Week 4 Flashcards
Payables
Liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier
Typically short term (30 - 60 days) and non-interest bearing
Other payables are those arising from the credit purchase of goods or services from non-inventory suppliers, any GST payable at the reporting date
Accruals
Liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier
Some can be determined on pro rata basis e.g. accrued wages
Others may require an estimate e.g. accrued utilities
Unearned revenue (aka deferred revenue or revenue received in advance)
Liabilities arising having received cash prior to providing goods or services
Entities providing insurance services or commercial property
Received but not earned e.g. lay-by sales, prepaid orders, gift cards
Current tax
Companies incur tax liabilities based on their taxable profit
Deferred taxes
Arise due to differences in the company’s tax liability calculated under the Income Tax Assessment Act and the company’s tax expense calculated under accrual accounting
Deferred taxes result in either and asset or liability and are classified as non-current
They do not represent a future cash flow
They are typically not material
Borrowings
Liabilities arising from borrowing money
Long term and interest bearing
Lease liabilities
A lease contract imposes obligations by way of lease payments
Lease liabilities care similar to reducing balance loans i.e. each payment is part principal, part interest
Provisions
Provisions are liabilities of uncertain timing or amount e.g. annual leave or warranties
Contingent liabilities
In a general sense, all provisions are contingent due to the existence uncertainty (if/when) or measurement uncertainty ($)
Their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, OR
They do not meet the recognition criteria (probable outflow of economic benefit and reliable estimate)
e.g. getting sued
Equity
The residual interest in the assets of the entity after deducting all its liabilities
Made up of Equity contributed by investors (issued capital) and Equity accumulated (by the entity) on behalf of investors (reserves and retained earnings)
Reserves (type 1)
Profits that have been appropriated for further investment/borrowings e.g. Retained earnings - undistributed profits
Reserves (type 2)
Reserves required by Accounting Standards arising from unrealised gains and losses e.g. Revaluation surplus from revaluing assets to their fair value
Dividends (ordinary dividends)
Distribution of retained earnings (or reserves) in the form of cash or other consideration (e.g. share dividends)
Annual or more frequent e.g. interim and final
Non-controlling interests
Arises from consolidation when parent hold less than 100% of the shares in a subsidiary
Consolidation aggregates 100% of subsidiary’s net assets
Parent holds, say, 90% of the shares (the controlling interest)
The other 10% (the non-controlling interest) held by shareholders who are not members of the parent entity
WACC
WACC = (debt weighting x after-tax required rate of return on debt) + (equity weighting x required rate of return on equity)
WACC is commonly used as the rate at which to discount future cash flows to determine net present value (NPV)
