certain At least 90% Report as asset (no longer
contingent).
Probable (more likely than not) 51–89% probable Disclose.
Possible but not probable 5–50% No disclosure required.
Remote Less than 5% No disclosure required.
*In practice, the percentages for virtually certain and remote may
deviate from those presented here.

Contingent assets are disclosed when an inflow of economic benefits is considered more likely than not
to occur (greater than 50 percent). However, it is important that disclosures for contingent assets avoid
giving misleading indications of the likelihood of income arising. As a result, it is not surprising that the
thresholds for allowing recognition of contingent assets are more stringent than those for liabilities.

Presentation and Analysis

Presentation of Current Liabilities

In practice, current liabilities are usually recorded and reported in financial statements at their full
maturity value. The current liabilities accounts are commonly presented after non-current liabilities in
the statement of financial position. Within the current liabilities section, companies may list the accounts
in order of maturity, in descending order of amount, or in order of liquidation preference.

Analysis of Current Liabilities

The distinction between current and non-current liabilities is important. It provides information about
the liquidity of the company. Liquidity regarding a liability is the expected time to elapse before its
payment. In other words, a liability soon to be paid is a current liability. A liquid company is better able
to withstand a financial downturn. Also, it has a better chance of taking advantage of investment
opportunities that develop.

Analysts use certain basic ratios such as net cash flow provided by operating activities to current
liabilities, and the turnover ratios for receivables and inventory, to assess liquidity. Two other ratios used
to examine liquidity are the current ratio and the acid-test ratio.

Current Ratio

The current ratio is the ratio of total current assets to total current liabilities.
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[Formula] Current Ratio = Current Assets / Current Liabilities

The ratio is frequently expressed as a coverage of so many times. Sometimes it is called the working
capital ratio because working capital is the excess of current assets over current liabilities.

Acid-Test Ratio

Many analysts favor an acid-test or quick ratio that relates total current liabilities to cash, short-term
investments, and receivables.

[Formula] Acid-Test Ratio = Cash + Short-Term Investments + Net Receivables / Current Liabilities