Current Liabilities, Contingent Liabilities, Non-Operating Liabilities Flashcards
When analyzing the accounting equations from a uses and sources standpoint, assets are
uses because they are investments that management has made
When analyzing the accounting equations from a uses and sources standpoint, liabilities and equity are
sources because they inform us how those assets were financed
What are the three essential characteristics of a liability?
- probable future sacrifices of economic benefits
- present obligations to other entities
- resulting from past transactions or events
The type of liability that requires sacrifice of inventory or services, rather than cash, is
deferred revenue
Financial leverage (increases/decreases) when a company acquires assets and finances them with liabilities.
increases
The more liabilities you have, the less likely it becomes that you’ll be able to pay all of them. This principle is called…
default risk
Accounts payable, accrued liabilities and deferred performance liabilities are examples of what kind of liability?
current operating liabilities
Short-term interest-bearing debt and current maturities of long-term debt are examples of what kind of liability?
current non-operating liabilities
When a liability is current, it…
is due within a year and generally not interest-bearing
True or false: all liabilities are certain.
FALSE!
When an existing uncertain situation might result in a future loss depending on the outcome of a future event, like a lawsuit, this liability becomes…
contingent
Contingent liabilities are ONLY RECORDED IF…
- a loss is probable
- the amount of the loss is reasonably estimable
What is the journal entry for recording a contingent liability?
Dr. Expense
Cr. Liability
If the contingent liability is REMOTE, then you do the following…
no footnote disclosure and no recognition
If the contingent liability is REASONABLY PROBABLE, then you do the following…
if it cannot reasonable be estimated, then you disclose in footnotes and apply no recognition
If the contingent liability is PROBABLE, then you do the following…
recognize accrual through debiting expenses and crediting liabilities
True or false: Warranties are a contingent liability.
TRUE!
This type of warranty is part of the quality assurance of the product, coming with no extra fee.
embedded warranty
This type of warranty requires extra payment for coverage.
extended warranty
The expected cost of commitment for the warranty should be estimated at…
the time of the sale
At the time of repair or replacement under the warranty, the warranty liability (increases/decreases)
decreases
Interest rates given are always done so as…
annual rates
For current non-operating liabilities, the interest expense =
(principal) x (annual rate) x (portion of year outstanding)
What is the journal entry for ACCRUED INTEREST under short-term interest-bearing debt?
Dr. interest expense (Ex)
Cr. interest payable (L)
What is the journal entry for PAYING the accrued interest under short-term interest-bearing debt?
Dr. interest payable (L)
Cr. Cash (A)
Long-term obligations are reclassified and reported as _______ _________ when they become payable within the upcoming year.
current liabilities
Short-term interest-bearing debt often is found in the form of a bank line of credit. How does this typically go?
borrow a little, pay it back, borrow more, pay that back, like a credit card
For short-term interest-bearing liabilities, the note is recorded as a _______ __________ while the interested is _________ __ ________ _________.
current liability, interest is incurred as time passes
