What you will learn to do: Identify other current liabilities
So far in this module, we’ve covered trade accounts payable and payroll, as well as a few smaller items such as income taxes and sales taxes payable. Although there are many potential categories of current liabilities, most of them follow the same rules and concepts as the ones you’ve seen so far and fall into one of the two major categories:
- Accrued expenses
- Deferred revenues
In this section, we’ll focus on a few more kinds of current liabilities that involve estimation and some extra judgment.
Let’s take a look at the consolidated balance sheet for Macy’s, Inc. as of February 1, 2020:
| Description | February 1, 2020 | February 1, 2019 |
|---|---|---|
| Subcategory, ASSETS | ||
| Subcategory, Current Assets: | ||
| Cash and cash equivalents | $ 685 | $ 1,162 |
| Receivables | 409 | 400 |
| Merchandise inventories | 5,188 | 5,263 |
| Prepaid expenses and other current assets | 528 | 620 |
| Total Current Assets | Single line6,810 | Single line7,445 |
| Property and Equipment – net | 6,633 | 6,637 |
| Right of Use Assets | 2,668 | — |
| Goodwill | 3,908 | 3,908 |
| Other Assets | 714 | 726 |
| Total Assets | Single line21,172Double line | Single line19,194Double line |
| Subcategory, LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
| Subcategory, Current Liabilities: | ||
| Short-term debt | $ 539 | $ 43 |
| Mechandise accounts payable | 1,682 | 1,655 |
| Accounts payable and accrued liabilities | 3,448 | 3,366 |
| Total Current Liabilities | Single line5,750 | Single line5,232 |
| Long-Term Debt | 3,621 | 4,708 |
| Long-Term Lease Liabilities | 2,918 | — |
| Deferred Income Taxes | 1,169 | 1,238 |
| Subcategory, Shareholders’ Equity | ||
| Total Macy’s Inc. Shareholders’ Equity | 6,377 | 6,436 |
| Total Shareholders’ Equity | Single line 6,377 |
Single line 6,436 |
| Total Liabilities and Sharesholders’ Equity | Single line $ 21,172 Double line |
Single line $ 19,194 Double line |
| The accompanying notes are an intergral part of these Consolidated Financial Statements. | ||
| F-8 | ||
Current assets were $6.810 billion and current liabilities were $5.750 billion. Of the current liabilities, short-term debt and trade (merchandise) accounts payable are predictably at the top of the list. For a breakdown of the other accounts payable and accrued liabilities in the amount of 3.448 billion, we would explore the notes, and find this:
| 7. Accounts Payable and Accrued Liabilities | ||
|---|---|---|
| Description | February 1, 2020 | February 1, 2019 |
| Description | (millions) | |
| Accounts Payable | $ 977 | $ 983 |
| Gift cards and customer rewards | 839 | 856 |
| Lease related liabilities(a) | 399 | 180 |
| Allowance for future sales returns | 213 | 269 |
| Accrued wages and vacation | 194 | 268 |
| Current portion of post employment and postretirement benefits | 180 | 194 |
| Taxes other than income taxes | 145 | 134 |
| Restructuring accruals, including severance | 113 | 67 |
| Accrued interest | 41 | 51 |
| Deferred real estate gains | — | 23 |
| Other | 242 | 229 |
| Total | Single line $ 3,448 Double line |
Single line $ 3,366 Double line |
| (a) As of February 1, 2020, the balance includes the current portion of operatin leases and finance leases accounted for under ASU 2016-02. As of February 1, 2019, lease related liabilities were accounted for under ASC Subtopic 840, Leases. See Note 4 for information on leases. | ||
We see some accounts payable that are separate from the merchandise accounts payable, probably utilities, rent, and other non-inventory payables. We also see a deferred/unearned revenue account for gift card balances outstanding. Next is a line item for short-term and current lease obligations, followed by an allowance for future sales returns.
In an earlier section, you studied briefly, accrued wages. Notice that the company has also accrued vacation pay that has been earned by the employee and therefore incurred by the company, but that will be paid out in the future, as well as an accrual for retirees’ health and pension payments that are currently due.
Recall that FASB’s Concept Statement No. 6 defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”
Also recall that current liabilities are obligations that (1) are payable within one year or one operating cycle, whichever is longer, or (2) will be paid out of current assets or create other current liabilities.
Therefore, when preparing financial statements or auditing a company’s books, accountants must actively seek out any financial obligations that the company has committed to. You’ve seen this in action with things like gift cards and salaries and wages earned, as well as income tax due and of course trade accounts payable.
Other current liabilities include the income taxes due, interest due on loans, and some other liabilities that are less common, such as current obligations that arose from some restructuring and some gains on the sale of real estate in the prior year that were not recognized until the current year.
Some other common current liabilities include product warranties and contingent liabilities, such as pending lawsuits. These both require some estimating and judgment, as you’ll see on the following pages.