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The Controller's Function: The Work of the Managerial Accountant, 4th Edition by Steven M. Bragg

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Chapter 15

Liabilities

It has been said that the management, or planning and control, of a company's assets rests largely in the hands of the operating executives but that management of the liabilities and equity is primarily the responsibility of the financial executives. To an extent, this is true—the controller must closely plan and monitor liabilities to foresee changes in the company's liabilities.

This chapter discusses the practical considerations regarding liability planning, measurement, and control, as well as miscellaneous issues related to liabilities, such as bond ratings, debt capacity, and leverage.

Objectives

The purpose of liability management is to ensure that the company has enough cash to meet funding requirements for any purpose significant to its long-term financial health. Thus, it is not merely to avoid insolvency or bankruptcy. From the standpoint of the controller, the objectives of liability management are:

  • Recording and disclosing the company's financial obligations in accordance with generally accepted accounting principles
  • Reporting corporate liabilities in the proper form, as required by indentures and credit agreements
  • Maintaining a sound financial structure of debt in proportion to equity through effective planning and control
  • Securing necessary borrowed funds in a timely manner and at a cost that is competitive
  • Creating and maintaining controls that restrict commitments within well-defined limits so that they do not result in excessive liabilities ...

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