chapter 8 mgmt.

line of credit-

borrow up to certain prearranged limit without paperwork

Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2021, signing a 6%, six-month note. record notes payable

cash 100,000 debit. notes payable 100,000 credit

Assume you buy lunch in the airport for $15 plus 10% sales tax.

cash 16.50 debit. sales tax payable 1.50 credit. sales revenue 15.00 credit.

quick assets-

cash, current investments, accounts receivable

lawsuits, product warranties, environmental problems, and premium offers are examples of what?

contingent liabilities

The collection of cash from the customer does what to the company?

creates a liability

Current ratio=

current assets / current liabilities

acid-test ratio has one difference from current ratio?

current assets in the numerator are only those that quickly convert to cash

The amount of current assets available for every $1 of current liabilities

current ratio

Current portion of long-term debt-

debt that will be paid within the next year

In a lawsuit, defendant faces what? the plaintiff has what?

defendant-contingency liability plaintiff- contingency gain

line of credit is what type of agreement?

informal

Deferred revenues-

liability account used to record cash received in advance

a large positive working capital means what?

liquidity

commercial paper-

loan from one company to another with maturities of 70 to 270 days

probable that jeep will lose 100 in future. record entry

loss 100 debit. contingent liability 100 credit.

A contingent liability is recorded only if

loss is probable and amount is reasonably estimable

trade account payable=

means notes payable

The higher the current ratio,

more liquid it is

when line of credit is first negotiated, what happens?

no entry is made first because no money borrowed yet

Expected End of Period Current Ratio = $5 mil. / $4 mil. = 1.25 Company decides to delay receipt of $1 million in goods until the following period. what happens? new current ratio?

this decreases assets and liabilities by 1 million increases ratio. $4 / $3 = 1.33

We record interest expense in the period in which we pay it, rather than in the period we incur it A. True B. False

true

contingency-

uncertain problem

Employers must also pay federal and state

unemployment taxes

Payroll Employer Costs

Federal and state unemployment taxes Employer matching portion of Social Security and Medicare Employer contributions for health, dental, disability, and life insurance Employer contributions to retirement or savings plans

Collectively, Social Security and Medicare taxes are referred to as

FICA taxes

payroll cost for employee

-Federal and state income taxes -Employee portion of Social Security and Medicare (FICA taxes split) -Employee contributions for health, dental, disability, and life insurance -Employee investments in retirement or savings plans

2 fringe benefits?

-Health, dental, disability, and life insurance -retirement or savings

liability-

-responsibility to sacrifice future asset because of past event

contingent gain-

-uncertain situation that might result in gain

Criteria for Reporting a Contingent Liability.

1. The likelihood of payment is -Probable -Reasonably possible -Remote 2. The amount of payment is -Reasonably estimable; or -Not reasonably estimable.

1. Within the next year 2. After the next year

1. current liability 2. long-term liability)

acid-test ratio, or quick ratio=

Cash + Current investments[no inventory/prepaid rent] + Accounts receivable / current liabilities

Assume Apple Inc. sells an iTunes gift card to a customer for $100. record deferred revenue.

Cash 100 debit. Deferred Revenue 100 credit.

When the customer purchases and downloads, say, $15 worth of music, Apple records the following:

Deferred Revenue 100 debit. Sales Revenue 100 credit.

Assume Southwest Airlines borrows $100,000 from Bank of America on September 1, 2021, signing a 6%, six-month note. Record Interest for full term of loan, not paid yet in December.

Interest expense 2,000 debit. Interest payable: 2,000 credit.

FICA tax rate (Social Security and Medicare) 7.65% Federal and state unemployment tax rate 6.2%. 100,000 overall. record employer payroll taxes.

Payroll tax expense 13850 debit. FICA tax payable (.0765 x 100,000) 7650 credit. Unemployment tax payable (.062 x 100,000) 6,200 credit.

Hawaiian Travel Agency has a total payroll for the month of January of $100,000 for its 20 employees. Federal and state income tax withheld $24,000. FICA tax rate (Social Security and Medicare) 7.65%. Record employee salary expense and withholdings. (hint: FICA Tax 7.65% to .0765)

Salaries Expense 100,000 debit. Income Tax Payable: 24,000 credit. FICA Tax Payable: 7,650 credit. (.0765 x 100,000) Salaries Payable 68,350 credit.

notes payable-

a liability that creates interest expense

Because the numerator contains only a portion of the current assets used in the current ratio,

acid-test ratio will be smaller

Fringe benefits-

additional benefits from employer

Accounts payable-

amount owed to suppliers for service that company bought on credit

contingent liability-

an uncertain situation that might result in a loss depending on outcome of a future event

Interest on notes is calculated as=

face value x annual rate x fraction of the year

In some states, companies are required to collect sales tax when selling goods or services and then

giving them back to government

Liquidity-

have money to pay maturing debt

repayment of note.borrows $100,000 from Bank of America on September 1, 2021. 2,000 interest payable owed is recorded. 2,000 interest expense recorded of the four months on december 31st. complete payment on march 1st.

notes payable 100,000 debit. interest payable 2,000 debit [decrease amount owed] interest expense 1,000 debit (100,000 x 6% x 2/12) cash 103,000 credit.

time it takes to produce revenue is called

operating cycle

If a company has an operating cycle longer than one year, its current liabilities are defined by the

operating cycle, not length of year

long-term liabilities-

payable more than one year from now

current liabilities-

payable within one year

in current portion of long-term debt, long-term obligations are what when they become payable within the upcoming year?

reclassified

debt covenant

requires certain minimum financial measures be met or the lender can recall the debt.

Health insurance premiums (Blue Cross) paid by employer 5,000 Contribution to retirement plan (Fidelity) paid by employer 10,000. Record employer-provided fringe benefits.

salaries expense 15,000 debit. accounts payable 5,000 credit. accounts payable 10,000 credit.

Sales tax payable-

sales taxes collected from customers by the seller

Assume warranty costs are estimated to be 3% of sales. December sales are $1.5 million and customers make warranty claims of $12,000 in January of the following year. 2 entries. dec. and jan.

warranty expense: 45,000 debit. warranty liability: 45,000 credit. warranty liability: 12,000 debit cash: 12,000 credit.

working capital equation

working capital = current assets - current liabilities

3 liquidity measures?

working capital, current ratio, acid-test ratio

Not the best measure of liquidity for comparing across companies, because the ratio does not control for the relative size of each company

working capital= current assets-current liabilities

Can management influence the ratios that measure liquidity?

yes