On Which Financial Statements Do Companies Report Long-Term Debt?

Financial statements are like a report card for a business. They highlight a company’s health and financial wellness through numbers like income and debt. These statements come in different forms, including the balance sheet, income statement, and cash flow statement. Each of these outlines a different set of financial data. A company lists its long-term debt on its balance sheet under liabilities, usually under a subheading for long-term liabilities.

Key Takeaways

• Long-term debt is reported on the balance sheet.
• In particular, long-term debt generally shows up under long-term liabilities.
• Financial obligations that have a repayment period of greater than one year are considered long-term debt.
• Examples of long-term debt include long-term leases, traditional business loans, and company bond issues.

Long-Term Debt

Any obligation that a company bears for a period that extends beyond the current operating cycle or current year is considered a long-term liability. Put simply, the time is one year from the date the obligation was incurred.

Long-term liabilities can be related to financing or operations:

• Financing liabilities are debt obligations produced when a company raises cash. They include convertible bonds, notes payable, and bonds payable.
• Operating liabilities are obligations a company incurs during the process of conducting its normal business practices. They include capital lease obligations and post-retirement benefit obligations to employees.

Both types of liabilities represent financial obligations that a company must meet in the future, though investors should look at the two separately. Financing liabilities result from deliberate funding choices, providing insight into the company’s capital structure and clues to future earning potential.

Long-Term Debt

Long-term debt is listed under long-term liabilities on a company’s balance sheet. Financial obligations with a repayment period of greater than one year are considered long-term debt.

This is contrasted with current debt, which includes short-term obligations (debts due within a year). The portion of any long-term debt that is payable within 12 months is also listed as a current debt. This portion of long-term obligations, which are called short/current long-term debt, often include things like long-term leases, traditional business financing loans, and company bond issues.

Important

Financial statements can help you understand whether a company is financially sound. But, it’s important to understand that these documents are often subject to interpretation as one investor may make certain conclusions about a company while another investor may draw a different one.

Financial Statements

Financial statements record the various inflows and outflows of capital for a business. These documents present financial data about a company efficiently and allow analysts and investors to assess a company’s overall profitability and financial health.

To maintain continuity, financial statements are prepared in compliance with generally accepted accounting principles (GAAP). Among the various financial statements a company regularly publishes are balance sheets, income statements, and cash flow statements.

Balance Sheet

A balance sheet is the summary of a company’s liabilities, assets, and shareholders’ equity at a specific point in time. The three segments of the balance sheet help investors understand the amount invested into the company by shareholders, along with the company’s current assets and obligations.

There are a variety of accounts within each of the three segments, along with documentation of their respective values. The most important lines recorded on the balance sheet include cash, current assets, long-term assets, current liabilities, debt, long-term liabilities, and shareholders’ equity.

Debt vs. Equity

A company’s long-term debt, combined with specified short-term debt and preferred and common stock equity, makes up its capital structure. Capital structure refers to a company’s use of varied funding sources to finance operations and growth.

The use of debt as a funding source is relatively less expensive than equity funding for two principal reasons. First, debtors have a prior claim in the event a company goes bankrupt. As such, debt is safer and commands a smaller return.

This effectively means a lower interest rate for the company than that expected from the total shareholder return (TSR) on equity. The second reason debt is less expensive as a funding source stems from the fact interest payments are tax-deductible, thus reducing the net cost of borrowing.

Who Must File Financial Statements?

Certain entities are legally required to file financial statements in the United States. Different entities file statements with a corresponding agency. For instance, public companies file their financial statements with the Securities and Exchange Commission (SEC) while non-profit organizations must file them with the Internal Revenue Service (IRS). Private companies are not required to file specific financial statements but must submit documents like the articles of incorporation and certificate of formation in the state where they are registered or incorporated.

What Are Some Examples of Long-Term Liabilities?

Long-term liabilities are any financial obligations that a company must over for a period of more than one year. They may also be referred to as long-term debts or non-current liabilities. Some of the most common examples of long-term liabilities include long-term loans, pensions, long-term leases, bonds, and mortgages.

What’s the Difference Between Long-Term and Short-Term Liabilities?

Long-term liabilities are financial obligations that are paid over more than a 12-month period. This includes things like bonds, mortgages, and long-term leases. Short-term liabilities are due within one year. Examples of short-term debts include accounts payable, taxes, payroll, and short-term loans.

The Bottom Line

Financial statements offer analysts and investors insight into the financial health of a company. If you want to see how much long-term debt a company has, take a look at its balance sheet. When you do your analysis, be sure to compare the company’s balance sheet over several periods rather than looking at just one. This will give you a more accurate picture of where the company stands and whether it’s paying off or assuming more long-term debt.