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Financial Acct Systems 2 > Ch 13 > Flashcards

Ch 13 Flashcards

0
Q

3 essential characteristics of a liability

A

1 present obligation that entails settlement by probable
Future transfer, or use of cash, goods or services

2 unavoidable obligation

3 transaction or event creating obligation has already occurred

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1
Q

Liabilities

A

Probable future sacrifices of economic benefits arising
From present obligations of particular entity

To transfer assets or services to other entities in future
As a result of past transactions

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2
Q

Current liabilities

A

Obligations whose liquidation is reasonably expected to
Require use of current assets or the creation of other
Current liabilities

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3
Q

Operating cycle is the period of time elapsing…

A

btw acquisitions of goods and services involved in

manufacturing and final cash realization from sale

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4
Q

5 Typical current liabilities that don’t end in payable?

A 
1 current maturities on Longterm debt
2 short term obligations expected to be refinanced
3 customer advances and deposits
4 unearned revenues
5 employee related liabilities
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5
Q

Accounts payable AKA Trade accounts payable

A

Balances owed to others for goods, services or supplies
Purchased on open account

Arise b/c time lag between receipt of product or service
And transfer of payment

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6
Q

Notes Payable AKA Trade notes payable

A

Written promises to pay certain sum of money on specified
Future date

May arise from purchases, financing or other transactions

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7
Q

Zero interest bearing note 4 things (note 3 and 4 are same thing)

A

1 Does not state an interest rate on face of note
2 interest is still charged
3 at maturity, borrower must pay back amount greater
Than received on issuance day
4 borrower receives in cash present value of note

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8
Q

Discount on notes payable

A

Contra account to notes payable

Subtracted from notes payable on balance sheet

Represents interest expense charged in future periods

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9
Q

Current maturities on long term debt

A

Current liabilities on portion of bonds, mortgage notes,

Other Longterm indebtedness that matures within year

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10
Q

Companies exclude Longterm debts maturing currently

As current liabilities if… 3 things

A

1 retired by assets accumulated for this purpose that
Properly haven’t been shown as current assets

2 refinanced, or retired from proceeds of new debt issue

3 converted into capital stock

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11
Q

When only a part of Longterm debt is to be paid within the next 12 months the company reports…

A

The maturing portion of Longterm debt as current liability

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12
Q

Due on demand, callable

A

Any liability should be classified as current if callable by
Creditor or due on demand in operating cycle

Callable Brought on by violation of agreement

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13
Q

Short term obligations that are expected to be refinanced on long term basis

A

Will not require use of working capital over next year

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14
Q

2 refinancing criteria for exclusion of short term obligation from current liabilities

A

1 intend to refinance obligation on long term basis

2 demonstrate ability to consummate refinancing

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15
Q

Intention to refinance on Longterm basis means?

A

Company intends to refinance short term obligations

So it won’t require use of working capital in fiscal year

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16
Q

2 ways company demonstrates ability to consummate refinancing?

A

1 actual refinancing

2 entering financing agreement

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17
Q

Ability to consummate the refinancing: Actual refinancing

A

by issuing long term obligation or Equity securities after date
of balance sheet but before It is issued

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18
Q

Ability to consummate the refinancing: Entering a financing agreement

A

That clearly permits company to refinance debt on long term

Basis on terms readily determinable

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19
Q

IFRS requires that the current portion of long term debt be classified as…

A

Current unless agreement to refinance on Longterm basis

Is completed before date of financial statements

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20
Q

Cash dividends payable

A

Amount owed by corporation to stockholders as result

Of board of directors’ authorization

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21
Q

Preferred dividends in arears

A

Companies don’t recognize accumulated but undeclared
Dividends on cumulative preferred stock as liability

B/c not obligation til board of directors authorizes payment

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22
Q

Stock dividends

A

Dividends payable in form of additional shares of stock

Not recognized as liability

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23
Q

Returnable cash deposits

A

Received from customers and employees

Guarantees performance of contract or service
Or guarantees to cover payment of expected future obligations

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24
Q

Unearned revenues, how are they accounted for (2 steps)

A

1 when company receives advanced payment, it debits cash
Credits unearned revenues

2 when company recognizes revenue it debits unearned
revenue and credits revenue account

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25
Q

3 types of employee related liabilities

A

1 payroll deductions

2 compensated absences

3 bonuses

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26
Q

Payroll deductions, 4 most common types?

