Class Notes Ch 10 Flashcards
what are liabilities
present obligations to transfer economic resources as a result of from past transactions
two types of liabilites
current anad non current
two genres of liabilities
1) financial liabilities
2) non financial liabilities
Financial Liablity
contractual obligations to pay cash in the future! they need cash to address
what are non financial liablities
this obligation is settled by the provision of goods/service in the future
EX: DEFFERED REVENUE!
JE: DRcash
CR Defferred rev
Dr Deferred rev
Cr service revenue
another name of deffered revenue
custoemr deposits
what are current liabliites
expected to be paid or settled within one year of the data on the sofp or within the operating cycle
<1 year
can current liablities be financial and non financial
yes!!!
how can current liabliites be paid (3 ways)
1) paid throguh cash
2) paid through the transfer of goods and services
3) paid through trannsferring it to a new liablitiy (note payable)
types of current liabilities
-bank indebtedness
-a/p and accrued liabilities
-refund liabilitiy
-def rev
-sales and taxes
-payroll
-note paayable
-current portion of bank loand and mortgage
how do we record sales tax JE
Dr Cash
Cr Sales
Cr Sales Tax Payable
When you see the cash flows diagram
you need to account for how much cash has changed in terms of the accounting equation AT THE TIME OF SALE
Is sales tax payable included in sale price
may or may not be
how to calculate the sales portion if included in sale price
divide the cash received by 100% plus the sales tax percentage
Total Receipts / (1+ Tax Rate) =Sales REVENUE
WHO IS SALES TAX REMITTED TO
-what is JE for remittance
THE APPROPRIATE PARTY! government gets gst and province gets hst
sales tax payable
cash
what is gross pay
what are payroll deductions
what is net pay
the total amount owed to employees
money withheld from gross pay
gross- payroll deductions= net pay
bonds are the hardset part!!
what are some mandatory employee payroll deductions
1) federal and provincial income tax
2) cpp
3) ei or ui (employment insurance/unemployed insurance)
what are some volunaty employee payroll deductions
health and pensions
union dues
chartiable donations
how do you record employee payroll deducations IN A JE
DR Salaries Expense
Cr CPP payable
Cr EI payable
Cr Employment IT payable
Cr United way payable
Cr Union dues payable
Cr salaries payable
(to record salaries and employee deductions for the week ending march 15)
are payroll deductions on behalf of the company or employees
both!!!!!
what are EMPLOYER PAYROLL LIABILTIEIS
1)employers share of cpp and ei
2) contribution to workers comp
3) employees benefits (compensated absence, employer sposored health plans and pension)
JE for employer payroll liability
also, is this an accrual entry?
Dr Employee benefits expense
Cr CPP payable
Cr EI payable
CR workers comp payable
CR health insurance benfits payable
(to record employers payroll costs for the week ending march 15)
YES
what is the JE when all the payables are paid
Dr CPP payable (both employer+ employee)
Dr EI payable (both employer+ employee)
DR workers comp payable
DR health insurance benfits payable
Cr Cash
what are provisions
-diff between aspe and ifrs
you record these as liabilties when obligation exists, outflow of money is likely, amount that well have to pay can be estimated reliably!!
under ifrs: ‘probable’: more likely than not >50%
under ASPE: ‘likely’ instead of probable which means higher level of certainty
what are contingent liabilities
possible obligaitons that depend on some future events,
these are not recorded, only notes to financial statements if even oNEEEE of these conditions is present
-> outcome is not probable
-> outcome is not determinable
-> an estimate of the outcome cannot be made
contingent liabilties depend on
the occurence of a future event
contingent liabilites EX
like the arisal of a lawsuit!!
what are interest bearing liabilities
indebtedness to a creditor requiring more than a short period of time to pay the amount owed
when can interest on interest bearing liabilities be paid? (2)
ON A SIGNLE DUDE DATE like when principal due
or vairous dates b4 principal
what are types of interest bearing liabilities
1) operating lines of credit that have no set of date
2) note w a single principle pay of maturity
3) loans w instalment payments of principal on scheduled dates (mortgages)
operating line of credit meaning
pre arranged agreement between a company and a lender, allows the omcompany borrow up to a pre authorized limit wheenver required
why is operating line of credit important
because it helpd mange temporary cash shortfalls
when does a company pay back operating line of credit
whatever portion of th eborrowed funds it chooses whenever it is able to
is the interest charged on operating line of credit fixxeD?
no it is floating/variable interest rate
what may the bank require to give an operating line of credit?
security/collateral may be required by bank (ex: secured with inventory)
how are operating lines of credit recorded on the current liablities section of sofp
bank indebtedness
operating line of credit is a current liability with a floating interest rate
word
what are liabilities with principal due at maturity
-> promise to pay a specfied amount usually on a fixed future date
when are liabilities with principal due at maturity used
in place of a/p cuz they hav STRONGER LEGAL CLAIM!!!
liabilities with principal due at maturity example
notes receivable
what are chaaracterisitcs of liabilities with principal due at maturity
-formal written promise
-strong legal claim
- bears interest at a fixed interst rate which is constant
- can be issued or different periods of time (<1 year then current liabilities)
what are liabilities with instalment plans
normally non-current liabilities
(usually you pay in >1 year)
EX: bank loan payable, mortgage payable
how do you pay off liabilities with instlament plans
series of periodic payments, called instalments, consisting of
a) interest on the unpaid balance of the loan at the beginning of the period
b) a repaument of a portion of th eloan principal
a specified repayment schedule should be followed for
LIABILITIES WITH INSTALMENT PAYMENTS!!
