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48 Cards in this Set
- Front
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liability according to FASB |
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transaction or events |
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Current liabilities |
are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities |
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operating cycle |
period of time elapsing between the acquisition of goods and services and the final cash realization resulting from sales and subsequent collection |
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typical current liabilities |
-account payable -notes payable -current maturities of long term debt -short-term obligations expected to be refinanced -dividends payable -customer advances and deposits -unearned revenues -sales taxes payable -income taxes payable -employee-related liabilities |
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accounts payable / trade accounts payable |
balances owed to others for goods, supplies, or services purchased on open account - time lag between receipt of services or acquistion of title to asserts and the payment for them - terms of sale (eg. 2/10, n/30 or 1/10, E.O.M.) usually state period of extended credit, commonly 30 to 60 days |
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note payable |
written promises to pay a certain sum of money on a specified future date - arise from purchases, financing, or other transactions. - classified as short-term or long-term -May be interest-bearing or zero-interest-bearing |
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interest bearing note example |
castle national bank agrees to lend $100,000 on March, 1 2017, to landscape Co. if Landscape sign a $100,000, 6%, four month note. Landscape records the cash received on March 1: cash 100,000 Notes payable 100,000 Landscape prepares financial statements semiannually; interest is calculated:($100,000*6%*4/12): 2,000 interest expense 2,000 interest payable 2,000 @ maturity (July 1) accrued interest July 1 Notes payable 100,000 interest payable 2,000 cash 102,000 |
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non-interest bearing note example (discount on notes payable) |
On March 1, landscape issues a $102,000, four-month, zero-interest-bearing note to Castle National Bank. The present value note is as follows: March 1: Cash 100,000 discount on Notes payable 2,000 notes payable 102,000 |
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Discount on Notes payable |
is a contra account to notes payable, and therefore is subtracted from Notes payable on the balance sheet - the cost of borrowing -debited to interest expense over the life of the note -represents interest expense chargeable to future periods ex on balance sheet: current liabilities notes payable 102,000 less: discount on notes payable 2,000 = 100,000 |
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dividends payable |
amount owed by a corporation to its stockholders as a result of board of directors' authorization - generally paid within three months (quarterly) -undeclared dividends on cumulative preferred stock not recognized as a liability -dividends payable in the form of additional shares of stock are reported in stockholder equity. |
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customer advances and deposits |
returnable cash deposits: received from customers and employees - to guarantee performance of a contract or services or - as guarantees to cover payment of expected future obligations -may be classified as current or long term liabilities. |
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unearned revenues |
payment received before delivering goods or rendering services examples: airline: type of business unearned ticket revenue: unearned revenue passenger revenue: earned revenue |
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sales tax payable |
retailers must collect sales taxes from customers on transfers of tangible personal property and on certain services and then remit to the proper governmental authority |
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sales tax payable example |
prepare the entry to record sales taxes assuming there was a sale of $3,000 when a 4% sales tax is in effect: cash 3,120 sales revenue 3,000 sales tax revenue 120 |
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non-segregated sales tax |
some companies do not segregate the sales tax; the company credits both amounts in total in the Sales revenue account |
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non-segregated sales tax example |
assume the Sales Revene account balance of %150,000 includes sales taxes of 4%. Prepare the entry to record the amount due the taxing unit. tax calculation: 150,000/1.04 = $144,230.77 $150,000-$144,230.77= $5,769 sales revenue $5,769.23 sales taxes payable $5,769.23 |
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income payable |
businesses must prepare an income tax return and compute the income tax payable - taxes payable are a current liability -corporations must make periodic tax payments - differences between taxable income (tax law) and accounting income (GAAP) sometimes occur |
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employee related liabilities |
amounts owed to employees for salaries or wages are reported as a current liability current liabilities related to employee compensation may include: -payroll deductions -compensated absences -bonuses |
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payroll deductions |
Most common types of payroll deductions are taxes, insurances premiums, employee savings, and union dues. -social security taxes (since January 1, 1937) -unemployment taxes -income tax withholding |
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social security taxes (since January 1, 1937) |
social security taxes (since January 1, 1937) -Federal OLD AGE, SURVIVOR, AND DISABILITY INSURANCE (OASDI) benefits for certain individuals and their families -funds from taxes levied on both employer and employee -current rate 6.2% based on the employee's gross pay up to $118,500 annual limit -OASDI tax is usually referred to as FICA |
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social security taxes (since January 1, 1937) CONTINUED |
-1965, congress passed the first federal health insurance program for the aged-- puparly known as Medicare -alleviates the high cost of medical care for those over age 65 -hospital insurance tax, paid by both by employee and employer at the rate of 1.45% on the employee's total compensation. -OASDI tax (FICA) and the Federal Hospital Insurance Tax |
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unemployment taxes |
provides a system of unemployment insurance - Federal unemployment tax act (FUTA) - only employers pay the unemployment tax -rate is 6.2% on the first $7,000 of compensation paid to each employee the calendar year - if employer is subject to a state unemployment tax of 5.4% or more it receives a tax credit (not exceed 5.4%) and pays only .8% tax to the federal government. |
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unemployment taxes continued |
state unemployment compensation laws differ both from the federal law and among various states. Employers must refer to the unemployment tax laws in each state in which they wages and salaries |
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income tax withholding |
federal and some state income tax law require employers to withhold from each employee's pay the applicable income tax due on those wages |
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income tax withholding who pays |
employee pays: - income tax withholding -FICA taxes- employee share - Union dues Employer pays: - FICA taxes- employer share -federal unemployment - Sate unemployment |
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compensated abscences |
