accting for liabilities and equity

Question 1

definition of liabilities:

Answer 1

• present obligation to external party
• future outflow of resources embodying economic benefits
• obligation must have resulted from past events

Question 2

liabilities recognition?

Answer 2

• probable that future economic benefits will flow from the entity
• cost or value can be reliably measured

Question 3

where are liabilities displayed?

Answer 3

in Statement of Financial Position in order of liquidity

Question 4

current liability?

Answer 4

an obligation that can reasonably be expected to be paid within 1 year (or within the operating cycle).

Question 5

what are ones other than current liabilities called?

Answer 5

non-current

Question 6

non current liabilities?

Answer 6

loan payable
mortgage payable
debentures payable

Question 7

what are provisions?

Answer 7

a type of liabilities for which the amount or timing is uncertain. Future expected outlays where no present obligation exists are excluded.

Question 8

contingent liabilities?

Answer 8

are possible obligations arising from a past event. Whether or not a liability exists depends on the occurrence (or non-occurrence) of an event, which is often beyond the control of the company.

Question 9

Provisions are liabilities for which amount of…

Answer 9

future sacrifice is uncertain e.g. long service leave and warranty

Question 10

Provision:

what is warranty

Answer 10

an obligation of supplier of goods or services to purchaser that product will be functional for stated period of time

Question 11

Provision:

uncertainty in measuring future sacrifice as…

Answer 11

it is conditional upon customer making a claim

costs of satisfying the claim depend on nature of fault

Question 12

contingent liabilities are liabilities

Answer 12

• for which amount of future sacrifice uncertain it cannot be measured reliably
• do no satisfy the probability criterion
• dependent upon occurrence of uncertain future event outside control of entity

Question 13

Contingent liabilities are not recognised in the accounts because

Answer 13

they are neither probable nor able to be measured reliably.

Question 14

contingent liability must be disclosed in ….

Answer 14

However, they must be disclosed in the notes to the financial statements.

Question 15

notes payables record obligations in form of?

Answer 15

written notes

Question 16

notes payable require and issued to/for?

Answer 16

require borrower to pay interest - borrowing costs/finance costs
- issued for varying period of time and frequently issued to meet short-term financing needs

Question 17

non-current liabilities:

obligations expected to be paid after…

Answer 17

1 year or outside normal operating cycle

Question 18

non-current: common forms of obligations are

Answer 18

bank loans

long-term notes

Question 19

non-current: debentures are…

Answer 19

notes that are subject to secured charge on issuer’s assets

Question 20

non-current: unsecured notes

Answer 20

not subject to security over assets

Question 21

non-current: debentures are redeemed when…

Answer 21

purchased (repaid) by issuing company

Question 22

debentures may be redeemed before..

Answer 22

maturity

Question 23

Redeeming debentures before maturity:

company decide to do so to

Answer 23

reduce interest cost and remove debt from its statement of financial position

Question 24

Redeeming debentures before maturity

company must:

Answer 24

• Eliminate carrying amount of notes at redemption date.
• Record cash paid.
• Recognise gain or loss on redemption.

Question 25

Why issue unsecured notes or debentures? advan

Answer 25

advan:

• shareholder control not affected (noteholders don’t have voting rights, so current owners (shareholders) retain full control)
• tax savings result (interest deductible for tax purpose; dividends on shares not)
• earning per share higher (altho interest expense reduce profit, earnings per share often higher under debt financing as no additional shares issued)

Question 26

Why issue unsecured notes or debentures? disadv

Answer 26

• Company is locked into fixed payments: these must be made in good and bad times.
• Interest must be paid on periodic basis.
• Principal must be paid at maturity.
• Company with fluctuating earnings and relatively weak cash flow may experience difficulty in meeting interest payments in periods of low earnings.

Question 27

what is equity?

Answer 27

The residual interest of the owner/s in the assets (less liabilities) of the entity

Question 28

equity calculation

Answer 28

assets - liabilities = net assets

net assets = equity

Question 29

Single proprietorship or sole trader

Answer 29

– Owned by one person
– Simple to set up
– Common form of business structure
– Separate accounting entity, not separate legal entity

Question 30

• Partnership/

Answer 30

– Owned by two or more partners
– Simple to set up
– Separate accounting entity, not separate legal entity

Question 31

• Company or corporation

Answer 31

– Owned by shareholders
– Separate accounting entity – Separate legal entity
– Limited liability
– Protection for owners

Question 32

The equity of a typical company split into 3 major categories:

Answer 32

share capital
retained earning
reserves

Question 33

The equity of a typical company split into 3 major categories:
share capital?

Answer 33

Ordinary or preference shares

Question 34

The equity of a typical company split into 3 major categories: retaining earning?

Answer 34

Retained earnings represent accumulated profits that have

not been distributed to shareholders as dividends.

Question 35

The equity of a typical company split into 3 major categories: reserves?

Answer 35

Examples (Disclose the nature and purposes of reserves ):

General reserve Revaluation surplus

Question 36

shareholder rights: company owners and different types of shares?

Answer 36

A company is owned by its shareholders.
• Different classes of shares carry different ownership rights:
• ordinary shares
• preference shares
• When a company has only one class of shares they are referred to as ordinary shares.

Question 37

Ordinary shares have 3 major ownership rights:

Answer 37

1. to vote in election of board of directors at annual general meetings - actions that require shareholder approval
2. share company profits through receipt of dividents
3. share in assets on liquidation in proportion to their holdings - residual claim

Question 38

preference shares?

Answer 38

have priority over ordinary shares with respect to dividends and claims at liquidation

Question 39

A dividend is a

Answer 39

distribution of profit by a company to its

shareholders on a pro rata basis.

Question 40

Directors determine if dividend is

Answer 40

payable and fix amount, payment time and payment method

Question 41

forms of dividends?

Answer 41

cash
property
shares

Question 42

Public companies often pay 2 dividends:

Answer 42

Final dividend determined at end of year.

Interim dividend paid during the year.

Question 43

cash dividend is a

Answer 43

pro rata distribution of profit paid in cash to shareholders

Question 44

Companies can only pay a cash dividend if:

Answer 44

• Assets exceed liabilities by more than the amount of dividend proposed.
• It is fair and reasonable to shareholders as a whole.
• It does not materially prejudice the company’s ability to pay its creditors.

Question 45

who has authority to determine the amount of the dividend.

Answer 45

board of directors

Question 46

A share dividend is a

Answer 46

a pro rata distribution of the

company’s shares to shareholders.

Question 47

Total equity does not change because

Answer 47

• Retained earnings or general reserves decreases, and

- Share capital increases.

Question 48

A share dividend signals that?

Answer 48

this amount of retained earnings is not available to shareholders as cash dividends.

Question 49

Equity section of the statement of financial position of a corporation includes:

Answer 49

• Share capital: contributed equity (paid and any outstanding amounts).
• Retained earnings: prior profits kept within company and not distributed as dividends.
• Reserves

Question 50

Statement of Changes in Equity reflect and must show?

Answer 50

Reflects the net changes in equity accounts for the period.

• Must show for each equity account a reconciliation between opening and closing balances.

Question 51

why offer warranties?

Answer 51

statutory obligation to ensure goods/services are satisfactory stanadrd.
to gain consumer confidence/satisfaction and sales offer it greater period than required

Question 52

Explain the difference between a provision and other types of liabilities recognised on the statement of financial position.

Answer 52

provision is liability for which amt or timing of future sacrifice is uncertain - estimation
amt of future sacrifice of other liabilities such as mortgages. is quantified by invoice or contractual arrangement