Chapter 8: Current and Non-Current Liabilities Flashcards
What is the formula for A/P turnover ratio? What does it tell you?
A/P Turnover Ratio=Cost of Sales/Average Accounts Payable.
A high turnover ratio suggests a company is paying suppliers in a timely way. A low ratio means either liquidity problems or aggressive cash management.
What is the formula for average days to pay payables?
Average days to pay payables=365/Accounts payable turnover ratio.
If you pay one dollar of EI, how much would the company have to pay?
1.4 dollars.
When calculating the books for a year when you took a loan payable in the next year with interest, how do you calculate interest expense for that year?
Interest=PrincipalAnnual Interest rateNumber of months/12
What are warranty obligations? What is the journal entry for warranty obligations?
-Goods or services where the company has to pay money back to the customer because it didn’t work as they expected.
-When the sale is made, debit the warranty expense by multiplying sales by the percentage of warranty returns. And credit provision for product warranty by the same quantity.
-When the repair work is done, debit provision for product warranty because the liability goes away and we know that won’t be cashed in, and then we credit cash.
What is a contingent liability?
-A contingent liability is a possible liability that is created as a result of a past event, and which may or may not become a recorded liability, depending on future events.
-Examples of contingent liabilities include lawsuits, environmental problems, and tax disputes.
What is working capital?
Working capital=current assets-current liabilities?
What is quick ratio?
Quick Ratio=Quick Assets/Current Liabilities
-Quick assets are the most liquid form of assets, even more liquid than current assets which includes cash, and marketable securities.
-A high ratio normally suggests good liquidity, but too high a ratio suggests inefficient use of resources.
-Quick ratio signals a company’s ability to pay it’s short term debt.
What is the present value? What is the formula?
The amount of cash you are willing to accept today in replace of a cash receipt at some date in the future, or a future amount discounted for compound interest.
-Present value=Future value/(1+interest rate)
How do you calculate future value?
Future value=Present value*(1+interest rate)
What is the formula for interest for the period?
Interest for the period=PrincipalAnnual interest rateNumber of months/12 months
When do provisions occur? What three conditions require that a provision be recognized?
Businesses often incur expenses in one period and make cash payment in future periods. When the amount or timing of the liability is unclear, we call that a provision.
Here are the three conditions:
1) an entity has a present obligation due to a past event
2) cash or other assets will likely be needed to settle the obligation
3) a reliable estimate can be made as to how much the obligation is
What is a contingent liability? What two factors lead to contingent liabilities?
A contingent liability is caused by a past event, and may or may not create a liability, depending on future events. E.g. not studying is a contingent liability with the future event being the test itself and your performance in that moment.
A provision or contingent liability depends on two factors:
1) the probability of the future economic sacrifice
2) the ability of management to estimate the amount of the liability reliably
If the amount of a liability can be estimated reliably, should a liability be recognized? What are the disclosure requirements?
-A provision must be recognized
-Disclosure of the provision is required
If the amount of a liability can not be estimated reliably, should a liability be recognized? What are the disclosure requirements?
-No provision shall be recognized
-Disclosure is still required for the contingency
You want to calculate how much a dollar 3 years from now is worth at the present value? What is the formula?
-Present value=1/(1+i)^n times amount
-i is interest rate
-n is year
What is an annuity?
The present value of an annuity is the value now of a series of future payments. An annuity is characterized by:
1) an equal dollar amount each interest period
2) interest periods of equal length (year, half-year, quarter, or month)
3) an equal interest rate each interest period
When they ask you to prepare a journal entry to record additional payroll expenses, what are they asking you?
-The fundamental principal is that employers are required to match the contributions of employees with regards to CPP and EI contributions.
-So a journal entry must be captured to capture the liability of CPP and EI payables, that they have to pay those two things, and the expense as well.
-For EI, the company actually must pay 1.4 times whatever the employee pays. This must be in the calculation.
What is the estimated warranty liability? How do you get the estimated warranty liability for the new year? What is the warranty expense for the year? What is the cost of servicing products under warranty?
-The estimated warranty liability is the provision for warranty liability. It’s how much the company sets aside so they can handle customer’s using their warranty.
-To get the new year’s estimated warranty liability, you take the previous year’s warranty liability, you add on the warranty expense, subtract cost of servicing products under warranty, and you get the estimated warranty liability for the new year.
-Warranty expense is determined at the beginning of the year and is an estimated provision for how much warranty money will be paid by the company.
-Cost of servicing products under warranty is how much money we have to pay because the product is faulty under warranty time period.
How do you calculate the initial payment, when given the total payment after tax and the HST rate
Initial payment=total payment/1+HST Rate
What does reclassification entries fall into?
Adjusting entries
When the terms are n/15 2/30 or something like that, how does that affect the corresponding journal entry?
Assume that the other party would take the discount, and reduce your accounts payable accordingly. If they don’t take the discount, an adjusting entry will be in order.
What is the formula to calculate warranty expense?
Ending Balance=Beginning Blanace-Warranty Payments+Warranty Expense(x).
What is warranty expense?
Warranty Expense refers to the estimated cost a company expects to incur to repair or replace products under warranty during a specific period.
