[SOUND] [MUSIC] Before we jumped into our discussion for the day let's remind ourselves of a few concepts we touched on in our earlier lessons that introduced the balance sheet. If you recall, the balance sheet is a measurement of a company's position. When we looked at assets, we saw that assets answered our first measurement question, what do you own? We discussed current assets such as, account receivable and inventory, and also non-current assets with an emphasis on property plan and equipment. But we also touched on intangible asset. We're going to now turn our attention to answering our second measurement question. What do you owe? Using the balance sheet of the apparel manufacturer, VF Corporation, we'll answer that question by looking at the next section of the balance sheet, liabilities. We mentioned in an earlier lesson that liabilities are obligations that a company has to others. Let's start by look at some liabilities typically classified as current. Remember, current assets can be thought of as assets expected to be converted to cash or used up within one year. So it it probably comes as little surprise that current liabilities are obligations that are expected to use up current assets and usually require repayment to be made within one year. Who do companies typically owe? For the answer to that question, we can go back to our tour of the bakery. Okay, so you've seen this before. Why am I showing you Missy's kitchen and the assets we've already discussed? Well, look again. You see flour, eggs, and other ingredients. How did these items get into Missy's kitchen? Obviously Missy purchased them from a supplier. Now the supplier could ask Missy to write a check every time she receives raw materials from the supplier. But that would take a lot of effort when Missy expects to receive materials from multiple suppliers several times a week. A more convenient approach is for Missy to keep an account with the supplier, and then perhaps write one check to the supplier at the end of the month to pay for all the deliveries of raw materials that she received during the month. Of course, with this type of arrangement, at any time during the month prior to her writing the check, Missy's bakery owes the supplier for raw materials she has yet to pay for. And as an obligation to the supplier, Missy has a liability to the supplier. The current liability is described as an accounts payable on the balance sheet and is one of the liabilities most common to companies. What other obligations might the company have that can show up as a current liability on the balance sheet? Well, we see another line item that is commonly called accrued liabilities. Whereas accounts payable focuses on obligations to suppliers of inventory, accrued liabilities can be attributed to other obligations. Before we go on I have a couple of questions for you to make sure we're on the same page. Now that we're on the same page, let's go look at Jed's store, Body and Soul and see what potential liabilities we can pick out. As we approach Jed's store, the first thing I see is a potential liability. You see, Jed may lease his store space, which means he may have an obligation to the owner of the building. As we enter the store we see lots of merchandise, and Jed may purchase the merchandise on account. That may result in a liability, but would it be an accounts payable? We should probably ask Jed. I see the experts helping out patrons, but wait a minute, he has to pay them right? And if Jed has to pay them then he likely has an obligation unless he pays them at the end of each day. That means another possible liability. Okay, we see some possibilities, now let's have that conversation with Jed. You mentioned earlier that you wanted to purchase a building, buy this building, have it something that you own. Now as part of that did you have to acquire any debt to do that or is it something that you funded some other way? >> Well, that's a very good question. It took us several years to generate enough cash that we had a down-payment to build the building. So we were able to put 20% down to build this, buy the property, build the building and then we finance the rest of the building on a long-term 20 year loan to buy the building, which we're still working with now. >> Okay, I'm going to backtrack a little bit. >> Okay. >> So you talked about you go through a large number of shoes. >> Yes. >> Tell me a bit about the supplier of those shoes, and how often you receive those shoes and for our purposes, how often do you pay the supplier? >> Okay, those are all very good questions. So we are dealing with the manufacturers. With Nike Asics, Brooks, Saucony, New Balance, Adidas we're actually dealing with the companies themselves and their warehouses. Generally their shoes are made in different factories around the world, some in the United States and they have warehouses in the United States and we will deal with them at the warehouse. When we need a certain style, a certain model we will order it, we order daily, we have shoes coming in daily. Now the manufacturers also require that you place futures orders, so that they can have an idea of in six months what the demand will be around the country from their dealers like us. So we will place long term orders that we will have in and that's kind of guess work, what we expect. Probably about 20% of our total sales are those long term orders that we placed in advance, and 80% of our sales, of our shoes we sell, are things we do at once. Every Monday morning, I'll look at our inventory through the weekend, see what we're missing, what we need, and I will place orders. We can do it online now. That's changed over the last few years. We can look at their factory inventory, what they have in their What they have in there warehouse, we will place orders and generally we'll get those in two to three days. >> Okay >> So we'll have a lot of times, 100 to two to 300 pairs of shoes coming in everyday, so our orders come in daily. >> So, your orders come in daily. Do you pay immediately upon receiving those orders? >> The manufacturers will allow us dating. And they will generally give us 30, 60 to 90 days, depending on different programs they offer, to pay for the shoes we buy, and that's a beautiful thing for our business because we are able to carry some of our inventory always not having to pay for 90 days. So, generally, we will have payables outstanding of about $200,000 that we will be paying six months to 90 months and we keep extending that for the manufacturers. And so that's one of an easy way to finance our inventory so the manufacturers help us finance our inventory because generally we will turn those shoes over in 60 to 90 days or close to that. >> So that touches on another point. And that is it sounds like one of the reasons why you like that type of setup is because it allows you to retain cash for a little bit longer. So what's the importance of cash? >> Boy, cash is very important in our business. >> Okay. >> First of all, it gives us flexibility. If we need to make a purchase, sometimes the manufacturers will have closeouts, where a model that's been very successful for us, there's a new version taking its place. We will be able to buy, sometimes we've bought 100 to $200 thousand worth of a special model. We have a warehouse that will keep this shoes because we know that these shoes are highly popular, highly successful and so well give a huge discount on this closed out model and we’ll be able offer that discount to our customers plus it also helps our margins later on. So sometimes it’s nice have cash so to gives flexibility make those purchases. But generally speaking, cash is just a great thing to have and it's much better to have on our balance sheet to have cash than it is to have receivables from our customers or inventory, because both receivables and inventory, there's a risk. The inventory will gradually be devalued over time. Receivables from our customers, some will be un-collectible, so cash on the balance sheet is much more valuable to us than the risk of having those other items >> Okay great. Let's summarize some of the current liabilities we've discovered. First we saw current liabilities classified as accounts payable. Related to Missy purchasing raw materials inventory from a supplier on account. We also saw accounts payable at Jed's store related to him purchasing retail inventory on account. Second, we saw other obligations that might be classified as accrued liabilities, namely Jed shared his store's liabilities associated with obligations to his staff. Obligations to the government for taxes and several other obligations we would likely classify as accrued liabilities. One final thing I'll mention before wrapping up our lesson is that in our next lesson we'll hear about a couple of addition, okay. One final thing I mention before I wrapping up our lesson is that in our next lesson, we'll hear about a couple of additional current liabilities that may seem a bit sneaky. We'll also considered non current liabilities. I hope you'll be in a dancing mood. Until next time, be well. [MUSIC]
