Chapter 9: reporting and interpreting current liabilities Flashcards
when does a company have liquidity?
when it has the ability to pay for its current obligations
what is working capital
another way of measuring if a company has liquidity
current assets - current liabilities
has a significant impact on health and profitability of a company
what is the quick ratio
compares most liquid current assets to current liabilities
quick assets / current liabilities
higher ratio is gyuer, but not too high
if you pay a current liability fully with cash, what happens to the quick ratio?
it would decrease because the relative decrease of current liabilities is more than the relative decrease of quick assets
are all liabilities recorded as they occur during the accounting period?
nah boy
for example, sometimes when you gotta adjust journal entries at the end (like recognizes salaries expense and shit)
can liabilities be estimated? if so, must you record them?
yes they can, and yes you must record them
recorded as expenses first
estimated according to past experiences
record them with adjusting entries
so most companies produce their goods and services?
naaah boy
most companies buy them from other companies on credit
what is the meaning of accounts payable turnover ratio and the formula?
accounts payable turnover ratio =
costs of sales / average accounts payable
it is a measure of how management is efficient to repaying suppliers
how quickly can management can repay their accounts payable
average age of payables is 365 / accounts payable turnover ratio
a higher ratio is gyuer
what are accrued liabilities
expenses that have been incurred during an accounting period but have not yet been paid
are income taxes the only taxes to pay?
nah bruh
where do the recordings of taxes other than income tax go to?
they recorded as costs of sales
in the end, it just means higher price for consumers
they are technically liabilities that the company pays to government, hence they don’t make revenue out of the increase of the price
must there also be an income deduction recorded from employees’ salaries? if so, how is it recorded?
yes, there is a deduction
it must be recorded as a liability
what is time value of money?
interest that is associated with the use of money over time
the longer the money is held, the larger the amount of interest expense
deferred revenues
unearned revenues
ex: gift cards
are deferred revenues short term or long term obligations
it depends of when the services must be rendered
what is a provision
appears when the timing or amount of a certain liability due is uncertain
when must provisions be recognized?
- an entity has a present obligation as a result of a past event
- it is probable the cash or other assets will be required to settle the obligation
- a reliable estimate can be made of the amount of the obligation
what are contingent liabilities?
possible liabilities that arise form past events
their existence will be confirmed only by the occurence or non occurence of on or more uncertain future events not entirely in the company’s control
may or may not be recorded as a liability
ex: lawsuits, environmental problems, tax disputes
wether a situation produces a provision or a contingent liability relates to what two factors?
the probability of a future economic sacrifice
the ability fo management to estimate the amount of the liability reliably
what happens when the amount of a liability can be estimated reliably?
a provision must be recognized
disclosure of the provision is required
what happens when the amount of a liability can’t be estimated reliably?
no provision shall be recognized
disclosure is required for the contingency
what happens when there is either a present or possible obligation that may, but probably will not, require an outflow of resources?
no provision shall be recognized
disclosure is required for the contingency
what happens when there is either a present or possible obligation that has a lot of chances of not happening
no provision shall be recognized
disclosure is not required
why can too much working capital be trash
too many unproductive assets can bring about addition useless costs