A

Taxes, insurance premiums, employee savings, union dues

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27
Q

To the extent that a company has not remitted the amounts deducted to the proper authority at the end of the accounting period…

A

It should be recognized as a current liability

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28
Q 
Old age, Survivor, and Disability Insurance (OASDI) tax
AKA FICA (federal insurance contribution act)
A

Social security taxes levied from employees and employers gross pay

Benefits for certain individuals and their families

6.2% tax

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29
Q

Medicare AKA federal hospital insurance tax

A

2 part program alleviates high cost of medical care
For those over 65

1.45% tax

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30
Q

Social security tax

A

Combination of FICA and federal hospital insurance tax

31
Q

Companies should report the amount of unremitted employee and employer Social security tax on…

A

Gross wages paid as current liability

32
Q

All employers who meet the 2 criteria are subject to the Federal Unemployment Tax Act (FUTA)

A

1 those who paid wages of over $1500 during calendar
Quarter in year of proceeding year

2 those who employed 1 individual on at least 1 day in each
20 weeks during current or preceding calendar year

33
Q

Merit rating

A

Reduces state contribution rate for unemployment tax

Paid by employers

34
Q

Companies should record the amount of accrued but unpaid employer contributions as…

A

Operating expenses and current liabilities when preparing

Financial statements at year end

35
Q

3 Examples of employee payroll deductions

A

1 withholding taxes payable
2 FICA Taxes Payable
3 Union dues payable

36
Q

3 examples of employer payroll taxes

A

1 FICA Taxes Payable

2 FUTA Taxes Payable

3 SUTA Taxes Payable

37
Q

Compensated absences, examples

A

Paid absences from employment

Ex: vacations, illness, holidays

38
Q

Companies should accrue liability for the cost of compensation for future absences if all 4 of the following conditions exist

A

1 employers obligation to pay employee for future absences
Is attributable to employees’ rights to receive compensation services already rendered
2 obligation relates to rights that vest or accumulate
3 payment of compensation is probable
4 amount can be reasonable estimated

39
Q

Vested rights

A

Exist when employer has obligation to make payment
To an employee even after terminating his employment

Not contingent on employees’ future service

40
Q

Accumulated rights

A

Those that employees can carry forward to future periods

If not used in period in which earned

41
Q

Sick pay benefits vest or not

A

If sick pay benefits vest, company must accrue them

If sick pay benefits accumulate but do not vest, company
May choose whether to accrue them

42
Q

Bonus

A

Paid to employees depends on company’s profit

43
Q

Examples of contractual agreements for conditional expenses

A

Agreements covering rents or royalty payments conditional
On amount of revenues recognized

or quantity of product produced/extracted

44
Q

Contingency, examples

A

Existing condition, situation or set of circumstances
Of possible gain or loss

Ex. Lawsuits, warranties, default of a loan

45
Q

Gain contingencies, define, 4 examples

A

Claims or rights to receive assets who’s existence is
uncertain but may eventually become valid

1 possible receipt of monies from gifts, donations, asset sales
2 possible refunds from govt tax disputes
3 pending court cases with favorable outcome
4 tax loss carryovers

46
Q

Loss contingencies: contingent liabilities

A

Depend on occurrence of 1 or more future events to
Confirm either amt payable, the payee, the date payable,
It existence

47
Q

Provisions

A

IFRS term for estimated liabilities

48
Q

FASB’S term: probable

A

Future event is likely to occur

49
Q

FASB’S term: reasonably possible

A

Chance of future event is more than remote but less likely

50
Q

FASB’S term: remote

A

Chance of future events occurring is slight

51
Q

Companies should accrue an estimated loss from a loss contingency by charge to expense liability if both of the following 2 conditions are met…

A

1 info available prior to issuance of financial statements
Indicates that it is probable that liability has been incurred
At date of financial statements

2 amount of loss can be reasonably estimated

52
Q

3 loss contingencies that are usually accrued?

