Chapter 9: Current Liabilities Flashcards
Current liabilities are those that that the company expects to settle within the
next 12 months
liability (simple)
an amount that the company owes to others.
Liability (accounting standards)
an item that will require the outflow or sacrifice of economic resources in the future to settle an obligation that exists as a result of a transaction that has already taken place
Characteristics of a Liability
- It is a present obligation of the company.
- The company expects to settle it through an outflow of resources that represent future economic benefits.
- The obligation results from an event that has already happened.
Non-current liabilities
Are considered to be long-term liabilities
Working capital
quantified as the difference between a company’s current assets (those assets that are cash or will become cash within the next 12 months) and its current liabilities
At What Amount Are Current Liabilities Reflected on the Statement of Financial Position?
liabilities should initially be recorded at their fair value or at the present value of the payments that will be required to settle them
Time value of money
The concept that a specified sum of money is worth more if it is paid or received now rather than later
-a dollar paid in the future is worth less than a dollar today
Common current liabilities due to lenders include:
What Current Liabilities Arise from Transactions with Lenders?
1) bank indebtedness
2) short-term loans
3) current portion of long-term debt
Bank Indebtedness (or Line of Credit)
The amount that a company has borrowed on its line of credit from its bank
-normally presented as the first current liability because it will be repaid with the company’s subsequent cash deposits
Line of credit
An arrangement with a financial institution that allows a company to overdraw its bank account. The overdrawn amounts become a loan that must be repaid.
Revolving credit facilities
An agreement a company enters into with its bank, enabling it to borrow up to a negotiated limit. The company can use the credit facility as needed and repay it as funds are available
standby fees
Fees or interest charged by financial institutions for any unused portion of revolving credit facilities such as a line of credit, as the cost of having funds available when needed
working capital loan
A short‐term loan, often on a demand basis, that is arranged with a bank to cover a company’s short‐term cash shortages
secured
Characteristic of loans or other debts for which specific assets have been pledged to guarantee repayment of the debt.
collateral
An asset that has been pledged as security for a debt. If the borrower defaults on the debt, the lender can have the collateral seized and sold, with the proceeds used to repay the debt.
unsecured
Characteristic of loans or other debts when no specific assets have been pledged to guarantee repayment of the debt.
-creditors simply rely on the company’s general creditworthiness.
blended instalment payments
Loan payments that consist of both interest and principal, with the total amount remaining constant but the portion for interest becoming smaller as each payment is made and the outstanding loan principal is reduced.
current portion of long-term debt
The portion of long‐term debt that is due within one year (or one operating cycle)
reclassification entry
Journal entry to reclassify an item, such as a non‐current item becoming current.
reclassification entry example
Long-Term Loan Payable XXX
Current Portion of Long-Term Debt XXX
trade payables (aka trade accounts payable)
Amount of goods or services a company has purchased on credit from suppliers.
Why Are Accounts Payable Sometimes Considered “Free Debt”?
Accounts payable generally do not carry explicit interest charges and are commonly thought of as “free debt” for the length of the credit period (usually 30 days)
Interest associated with free debt
Not taking advantage of the discount, or paying a penalty for being late, can be viewed as equivalent to paying interest.
A number of current liabilities arise from ordinary transactions between a company and its customers or clients, including:
- unearned revenue (or deferred revenue)
- gift card liability
- customer loyalty provision
- provision for warranty claims
provision
Liabilities where there is uncertainty about the timing or the amount of the future expenditures
partially executed contracts
A contract between two entities in which one or both of the parties has performed a portion of its part of the agreement.
- ex paying tuition before school starts
- paying insurance on you car for the entire year.
since the sellers have not fulfilled their part of the contract, it would be inappropriate for them to recognize revenue at the time they receive the customer’s payment
Unearned revenues arise only when a
customer has made a payment in advance of receiving goods or services.