8.2: Current Liabilities Flashcards
Relationships between Operating Activities and Current Liabilities
What are accounts payable, and how do they relate to a company’s day-to-day operations?
Accounts payable, also known as trade accounts payable, are obligations created when a company purchases goods and services on credit.
These obligations are settled with cash payments after the goods and services have been received, and they are a way for companies to finance the purchase of inventory.
How do suppliers’ credit terms impact a company’s accounts payable?
Generous credit terms from suppliers allow buyers to resell merchandise and collect cash before payment to the supplier.
This can encourage more sales and provide financial flexibility to the buying company.
Why is delaying payment to suppliers generally not advisable for a company?
Delaying payment to suppliers can strain relationships, impact the quality of goods and services received, and indicate financial difficulties.
It can also create problems for suppliers, who have their own bills to pay.
How do managers and analysts evaluate a company’s management of accounts payable?
Managers and analysts use the accounts payable turnover ratio to evaluate a company’s effectiveness in managing its accounts payable.
This ratio helps assess how efficiently a company is paying its suppliers and managing its working capital.
How can understanding the relationship between operating activities and current liabilities help financial analysts?
Understanding the relationship between operating activities and current liabilities enables financial analysts to explain changes in various current liability accounts.
This understanding helps analyze how specific operating activities are financed, in part, by related current liabilities.
What does the accounts payable turnover ratio measure, and how is it computed?
The accounts payable turnover ratio measures how quickly a company pays its trade suppliers.
It is computed as the cost of sales divided by the average accounts payable.
The formula is: Accounts payable turnover ratio = Cost of sales / Average accounts payable.
Why might the numerator of the accounts payable turnover ratio be adjusted for merchandising companies, and how is it adjusted?
The numerator of the accounts payable turnover ratio is adjusted for merchandising companies because credit purchases are not usually reported.
To adjust, the formula becomes:
**Purchases = Cost of sales + Ending inventory – Beginning inventory. **
This adjustment helps calculate a more accurate ratio.
What is the average days to pay payables, and how is it calculated?
The average days to pay payables indicates how many days, on average, a company takes to pay its suppliers.
It is calculated by dividing 365 days by the accounts payable turnover ratio:
Average days to pay payables = 365 days / Accounts payable turnover ratio.
How can the average days to pay payables be used for company analysis, and what does it reveal about a company’s payment behavior?
Analysts use the average days to pay payables to compare a company’s payment behavior over time and against competitors.
A decrease in average days to pay indicates faster payment to suppliers.
In the given example, Starbucks paid its suppliers more quickly in 2021 compared to previous years and faster than Monster Beverages but slower than McDonald’s.
What are the limitations of the accounts payable turnover ratio, and why is it important to consider other factors for a comprehensive analysis?
The accounts payable turnover ratio is an average and does not provide insight into individual supplier payments.
A low ratio can indicate liquidity problems or aggressive cash management.
To fully understand the result, analysts need to consider other factors such as the quick ratio and cash flows generated from operating activities.
What are accrued liabilities, and how are they recorded in financial accounting?
Accrued liabilities are expenses that have been incurred before the end of an accounting period but have not yet been paid.
They include items such as employee salaries and wages, rent, and interest.
These expenses are recorded as adjusting entries at year-end to recognize the expense for the period and create an associated liability.
What is the purpose of recording accrued liabilities as adjusting entries, and when are they typically recorded?
Accrued liabilities are recorded as adjusting entries at year-end to recognize the expenses incurred in the period.
This ensures that the financial statements reflect the accurate expenses and associated liabilities, even though the payment has not been made by the end of the accounting period.
What expenses are included in accrued liabilities, as mentioned in the given text?
Expenses included in accrued liabilities can consist of items such as employee salaries and wages, rent, and interest.
These expenses have been incurred but not yet paid by the end of the accounting period.
How do corporations handle income taxes payable, and what are the components of income tax expense or recovery?
Corporations must pay income tax at the appropriate federal and provincial rates. Income tax expense or recovery has two components:
the current portion, which is payable or recoverable within prescribed time limits,
and the deferred portion, which arises due to differences between accounting rules for financial reporting and tax rules used to determine taxable income.
