Chapter 10: Current Liabilities and Payroll

Question 1

What are current liabilities?

Answer 1

A present obligation to pay for a transaction that has occurred in the past and cannot be avoided in the future

(e.g. accounts payable, interest payable, unearned revenue, lines of credit/overdraft)

Question 2

What are certain liabilities?

Answer 2

Liabilities with a known amount, payee, and due date

Question 3

What are some facts about accounts payable?

Answer 3

• It is often the largest current liability
• Must be closely controlled
• A “control” account
• Must balance to subsidiary ledger accounts

Question 4

What is the ‘operating line of credit’?

Answer 4

Pre-authorized approval to borrow money at a bank when needed, up to a pre-set limit

Question 5

What is a collateral?

Answer 5

Property pledged as security for a loan

• Provides protection in case company is unable to repay loan
• Includes, some, or all, of the company’s current assets

Question 6

What is the bank overdraft?

Answer 6

It can be shown as a bank account in a credit balance. The credit balance in cash is reported as a current liability. Interest is usually charged

Question 7

What are provisions?

Answer 7

Liabilities of uncertain timing or amount

e.g. product warranties, customer loyalty programs, gift cards

Question 8

What are product warranties?

Answer 8

Promises made by the seller to a buyer to repair or replace a product if it is defective or does not perform as intended

• Warranty expense is recorded in the same period in which the sale is recorded
• Fulfills the matching principle
• Liability is known to exist - amount is based on an estimate

Question 9

What is customer loyalty programs?

Answer 9

Programs that result in future savings for members on the merchandise or services the company sells. Fulfills the matching principle

Question 10

What is a contingent liability?

Answer 10

A liability whose existence will be confirmed only by the occurrence or non-occurrence of a future event

Question 11

Under the IFRS, what’s considered a contingent liability?

Answer 11

Possible obligations that are not recognized

Question 12

Under the IFRS, what’s considered a provision and recorded?

Answer 12

Contingencies that are probable

Question 13

Under the ASPE, what is considered a contingent liability?

Answer 13

Uncertainties with a lawsuit

Question 14

Why is payroll important?

Answer 14

• Employees are sensitive to payroll errors
• Accurate payroll is attached to employee morale
• Payroll is attached to federal and provincial regulations
• Payroll and related expenses are a large portion of current liabilities and significantly impacts net income

Question 15

What should payroll systems be designed to do?

Answer 15

• Pay employees accurately and in a timely manner
• Meet regulations for federal / provincial governments
• Provides useful data for management decision making

Question 16

Payroll systems should include

Answer 16

• A payroll register
• An employee’s earnings record
• Pay advice ( for electronic payments ) or payroll cheques

Question 17

What are internal controls for payroll systems?

Answer 17

• Restrict access to payroll cheques and signatures
• Hiring and firing of employees should be properly authorize
• Changes in pay rate should be properly authorized
• Employees should use swipe cards or punch cards
• Payroll cheques should not be distributed by supervisor
• Separate payroll (bank) account should be used