Current Maturity

\(2 \%\) Extra-Credit Assignment¶

Will long-term borrowings will be reclassified into short-term borrowings?

By: Ahmed Thahir, 2020A7PS0198U

Summary¶

No, not exactly. However, long-term borrowings will be reclassified into current liabilities (not exactly short-term borrowings) upon a certain date, using the concepts of

Current Maturity of Long-Term Debt
Current Portion of Long-Term Debt

Explanation¶

The current maturity of a company’s long-term debt refers to the stage when a long-term debt (or a portion of it) is due within the next 12 months.

Current Portion of Long-Term Debt (CPLTD) refers to the portion of liabilities that have gone throught current maturity of long-term debt. It can be less than or equal to the Long-term Debt (LTD).

\[ 0 \le \text{CPLTD} \le \text{LTD} \]

This means that portion of long-term debt that is to be paid within a year is reclassified from a non-current liability to a current liability.

Why?¶

This is to accurately analyze the liquidity of a company, since CPLTD must be paid within the coming year; liquidity is a company's ability to convert assets to cash or acquire cash—through a loan or money in the bank—to pay its liabilities/obligations within the current year.

\[ \begin{aligned} \text{Current Ratio} &= \frac{\text{Current Assets}}{\text{Current Liabilities}} \\ &= \frac{\text{Current Assets}}{\text{Short-Term Borrowings + \textcolor{hotpink}{CPLTD}}} \\ \text{Quick Ratio} &= \frac{\text{Current Assets - Inventories}}{\text{Current Liabilities}} \\ &= \frac{\text{Current Assets - Inventories}}{\text{Short-Term Borrowings + \textcolor{hotpink}{CPLTD}}} \\ \text{Cash Ratio} &= \frac{\text{Cash \& Cash Equivalent + Short-Term Investments}}{\text{Current Liabilities}} \\ &= \frac{\text{Cash \& Cash Equivalent + Short-Term Investments}}{\text{Short-Term Borrowings + \textcolor{hotpink}{CPLTD}}} \end{aligned} \]

As you can see in all forms of liquidity analysis, we need to include CPLTD to ensure an accurate analysis.

References¶

[1] “Current Maturity Definition,” Investopedia. https://www.investopedia.com/terms/c/currentmaturity.asp (accessed Apr. 30, 2023).

[2] “What Is the Current Portion of Long-Term Debt (CPLTD)?,” Investopedia. https://www.investopedia.com/terms/c/currentportionlongtermdebt.asp (accessed Apr. 30, 2023).

Last Updated: 2024-01-24 ; Contributors: AhmedThahir