Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client’s liquidity? Explain.

Current liabilities are the liabilities that are payable within a financial year. It occurs either out of realization from current assets or by creating fresh current obligation.

Unearned revenue is an obligation that comes from the existing sales but for which some of the products or services are overdue to the customers in the future. When there is a sale, customers pay for the product delivered to them as well as for the future products or services. For this reason, the firm identifies revenue from the existing product and portion of the income from sale is listed as an obligation (unearned revenue) for the number of future products or services that are unpaid to customers. Market analysis advises that an increase in the unearned revenue liability is still regarded as a positive signal about the sales and income. With the growth of sales, the unearned revenue also grows. Hence, an increase in a liability is regarded as a positive news about the firm’s accomplishment. However, when the unearned revenue falls, the firm owes less future values but this also implies that sales of new products may have slowed.