paid absences for vacation, illness, and holidays. accrue a liability if all the following conditions exist - the employers obligation is attributable to employees' services ALREADY rendered. - the obligation relates to rights that vest or accumulate -payment of the compensation is probable -the amount can be reasonably estimated. |
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bonus agreements |
payments to certain or all employees in addition to their regular salaries -bonuses paid are an operating expense. -unpaid bonuses should be reported as a current liability |
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current liabilities of long-term debt |
portion of bonds, mortgage notes, and other long-term indebtedness that matures within the next year exclude- long-term debts maturing currently if they are to be 1. retired assets accumulated that have not been shown as current assets 2. refinanced, or retired from the proceeds of a new debt issue 3. converted into capital stock |
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short term obligations expected to be refinanced |
exclude from current liabilities if BOTH of the following conditions are MET: 1. must intend to refinance the obligation on a long-term basis. 2. must demonstrate an ability to refinance. - actual refinancing -enter into a financing agreement |
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CONTINGENCIES |
an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (Gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. FASB 5 |
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Gain on contingencies |
Typical Gain Contingency are: 1. possible receipts of monies from gifts, donations, asset, sales, and so on 2. possible refunds from the government in tax disputes 3. pending court cases with a probable favorable outcome. 4. tax loss carryfowards gain contingencies ARE NOT RECORDED. |
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Loss contigencies |
involves possible losses likelihood of loss FASB uses 3 areas of probability - probable -reasonably possible -remote |
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in contingencies there is the factor of likely hood or probability |
if its probable --> accrue if its reasonably possible --> footnote remote (not likely) --> ignore |
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contingencies usually accrued |
Loss related to: 1. collectibility of receivables 2. obligations related to product warranties and product defects 3. premiums offered to customers |
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contingencies loss not accrued |
loss related to: 4. risk of loss or damage of enterprise property by fire, or other hazards 5. general or unspecified business risks 6. risk of loss from catastrophes assumed by properly and casualty insurance companies, including reinsurance companies. |
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contingencies of loss may be accrued |
loss related to: 7. threat of expropriation of assets 8. pending or threatened litigation 9. actual or possible claims and assessments** estimated amounts of losses incurred prior to the balance sheet date but settled subsequently should be accrued as of the balance sheet date. ** 10. guarantees of indebtedness of others 11.obligations of commercial banks under "standby letters of credit" 12. agreements to repurchase receivables ( or the related property) that have been sold |
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common loss contingencies |
1. Litigation, claims, and assessments 2. guarantee and warranty costs. 3. premiums and coupons 4. environmental liabilities |
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Factors in determining whether to record litigation, claims, and assessments |
companies must consider the following factors, in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments -time period in which the action occurred -probability of an unfavorable outcome -ability to make a reasonable estimate of the loss. |
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guarantee and warranty costs |
promise made by a seller to a buyer to make good on deficiency of quantity, quality, or performance in a product. companies often provide one of two types warranties to customers: 1. assurance-type warranty 2. service- type warranty |
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assurance-type warranty |
warranty that the product meets agreed-upon specifications in the contract at the time the product is sold. - should be expensed in the period the goods are provided or services performed. \ - should record a warranty liability |
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consideration payable |
companies should charge the cost of premiums and coupons to expense in the period of the sales that benefits from the plan. - company estimates the number of outstanding premium offers that customers will present for redemption - company charges the cost of premium offers to premium expense and credits premium liability. underlying concepts warranties and coupons are loss contingencies that satisfy the conditions necessary for a liability. Regarding the income statement, the expense recognition principle requires that companies report the related expense in te period in which the sale occurs. |
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environmental liabilities (loss contingency) |
a company must recognize an ASSET RETIREMENT OBLIGATION (ARO) when it has an existing legal obligation associated with the retirement of a long-lived asset and when it can reasonably estimate the amount of the liability ARO should be received as a failure |
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loss contingency (environment liabilities) obtaining events |
examples of existing legal obligation, which require recognition of a liability include, but are not limited to: -decommissioning nuclear facilities; -dismantling, restoring, and reclamation of oil and gas properties; -certain closure, reclamation, and removal costs of mining facilities; - closure and post-closure costs of landfills |
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loss contingencies - self insurance |
self insurance is not insurance, but risk assumption. there is little theoretical justification for the establishment of a liability based on a hypothetical charge to insurance expense. note 21: insurance: |
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Presentation of current liabilities |
- usually reported at their full maturity value. -differences between present value and the maturity value is considered immaterial - companies may list the accounts in -- order of maturity -- descending order of amount or, -- order of liquidation preference. |
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presentation of current liabilities (notes) |
company excludes a short-term obligation from current liabilities because of refinancing, it should include the following in the note to the financial statements: 1. a general description of the financing agreement 2. the therm of any obligation incurred or to be incurred 3. the terms of any equity security issued or to be issued. |
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presentation of contingencies (disclosure should include): |
-nature of the contingency - an estimate of the possible loss or range of loss or a statement that an estimate cannot be made Companies should disclose certain other contingent liabilities 1. guarantees of indebtedness of others 2. obligations of commercial banks under "stand-by letters of credit." 3. guarantees to repurchase receivables (or any related property) that have been sold or assigned. |
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ratios that help assess liquidity |
current ratio = current assets/current liabilities acid-test ratio = cash+ short-term investments+ accounts receivable net/ current liabilities |
