Chapter 9 - Liabilities
Accounts payable turnover ratio
A high ratio of this suggests that the company is paying its accounts with suppliers quickly, in a timely manner
Notes payable
A note payable specifies an annual interest rate associated with the borrowing
COGS Expense / Average accounts payable
Account payable turnover ratio
365 days / Accounts Payable Turnover Ratio
Average age of payables
Current Liabilities: Accounts payable Accrued liabilities Notes payable Current portion of long-term debt Noncurrent liabilites: Long-term debt Deferred taxes Bonds
Balance Sheet
Future value * present value factor
Calculating Present value:
75% economic life transferred end asset fair market value present value 90% fair market value
Capital lease criteria: 1) Lease term is ____ or more of the assets´s expected ______ 2) Ownerships of the asset is ____ to the lessee at the ___ of the lease 3) Lease permits lessee to purchase the ____ at a price that is lower than its ______ 4) The _______ of the lease payments is over ___ or more of the _____ of the asset when the lease is signed
Operating Activities (indirect) Net Income + Increases in current liabilities - Decreases in current liabilities Under Financing Activities + Increase in long-term liabilities - Decrease in long-term liabilities
Cash Flow
suppliers/creditors manipulation creditors
Caution with Accounts Payable Turnover Ratio: 1) Might not be generalizable is a company pays some _______ on time but is late with other 2) Subject to _____; managers could be late in paying _____ during the entire year but catch up at year-end so that the ratio is at an acceptable level
pay interest
Company is legally obligated to ______
bankruptcy
Creditors can force the company´s ______
Total current assets / total current liabilities
Current Ratio
income statement
Liabilities are not shown on the _______
debt & equity
Liabilities: Two sources of financing ______ & ______
Dr. Cash (+A) Cr. Note Payable (+L)
Note payable: Journal entry when the note is issued
Dr. Interest Expense (+E,-SE) Cr. Interest Payable (+L)
Note payable: Recodring the adjusting journal entry for the interest owed
Dr. Interest Payable (-L) Cr. Cash (-A)
Note payable: Recodring the interest payment to the lender
interest revenue interest expense
Note payable: To the lender, interest is a(an)______ To the borrower, interest is a(an) _______
Dr. Compensation Expense (+E,-SE) Cr. Cash (-A) Cr. FICA Payable (+L) Cr. Income tax withheld (+L)
Payroll journal entry:
Social Secutiry Tax & Medicare Tax (FICA) Federal Income Tax & State and Local Income Taxes (Taxes) Voluntary Deductions
Payroll taxes: Gross pay Less Deductions: - - - - - = Net pay
Liabilities
Probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services
Deferred/Unearned revenue
Revenues that have been collected but not earned
bonds public
Significant debt needs are often filled by issuing _____ to the ____
banks insurance companies pension plans
Small debt needs can be filled by a single source:
Footnotes at the bottom
Summary of significant accounting policies - description of pertinent information concerning accounting treatment of liabilities Liabilities note - a listing of the major classifications of liabilities with information about maturities and interest rates. Information about contingent liabilities
Probable
The Probabilities of occurrence of a contingent liability: _______ - the change that the future event or events will occur is high
Reasonably possible
The Probabilities of occurrence of a contingent liability: _______- the chance that the future event or events will occur is more that remote but less than likely
Remote
The Probabilities of occurrence of a contingent liability: _______- the chance that the future event or events will occur is slight
Current cash equivalent
This is the cash amount a creditor would accept to settle the liability immediately
Current Ratio
This measures a company´s liquidity - the ability of the company to pay its short-term obligations with current assets
Working Capital
This measures a margin of safety that ensures a company can meet in short-term obligations
Present value Future value Interest rate Time period
Time Value of money:
Current assets - Current liabilities
Working Capital
Working capital
_____ impacts the profitability of the company: Managing this: Don´t want too little becasue then you do not have enough current assets to pay off current liabilities Don´t want too much because it is not an efficient use of current assts (they just sit there)
Liabilities
______ are recorded at their current cash equivalent, which is the cash amount a creditor would accept to settle the liability immediately
Creditors
______ often require the borrower to pledge specific assets as security for long-term liabilities
Contingent liabilities
_______ are potential liabilities that are created as a result of a past event
Deferred revenues
________ are reported as a liability because cash has been collected but the related revenue has not been earned by the end of the accounting period
Liquidity
ability to pay current obligation
Accrued Liabilites
another name for accrued expenses
Trade accounts payable
another name for an accounts payable
Deferred revenues
another name for unearned revenues
debt
funds from creditors
equity
funds from owners
Capital lease
long-term lease Meet one of 4 criteria; Record an asset (debit) & a liability (credit) on the Balance Sheet
Current Liability
maturity = 1 year or less
Noncurrent Liability
maturity > 1 year
Unearned revenues
obligations arising when cash is received prior to the related revenue being earned
Notes payable
obligations due supported by a formal written contract
Accrued expenses
obligations related to expenses that have been incurred but have not been paid at the end of the accounting period
Accounts payable
obligations to pay for goods and services used in the basic operating activities of the business
Operating lease
short-term lease No liability or asset is recorded on the Balance Sheet