chapter 10 Flashcards
what are liabilities?
present obligations to transfer economic resources as a result from past transactions
what are the 2 kinds of liabilities?
current and non-current
what is a financial liability?
types of liabilities that have a contractual obligation to pay cash in the future
what are deferred revenue?
the obligation is settled by the provision of goods/ services in the future
what are current liabilities?
liabilities that are expected to be paid or settled within one year of the date on the statement of financial position or within the operating cycle
what are the 8 types of current liabilities?
bank indebtedness from operating lines of credit
accounts payable & accrued liabilities
refund liabilities
deferred revenue
sales and property taxes
payroll
notes payable
current portion of bank loans and mortgages
what are lines of credit?
demand loans that require monthly interest payments and can be called for payment at any time
when would a credit line be used?
for bridging capital needs or an overdraft of cash
what are the 3 kinds of sales tax?
federal goods and services tax (GST)
provincial sales tax (PST or QST)
combination into one sales tax (HST)
how would you record a sale that has sales tax?
dn cash 11,300
cr sales 10,000
cr sales tax payable 1,300
why is sales tax always payable?
because you are just holding it for the government and you are responsible to remit it to them
if the tax is included in the sale price how would you find the tax payable amount for a sale of 11,300 and a tax rate of 13%?
11,300/ 1.13= 10,000 sales revenue
what is salary?
or wages is based on an hourly rate and owed to employees known as gross pay
when payroll deductions are made what is it made from?
it is made from gross pay
once payroll deductions are made what is that called?
net pay
if a company goes bankrupt do they have to pay their payroll?
no they cannot
what are the 3 mandatory deductions from payroll?
CPP- canada pension plan, company matches 1 to 1
EI- employment insurance, company matches 1-1.4
income tax
what are the 3 voluntary payroll deductions?
benefits such as health and pension
union dues
charitable donations
what are contingent liabilities?
events with uncertain outcomes, that are dependant upon some future event
what are the 3 things to know for contingent liabilities?
to who the obligation is owed
when the obligation may have to be settled
what amount is needed to settle obligations
what are provisions?
uncertainty around timing of when it is due or the amount
when should provisions be recorded as a liability?
when present obligation exists
the outflow of reserves to settle that obligation is probable or likely
amount can be estimated reliably
under IFRS what percentage is considered probable for a provision?
more than 50%
under ASPE what percentage is considered probable for a provision?
likely is used instead of probable and implies a higher level of certainty
what are contingent liabilities?
possible obligations that are dependant upon some future events
how are contingent liabilities recorded?
they are not recorded, only in the notes to financial statements if one of these conditions are present:
the outcome is not probable
the outcome Is not determinable
an estimate of the outcome cannot be made
what are interest-bearing liabilities?
indebtedness to a creditor requiring more than a short period of time to pay the amount owed
what is principle?
the original amount borrowed of the interest-bearing liability
what are 3 types of interest bearing liabilities?
operating lines of credit that have no set date for repayment of principle
notes with a single principle payment on maturity
loans that require instalment payments of principle and interest on a schedule
what is an operating line of credit?
a pre-arranged agreement between a company and a lender to allow the company to borrow up to a pre-authorized limit whenever required to help manage temporary cash shortfalls
when does a company repay an operating line of credit?
company repays whatever portion of the borrowed fund it chooses whenever it is able to
how is interest charged on an operating line of credit?
it is charged using a floating interest rate and security (collateral) may be required by the bank
how is an operating line of credit record?
dn cash
cr bank indebtedness
what kind of liability are liabilities with instalment payments?
normally non-current liabilities and obligations to be paid after one year or more (bank loans payable, mortgages payable)
if there is a loan for 120,000 for 5 years at 6%, with a payment of 2,320, what is the interest payment an loan payment?
interest payment= 600
principle payment= 1,720
how is a bank loan with instalments recorded on a balance sheet?
the principal portion of the loan that will be repaid during the next year is a current liability
the portion that will be repaid after the next year is a non-current liability
how would a lease liability be recorded?
if it is a lease on a short term asset the lease is a current liability
if the lease is on a long term asset the lease is a non-current liability
what are the 3 advantages of debt financing?
in most cases easier than equity financing and dont have to give up portion of ownership
borrowing may allow companies to grow faster
interest expense is tax deductible
what are the 3 disadvantages of debt financing?
principle and interest must be paid back on certain dates
when incurring debt, companies must earn a rate of return that exceeds interest rate on that debt
often security must be pledged for debt financing
what are 3 liquidity ratios?
current ratio
inventory turnover ratio
receivables turnover ratio
what do liquidity ratios measure?
measure short-term ability to pay maturing obligations and meet unexpected cash needs within the next year
what are 2 solvency ratios?
debt to total assets
times interest earned
what does debt to total assets ratio measure?
indicates the extent to which a company’s assets are financed by debt
what is the debt to total assets ratio?
debt to total assets= total liabilities/ total assets
what is good for debt to total assets ratio?
lower is typically better
what does times interest earned measure?
provides an indication of a company’s ability to meet interest payments as they come due
what is the formula for times interest earned?
net income earned+interst expense +( income tax expense/interest expense)
what is better for times interest earned ratio?
higher is better
