Investors are interested in knowing about the company’s performance. They will check the company’s liabilities to determine how much debt and obligation it has. Suppliers will be interested in examining current liabilities so that they can know whether an organization is able to pay off its debts. Current liabilities will show the organizations dependence on short-term debts. Liabilities indicate the solvency of a company. A company that depends on current liabilities to finance its assets increases its risk of illiquidity. Excess figures of long-term liabilities may indicate that a company has a problem as it is depending on cash, which it does not have. Creditors need information on the company’s liquidity to determine whether they will lend money to the company. Studying the long-term abilities will provide crucial financial information to the investors, which are instrumental in determining whether the company makes worthwhile investments.
A contingency has three elements, which include an existing condition, uncertainty regarding the effects of the condition and the resolution of the uncertainty following the occurrence of future events. Companies should disclose loss contingencies so that they can indicate any incurred losses. The disclosure includes details concerning the nature of the contingency as well as approximate amount of the loss expected. General business risks are not accrued as a form of loss contingencies because businesses are not able to estimate the costs of the risk or to ascertain whether the risks will actually be realized. The conservatism principle in accounting requires that gain contingencies not be approved. They are only recognized when they are realized. However, such contingencies are usually disclosed in the financial statements. Reporting contingencies is essential as it provides information that will help investors determine the future of their investments.
A person never really owns property when he or she has leased it. At the end of the leasing period, the lessor retains his property and the lessee has to return it. This constitutes operating leases, which are treated as an operating expense on the income statement. They contribute to the expenses of the company since they depreciate. Capital leases resemble bank loans. The leased equipment is a liability as it is a form of debt. Capital lease payments include not only the payment for using the equipment, but also the related interest. The company recognizes the leased amount as a liability in the balance sheet. Although operating leases are not recorded in the financial statement, the information has to be disclosed in the financial statement notes, as they are part of the company’s obligations.
Companies choose to lease assets for different reasons. Companies working in industries that are constantly changing benefit from this form of agreement since they can exchange their assets whenever they become obsolete or outdated. Companies benefit since they do not have to report the leased properties in their balance sheets. In addition, they benefit from using the property acquired without adding heavy costs. Leasing does not affect the calculation of ratios. This means that they appear less risky and they become more attractive to investors. Investors are often concerned with the organizations ability to maintain its debts and obligations. They will often look at the information presented in the financial statements and ratios to determine how a company is performing. Leasing is especially important for companies starting a business. People do not have to hold on to their ideas because they lack the necessary funds to acquire assets. Leasing is cheaper, as it ensures that a person does not incur heavy costs (Nikolai et al., 2009).
Nikolai, L., Bazley, J., & Jones, J. (2009). Intermediate accounting update. New York, NY: Cengage Learning
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