Chapter 10 Flashcards
What is the definition of an accounting liability?
Probable sacrifice of future economic benefit that arises from a past transaction
What is the difference between a current liability and a long-term liability?
Current - will be paid off within the year
Long-term - will take a year+ to be paid off
What are some examples of current liabilities?
- Account payable
- Dividends payable
- Deffered revenue
- Payroll
- Taxes payable
What are journal entries involved with basic payroll?
- Gross wages expense and withholding liabilities
- Company’s expenses for payroll-related items (Social Security and Medicare tax)
How do you calculated the 401(K)?
The rate multiplied by the gross wages
How do you calculate income taxes?
The rate multiplied by the taxable wages (gross wages-retirement contributions)
Who pays for Social Security and Medicare?
By the employees and employer
What does withholding mean?
The employers deduct a certain amount from the employee’s gross wages to send directly to the government
What is contingency?
things that might happen by are not certain
potential obligation or asset that may arise based on the outcome of a future event
How are gain contingencies generally accounted for?
These are not recognized under GAAP
What are the terms that relate to loss of contingencies?
Probable, Reasonably Possible, Remote, Estimable, Not Estimable
If a loss is probable and estimate it is…
Recognized
If a loss is not estimable you…
put it in the footnotes
Reasonably possible means…
It is put on the notes whether it is estimable or not
When a loss is remote you…
Do not do anything
What is a note payable?
A long-term liability (like a bank loan)
How are account payable and note payable different?
Note payable is a formal obligation with a written contract like a bank loan.
Account payable not as formal, short-term, and is more likely to not be paid
What is the formula to calculate simple interest?
Principalratetime=interest
What is a bond?
a way to raise money through the public
What amount are bonds usually sold at?
$1000
What does it mean that a bond sells “at par”?
the bond is being sold for its face value - the amount that the issuer agrees to pay back to the bondholder at maturity
What is stated interest?
Determines how much interest is paid on the principal at regular intervals?
What does it mean that a bond is callable?
the bond can be redeemed by the issuer before its maturity date.
If the face value was 1,000 and was called at 102 what does that mean?
The bond will be bought back at 102% so it would be $1,020 to buy pack
Why are investors interested in debt-related ratios like the times interest earned ratio?
how many times a company can pay interest (the higher the better)
How do you calculate Times Interest Earned ratio?
Pretax income + interest expense/interest expense = TIE
