Question

Short-term obligations expected to be refinanced are not classified as current liabilities because?

1) they will be paid by the balance sheet date
2) the obligations will be satisfied before the financial statements are issued
3) their satisfaction will not require the use of assets classified as current as of the balance sheet date
4) none of these

Answer 1

Short-term obligations expected to be refinanced are not considered current liabilities because they won't require the use of current assets for their satisfaction. Bank balance sheet assets may not be on-hand due to asset-liability mismatches, and the value of loans in the secondary market depends on borrower reliability and movements in market interest rates.

Step-by-step explanation:

Short-term obligations expected to be refinanced are not classified as current liabilities because their satisfaction will not require the use of assets classified as current as of the balance sheet date. When an entity has the intent and ability to refinance a short-term obligation on a long-term basis and has taken any necessary steps to assure refinancing, it does not present the obligation as a current liability. This reflects the fact that the obligation will not drain current resources but will be managed through a refinancing process with new terms.

The money listed under assets on a bank balance sheet may not actually be in the bank due to the concept of asset-liability time mismatch, which implies that the bank's customers may withdraw their deposits in the short term, while loans made by the bank are repaid over a longer term. This results in the physical currency being lent out to borrowers while still being recorded as an asset on the balance sheet.

Regarding buying loans in the secondary market, the value you are willing to pay will vary based on several factors:

• If the borrower has been late on a number of loan payments, the loan is riskier, and you would likely pay less for it.
• If interest rates in the economy as a whole have risen since the loan was made, existing loans with lower interest rates are less attractive, so you would pay less for them.
• If the borrower is a firm that has just declared a high level of profits, this signals lower risk, and you might be willing to pay more for the loan.
• If interest rates in the economy as a whole have fallen since the loan was made, the loan's higher interest rate is more attractive, and you would pay more for it.