Ch 13 Current Liabilities Flashcards
LO1
Describe the nature, type, and valuation of current liabilities.
- Current liabilities - obligations whose liquidation a company reasonably expects to require the use of current assets or the creation of other current liabilities.
- Should be measured by the present value of the future outlay of cash required to liquidate them.
- Companies usually record and report current liabilities at their full maturity value.
- Several types:
1) A/P
2) Notes payable
3) Current maturities of long-term debt
4) Dividends payable
5) Customer advances & deposits
6) Unearned revenues
7) Taxes payable
8) Employee-related liabilities
LO2
Explain the classification of issues of short-term debt expected to be refinanced.
-Excluded from current liabilities if both of the following conditions are met:
1) company must intend to refinance the obligation on a long-term basis
AND
2) must demonstrate an ability to consummate the refinancing
LO3
Identify types of employee-related liabilities.
1) payroll deductions
2) compensated absences
3) bonus agreements
LO4
Identify the criteria used to account for and disclose gain/loss contingencies.
-Gain contingencies are not recorded, disclosed in the notes when the probabilities are high that a gain contingency will occur.
-Company should accrue an estimated loss from a loss contingency by charging expense and recording a liability only if both conditions are met:
1) info available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements
AND
2) the amount can be reasonably estimated
LO5
Explain the accounting for different types of loss contingencies.
- Litigation:
1) the time period in which the underlying cause for action occurred
2) the probability of an unfavorable outcome
3) the ability to reasonably estimate the amount of loss - Warranties - use the accrual method to charge warranty costs to operating expense in the year of sale if:
1) probable customers will make claims
2) reasonably estimate the costs involved
-Premiums/Coupon Offers/Rebates:
should charge their costs to expense in the period of the sale that benefits from the premium plan
- Asset retirement obligations:
1) when it has an existing legal obligation to the retirement of a long-lived asset
2) it can reasonably estimate the amount
LO8
Indicated how to present and analyze liabilities and contingencies.
- Current liability accounts are usually presented as the first classification
- W/in the current liabilities section, companies list out the accounts in order of maturity, in descending order of amount, or in order of liquidation preference
- Detail and supplemental information concerning current liabilities should be sufficient to meet the requirements of full disclosure
- If the loss is either probable or estimable but not both, and if there is at least a reasonable possibility that a company may have incurred a liability, it should disclose in the notes both the nature of the contingency and an estimate of the probable loss.
Accumulated Rights
Compensation rights that employees can carry forward to future periods if not used in the period in which earned.
Acid-Test (Quick) Ratio
- Liquidity ratio that measures the ability of a company to meet its maturing obligations with its available assets and to meet unexpected needs for cash.
- Cash plus short-term investments plus net receivables divided by current liabilities.
- Variation of the current ratio, the acid-test ratio eliminates inventories and prepaid expenses from the amount of current assets, to provide better information for short-term creditors.
Asset Retirement Obligation (ARO)
- Existing legal obligation, whose amount can be reasonably estimated, associated with the retirement of a long-lived asset.
- Should record the ARO at fair value.
Bonus
- Compensation in addition to regular salary or wages.
- Amount may depend on the company’s yearly profit.
- Shows the bonus expense in the income statement as an operating expense.
- If the bonus is not paid within the accounting period, the company includes the liability, Bonus Payable, as a current liability in the balance sheet.
Cash Dividend Payable
- An amount, payable in cash, that a corporation owes to its stockholders as a result of the board of directors’ dividend authorization.
- At the date of declaration, the dividend becomes a liability of the corporation, classified as a current liability.
Compensated Absences
- Paid absences from employment (e.g., for vacation, illness, and holidays).
- Accrue a liability for the cost of compensation for future absences and recognize the expense and related liability for compensated absences in the year in which the benefits are earned by employees.
Contingency
- Material events with an uncertain future.
- Uncertainty can involve a possible gain (gain contingency) or possible loss (loss contingency) that will ultimately be resolved when one or more future events occur or fail to occur.
- Typical gain contingencies are tax operating loss carryforwards or company litigation against another party. -Typical loss contingencies relate to litigation, environmental issues, possible tax assessments, or government investigations.
Contingent Liabilities
Liabilities that depend on a contingency, that is, on the occurrence of one or more future events to confirm either the amount payable, the payee, the date payable, or its existence.
Current Liabilities
-Obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities
Current Maturities Of Long-Term Debt
- The portion of bonds, mortgage notes, and other long-term indebtedness that will mature within the next fiscal year.
- However, long-term debts maturing currently as current liabilities are excluded from this category if they are to be retired by assets accumulated for this purpose that properly have not been shown as current assets; refinanced or retired from the proceeds of a new debt issue; or converted into capital stock.
Current Ratio
- Liquidity ratio that measures the ability of a company to meet its maturing obligations with its available assets and to meet unexpected needs for cash.
- Computed as total current assets divided by total current liabilities.
