Chapter 10 Liabilities 463Coca-Cola uses the term “notes,” which is similar to a bond. Notice also that
the current maturities are subtracted from the long-term debt total. As discussed
previously, this is done because the current maturities are included as current liabilities.Contingent Liabilities
As discussed earlier, contingent liabilities that are both probable and reasonably esti-
mated are reported on the balance sheet. Professional judgment is required in distin-
guishing between contingent liabilities that are probable versus those that are only
possible. Common examples of contingent liabilities disclosed in notes to the financial
statements are litigation, environmental matters, guarantees, and sales of receivables.
The following example of a contingency disclosure, related to litigation, was taken
from a recent annual report of Ford Motor Company:Various legal actions, governmental investigations and proceedings and claims are
pending or may be instituted or asserted in the future against us, including those aris-
ing out of alleged defects in our products; governmental regulations relating to safety,
emissions and fuel economy...Some of the foregoing matters involve or may involve
compensatory, punitive, or antitrust or other treble damage claims in very large
amounts, or demands for recall campaigns, environmental remediation programs, sanc-
tions, or other relief, which, if granted, would require very large expenditures...We
have established accruals for certain of the matters discussed...where losses are
deemed probable and reasonably estimable. It is reasonably possible, however, that some
of the matters discussed in the foregoing paragraph for which accruals have not been
established could be decided unfavorably to us and could require us to pay damages or
make other expenditures in amounts or a range of amounts that cannot be estimated
at December 31, 2004.At the time, Ford did not anticipate that these matters would have a material effect on
future financial statements, but acknowledged that material losses were possible.LIQUIDITY ANALYSIS
A company’s current and long-term liquidity can be analyzed from financial statement
information. Current liquidity is analyzed using the current and quick ratios. Long-
term liquidity is analyzed using the number of times interest charges earned and ratio
of total liabilities to total assets.Current Liquidity Analysis
Current liabilities are evaluated in relation to current assets, because current
assets are normally used to pay current liabilities. When current assets are not
deemed sufficient to pay current liabilities, the current liabilities may be refinanced
through long-term debt. Using long-term debt in this way is generally considered
undesirable. The current assets and current liabilities sections of recent balance sheets
forBarnes & Noble, Inc., and Borders, Inc., are shown in Exhibit 16.Analyze and interpret liq-
uidity using the current ra-
tio, quick ratio, number of
times interest charges
earned, and ratio of total
liabilities to total assets.