Crash Course in Accounting and Financial Statement Analysis, Second Edition (2024)
Short-Term Debt versus Long-Term Debt
Debt is typically aggregated into several buckets in the balance sheet depending on the duration and nature of the borrowing.
Short-Term Debt
Notes payable are short-term borrowings owed by the company that are due within one year. Current portion of long-term debt is the portion of long-term debt that is due within one year. For example, debt due in five years may have a portion due during each of those years. Each such portion would be considered current portion of long-term debt.
Notice that the two liabilities (notes payable and current portion of long-term debt) stem from financing activities, while all the previous current liabilities stemmed from operating activities. This will prove an important distinction in the cash flow statement and in ratio analysis because cash used or generated from operating activities should be analyzed differently from cash used or generated from changes in debt financing.
Long-Term Debt
Long-term debt is debt that is due in more than one year.
There are five commonplace approaches to financial statement analysis: horizontal analysis, vertical analysis, ratio analysis, trend analysis and cost-volume profit analysis.
Financial statement analysis is a great tool for evaluating the profitability of a company, but it does have its limitations due to the use of estimates for things like depreciation, different accounting methods, the cost basis that excluded inflation, unusual data, a company's diversification, and useful information ...
Even a financial statement audit for a Company with about $1 million in annual sales will take 40 hours to complete all the audit procedures required. The majority of time spent in a financial statement audit is used to test accounting transaction samples.
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