HOW IS INTEREST EXPENSE CALCULATED FOR LIABILITEIS WITH INSTALLMENT PAYMENTS
monthly int rate calculated by:
interest rate * amount of principal outstanding *1/12
loans with current and non current portions where do you record it in the sofp
current portion= current liabitliies
non current portion= non current liabilities
examples of non current liabilities
bank loans, notes, and mortgage payable
bonds payable
lease liabilties
deferred income taxes and pension liabilities
advantages of debt financing
easier to obtain then equity fianncing
-> if u issue shares u dilute percentages of shares owned by current shareholders
-> borrowing may allow company to grow faster
-> interest expense is tax deductible!
-> when incurring debt, companies must earna rate of return that is greater than int rate
-> sometimes u ened collateral
disadvantages of debt fianncing
how are current liabilities listed on sofp
in the order in which they are due
non current liabilities- statemetn presentaitaon
typically presented immediately following current liabilities and detail in notes
generally measuerd and reproted at amoutne xpected to be paid when due
is there an order of ncliabiilties
nope!
analysis of debt obligations
liquidity and solvency ratios
liquidity ratio
-meaning
-ratios
measure short term avility to pay obligations an meet unexpected cash needs for next year
CURRENT RATIO
INVENTORY TURNOVER RATIO
RECEVIABLES TUNOVER
Solvency
emaning
ratios
ratios measure abilitiy to meet long term obligations
DEBT TO TOTAL ASSETS
TIMES INTERESRST EARNED
Debt to total assets ratio
total liabiltiies/total assets
LOWER=BETTER
times interest earned
times int earned= EBIT / int expense
measure of companies abilityi to meet int payments as they are due
IGHHGHER IS BETTER
EBIT: net income + int expense+ tax
what is a bond payable
promise to repay an amount at a future date+ interest payments periodically
what are bonds a sub type of
interest bearing note payable
why do companies use bonds
separate large amount of moeny they need into small denominations- investors are able to afford them
what is the fixed int rate of bonds called
who recieves the int
bond holders get the int
the int rate=coupon rate
can bonds be secured or unsecured
both@! debenture
when are bonds payable
either at maturity (Term bonds)
or instalemnts (serial bonds)
what are redeemable bonds
can be retired by the company b4 maturity
where are bonds traded
publically on exchanges, the rpices are quoted as a % of the face value
what is the amrket rate/ effective interest rate/ yield of the bond
the rate the market investors are demanding for loaning funds
market rate > coupon interest rate
bonds are sold at a discount!!!
BEING SOLD BELOW FACE VALUE
market rate< coupon interest rate
bond are sold at a premium
what does it mean to issue a bond at discount
how to calc the price the bond are sold at
- when mkt rate> coupon rate
-THIS is cuz investors will get less interest from this bond over time, so they pay less
see what % of face value bonds are being sod at * face value
what does it mean to issue a bond at premium
how to calc the price the bond are sold at
-when coupon rate> mkt rate
-the investors will get paid higher int over the years, so they pay more upfront
% of face value bond is sold at *face value
IS BOND COUPON RATE FIXED
YES!!! that is why the price of the bond can change but not the coupon rate
why do we ammortize the discount or premium
cuz it is treated as an interest expense!!!!
how to calculate the ammortizations amount of bond premium/disc
- calc bond int expense
- calc bond int paid
- int expense-int paid= ammt amount
bond int expense: carry amt at begin of period * mkt rate
bond it paid: face amount of bond * coupon int rate
what is the carrying amount of discounted bonds
face value of bond- unamortized discount
the discount balance will increase until the bond reaches maturity
what is the carry amount for premium bonds
face value + unamortized premiuum
premium balance will fall until bond reaches maturity
JE for bond retirement
dr. Bonds payable
cr . cash
why do we never have gains or loss for bond retirement
cuz the discount increased during ammortization, or the premium fell during amortization and then it is equal to the face value
what is the issue price of bonds
the future value
what is the relation bw present and future value
present value< future value
what is teh diff between present value and future value
INTEREST
interest earned in one period on the interest earned in the previous years is called…
compound interest
what does present value mean
value today of:
bond face value to be received at maturity
and
interest payments (annuity) to be recieved periodically
so we SUM the face value+interest payments=pv
hwo to determine the issue price/pv using tables
- get face value (Table 1), and use the PV you know to determine the factor
- PV Factor * face value of bond
- get interest value (Table 2), and use the pv you know to get the factor
- PV annutiy factor * periodic interest payment (payment calculated using coupon rate)
- SUM the two
