C13 Current liabilities and Contingencies

Question 1

Defining liability with three phrases

Answer 1

past transactions, present obligation, future benefit

Question 2

non interest bearing note

Answer 2

Still has interest but it is deducted from the original amount to determine immediate cash proceeds.

REMEMBER: the “discount” is usually in view of a banker. The borrower usually suffers. It is interest for the borrower

Question 3

Secured Loans

Answer 3

Using A/R, inventory, and fixed assets as collateral

Pledging A/R (When A/R is collateral) and Factoring AR (Short-term selling of A/R to finance something

Question 4

Commercial Paper

Answer 4

Short term
unsecured notes sold in minimum amounts with varying maturities.
Used by large firms to borrow at lower rates

Question 5

Which type of liability is preferred: current or non?

Answer 5

Non current because it raises the working capital (something investors like to see!) and current ratio, and considered less risky because its not immediately due

Question 6

What differentiates provisions from contingencies

Answer 6

though there is uncertainty in both of the two (provision is uncertain in the timing or amount of furutre outflow of benefits), provisions have a DEFINITE present liability, where contingency doesn not. That’s why it’s contingent

Question 7

line of credit

Answer 7

allows a company to borrow cash without having to follow formal loan procedures and paperwork (similar to a tab), so that the ups and downs of business can smooth out (keynsian economics).

Short term bank loans are arranged under lines of credit (through non interest bearing notes) `

Question 8

familiar accrued liabilities

Answer 8

wages payable, income tax payable, and interest payable

Question 9

Warranties are ?

Answer 9

• first recognized as unearned income, and is a loss contingency
• BUT IF THEY PAID FOR THE WARRANTY, its not a loss contingency duh.

Question 10

to vest

Answer 10

to be eligible to earn something