Lecture 8 - Liabilities Flashcards
When are liabilities recognized on the Balance Sheet? (2)
(1) When it is probable that the outflow of an economic resource will occur
2) The amount can be measured reliably
Define Short-Term and Long-Term liabilities
1) Current, due within 1 year or within the company’s normal operating cycle.
= Nominal amounts
2) The ones that are due beyond 1 year
=Expressed in present values, taking time value of money into consideration
Mention 10 (!) common types of liabilities
- 1 bonus
1) Accounts Payable / Trade Payable
-Usually short term; 30-90 days
2) Accrued Liabilities
-An expense that is incurred but not yet paid
-Usually short-term - current
3) Costumer Deposits
-Amount paid for securing goods and property or services
-Refundable when the service is no longer required or when the contract lapses
4) Unearned revenues/deferred revenues collected in advance
-Have received cash before earning the revenue
5) Payroll-Related Liabilities / Employee Compensation
6) Sales Tax Payable
7) Tax Payable
8) Provisions
-Knows a liability exists but not the exact amount and timing.
-Still reported on balance sheet based on best estimate at the reporting date
-Eg. Warranties
9) Notes Payable
-Short-term or long-term
10) Debts:
-Short-term eg. Bank loans due within 1 year
-Long-term eg. bonds payable
-At the end of each year company reclassifies debt if it should be removed from long-term to short-term
*Contingent liabilities
-Not an actual liability
-Possible obligation needs to be confirmed by future event outside the control of the entity
-A present obligation that may but probably not requiere outflow of economic resources
-A sufficiently reliable estimation cannot be made presently
-Usually a disclosure. If it goes from possible—> probable a provision must be made
What posting should be made for an Unearned Revenue (1) and afterwards when the Revenue has been earned (2)?
1)
D: Cash
C: Unearned Sales Revenue
To record cash in advance for sale
2)
D: Unearned Ticket Revenue
C: Ticket Revenue
Earned revenue collected in advance
How should a Sales Tax be reported when a sale has been made?
D: Cash (sales revenue + tax)
C: Sales revenue
C: Sales Tax Payable
To record cash sales + related sales tax
How should provisions (here warranty) be reported initially upon estimation and afterward when an amount has been spent
1)
D: Warranty Expense (the estimated value)
C: Provision for warranty repairs
To accrue warranty expense
2)
D: Provision for warranty expense (the amount spent in period)
C: Inventory/cash depending on refund or exchange of products
How should Notes Payable be recorded when:
1) Inventory bought with note payable
2) The financial year ends but the maturity date has not been reached
3) The note payable becomes mature and paid
1)
D: Inventory
C: Note payable, short-term
2)
D: Interest expense (for the months since the note was created)
C: Interest payable
To accrue interest expense at year-end
3)
D: Note payable, short-term (principal)
D: Interest Payable (from earlier)
D: Interest Expense (the rest)
C: Cash
Payment of note payable and interest at maturity
What is Bonds Payable and what does a Bond Certificate include?
-Groups of notes payable issued to multiple lenders, called bondholders
-Includes:
1) The issuing company’s name
2) The principal/bond face value/maturity value/ par value
3) Maturity date
4) Interest Expense
Bond prices in the Bond Market
-How are the prices quoted
-Mention the 3 types and what they are quoted at
- At a percentage of their face value
1) Face value 100
2) Premium >100
3) Discount <100
What is the Time Value of Money?
Money earns income over time - a dollar today is worth more than a dollar to be received in the future
What is The Present Value of a Future Amount
How much would you pay today eg. 700 to receive an amount in the future eg. 1000:
The present value = the principal = 700
The future amount = 1000
How are Bond Prices determined?
And what are the 2 types of interest rate and their relation?
Market Price = Present Value = Present Value of the Principal + the Present Value of the Cash Interest Payments
1) The Stated Interest Rate: printed on the certificate.
2) The Market Interest Rate/ Effective Interest Rate: The rate investors demand for loaning out their money. Can fluctuate after the issuing of bonds.
Relationship:
Stated = Market Face Value
Stated < Market Discount
Stated > Market Premium
Define a Lease and how will it be recognized in the books of the lessee?
-A contract in which the asset user (lessee) agrees to make lease payments to the asset owner (lessor) in exchange for the right to control the use of the asset
-Right-of use Assets and
- Lease Liabilities
Describe the 3 main ways to finance operations and the benefits and disadvantages
1) Retained earnings
-Low risk
2) Issuing Shares
- No liabilities or interest expenses
- Less risky
- More costly
3) Issuing Bonds or Notes Payables
-Does not dilute control of operation
-If earnings of the borrowed money exceed the interest rate it will result in a higher EPS
-More debt increases the risk of the company
What does Earnings Per Share EPS signify?
- Amount of a company’s net income for each share outstanding
-Most important statistic for evaluating a company
-Standard measure of operation performance