A

1 collectibility of receivables
2 obligations related to product warranties and product defects
3 premiums offered to customers

53
Q

3 Loss contingencies not accrued

A

1 risk or loss or damage of enterprise property to fire,
Explosion or other hazards
2 general or unspecified business risks
3 risk of loss from catastrophes assumed by property
And casualty insurance companies including reinsurance
Companies

54
Q

6 loss contingencies that may be accrued

A

1 threat of expropriation of assets
2 pending litigation
3 actual claims and assessments
4 guarantees of indebtedness of others
5 obligations of commercial banks under standby letters of
Credit
6 agreements to repurchase receivables that have been sold

55
Q

4 of the most common loss contingencies

A

1 litigation, claims and assessments
2 guarantee and warranty costs
3 premiums and coupons
4 environmental liabilities

56
Q

Companies must consider the following 3 factors in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments?

A

1 time period where cause of action occurred

2 probability of unfavorable outcome

3 ability to make estimate of amount of loss

57
Q

Warranty AKA Product Guarantee

A

Promise made by seller to buyer to make good on

Deficiency of quantity, quality or performance of product

58
Q

Warranties: cash basis method

A

Seller or manufacturer charges warranty costs to period

In which it complies with warranty

59
Q

Warranty costs: accrual method AKA Expense warranty approach

A

Companies charge warranty costs to operating expense

In year of sale

60
Q

Sales warranty approach

A

Companies defer revenue on the sale of the extended warranty

61
Q

Printed coupons

A

Can be redeemed for cash discount on items purchased

62
Q

cash rebate

A

Buyer can obtain cash by returning the store receipt, rebate

Coupon and universal product code (bar code) to manufacturer

63
Q

Premiums

A

Additional bonus product when buying another product

64
Q

Accounting treatment of premiums and coupons?

A

Companies should charge costs of premiums and coupons

To expense in period of sale

65
Q

What do warranties and coupons what are they? What do they satisfy the condition for?

A

Warranties and coupons are loss contingencies that satisfy

Conditions necessary for a liability

66
Q

A company must recognize an Asset Retirement Obligation (ARO) when it has an…

2) Companies should record ARO at…

A

Existing legal obligation associated with retirement of a
Long lived asset

And when it can easily estimate the amount of liability

2) at fair value

67
Q

Examples of ARO’s

A

Decommissioning nuclear facilities

Dismantling, restoring, reclamation of oil and gas properties

Closure of mining, landfills

68
Q

Self-insurance

A

Not insurance but considered risk assumption

Company that assumes its own risks puts itself in position
Of incurring expense and losses if they happen

69
Q

Presentation of current liabilities

A

Recorded and Reported in financial statements at their full maturity value

70
Q

If a company excludes short term obligation from current liabilities because of refinancing it should include the following note with 3 things in financial statements

A

1 general description of financing agreement

2 terms of any new obligation incurred or to be incurred

3 terms of any equity security issued or to be issued

71
Q

If a company has a loss contingency that is either probable or estimable but not both it must disclose the following 2 info items in the notes

A

1 the nature of the contingency

2 an estimate of possible loss or range of loss or statement
that estimate can’t be made

72
Q

GAAP VS IFRS: contingencies

A

GAAP provides more guidance on content of disclosures

About contingencies than does IFRS

73
Q

Companies should disclose 3 other contingent liabilities, even though the possibility of loss may be remote as follows…

A

1 guarantees indebtedness of others

2 obligations of commercial banks under “standby letters
Of credit”

3 guarantees to repurchase receivables that have been sold
Or assigned

74
Q

Current ratio AKA Working capital ratio

A

Current assets/current liabilities

75
Q

Acid test ratio AKA Quick ratio

A

Acid test ratio =

(cash + short term investments + net receivables)/current liabilities

Financial Acct Systems 2 (22 decks)

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