9. Current liabilities, contingencies and the time value of money Flashcards
Current liability
An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year.
Accounts payable
Amounts owed for inventory, goods, or services acquired in the normal course of business.
Note payable
A liability resulting from the signing of a promissory note.
Discount on notes payable
A contra liability that represents interest deducted from a loan in advance. E.g. terms may be stated as 2/10, n/30. This means that if the payment is made within 10 days, a 2% discount is available. After this there is no discount and the payment must be made within 30 days.
Current maturities of long-term debt
The portion of a long-term liability that will be paid within one year.
Accrued liability
A liability that has been incurred due to the passage of time but has not yet been paid, e.g. wages payable.
Contingent liability
An existing condition for which the outcome is not known but depends on some future event.
Estimated liability
A contingent liability that is accrued and reflected on the balance sheet.
Contingent asset
An existing condition for which the outcome is not known but by which the company stands to gain. Contingent assets are never reported before they are realized due the conservatism of accounting, i.e. contingent assets are never accrued.
Time value of money
An immediate amount should be preferred over an amount in the future. This is due to the fact that money can be invested and through this increased over time with interest.
Simple interest
Interest is calculated on the principal amount only. Calculated by multiplying the principle amount with the interest rate per year and the time in years.
Compound interest
Interest calculated on the principal plus previous amounts of interest, i.e. interest on interest.
Annuity
A series of payments of equal amounts.
Future value of a single amount
Amount accumulated at a future time from a single payment or investment, future value = present value times (1 + interest rate)^number of periods.
Present value of a single amount
The amount at a present time that is equivalent to a payment or an investment at a future time. In many situations we want to determine how much should be invested to achieve a given amount in the future.
present value = future value times (1 + interest rate)^(minus)number of periods.
