CPLTDCurrent Portion of Long-Term Debt
References in periodicals archive ?
If the premise is accepted that CPLTD is repaid from CPFA and not from current assets, it must follow that the current ratio is flawed by including CPLTD as a current liability that must be paid from current assets.
This approach would take CPLTD out of current liabilities, or at least adjust the calculation of working capital and current ratio accordingly That would require inventing some new terms:
The alternate solution is to leave CPLTD with current liabilities, but calculate CPFA and report it with current assets.
Academics may debate whether the most appropriate treatment is (Solution l) to move CPLTD from "current" back to long-term to match it with the fixed assets it finances; or (Solution 2) to take the portion of the fixed asset that is "current" and move it up with current assets.
By excluding CPFA and CPLTD from the formulas, Solution 1 provides a valuable analysis of the short-term cycle: Are current assets (traditionally defined to exclude CPFA) adequate to repay the short-term liabilities that financed them (excluding CPLTD)?
However, CPLTD and CPFA complicate the understanding of short-term and long-term cash flow cycles because they contain elements of both cycles, as their titles indicate: "The current portion of long-term debt" and "the current portion of fixed assets.
Notice that CPLTD appears in both the measure for the repayment of short-term debt--the current ratio--and the measure for the repayment of long-term debt--the DSCR.
However, the old acid-test ratio suffers from the same flaw as the old current ratio--it erroneously suggests that CPLTD, included as a current liability, is repaid by the current (acid) assets.
For example, a negative trading capital and a positive current-period capital would indicate that the short-term assets do not cover short-term liabilities, but the company is able to keep current because the long-term cycle is generating cash flow (CPFA) adequate to repay both the CPLTD and any shortfall in the short-term cycle.
And it is easy to calculate: It is the scheduled depreciation for the coming year, just as CPLTD is the scheduled principal payments for the coming year.