Chapter 9 - Liabilities Flashcards
True or false: in general, short-term liabilities are expressed in nominal amounts, while long-term liabilities are expressed in present values.
True
True or false: current liabilities = long-term liabilities.
False
True or false: non-current liabilities = short-term liabilities.
False
True or false: “accounts payable”, “trade payables”, and “trade creditors” describe the same type of liability.
True
How long are credit terms usually?
30-90 days.
Explain the following sentence: “an accrued liability is an expense that a company has incurred, but not paid yet”.
Accrued liabilities are a type of financial obligation that a company owes for goods or services, but hasn’t made the payment for yet.
Are the majority of accrued liabilities short-term or long-term?
Short-term.
Are the majority of “unearned revenue” liabilities short-term or long-term?
Short-term.
What does “current portion of long-term debt” refer to?
The part of a loan that’s due in the coming financial year (a short-term/current liability).
What’s a contingent liability?
Not actually a liability, but a disclosure item in the notes of a company’s financial statements.
Give examples of contingent liabilities.
Corporate guarantees, lawsuits, and tax disputes.
What does “debt ratio” refer to?
The percentage of a company’s assets that’s financed by liabilities.
Why do companies issue/sell bonds to the public?
To be able to borrow huge sums of money.
True or false: a bond payable is not the same as a note payable.
False
What does “term bonds” refer to?
All bonds in an issue mature at the same time.
What does “serial bonds” refer to?
All bonds in an issue mature in installments over a period of time.
What type of account is “bond discounts”?
A contra liability account.
Bond prices are determined by what?
Bond interest rates.
What are the two types of interest rates?
- the stated interest rate
- the market interest rate
When a company issues bonds payable, what happens on the balance sheet?
Both assets and liabilities increase.
When a payment of interest expenses happens, what happens on the balance sheet?
Both assets and equity decrease.
What are the two types of leasing?
- operating leases
- capital/finance leases
How do you calculate a company’s debt ratio?
Debt ratio = Total liabilities / Total assets
What are the three ways to finance operations?
- retained earnings
- issuing shares
- issuing/selling bonds payable
Give examples of current liabilities.
Accounts payable, notes payable, accrued liabilities, and deferred (unearned) revenue.
Give examples of non-current liabilities.
Long-term notes payable, bank loans, bonds, and lease liabilities.
What factors affect a bond issue’s price?
The principal amount, maturity and interest payment dates, the nominal interest rate, and the market interest rate.
If the market interest rate equals the nominal interest rate, what happens?
A bond is issued/sold at its principal amount.
If the market interest rate is higher than the nominal interest rate, what happens?
A bond is issued/sold at a discount.
If the market interest rate is lower than the nominal interest rate, what happens?
A bond is issued/sold at a premium.
True or false: both a bond discount and a premium should be recorded in a contra-liability account.
True
How do you calculate a bond’s carrying amount?
Carrying amount = Principal amount + Premium
