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78 Cards in this Set
- Front
- Back
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liabilites are defined by FASB as
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probable future sacrifices of economic benefits arising from present obligatons of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
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a liability has three essential characteristics
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it is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services
it is an unavoidable obligation the transaction or other event creating the obligation has already occurred |
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Liabilities are divided into the basic categories of
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current liabilites
and long term debt |
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current assets are
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cash or other assets that companies can reasonably expect to cash, sell or consume in operations within a single operating cycle or within a year
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current liabilities are
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obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liablities
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the operating cycle is the
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period of time elapsing between the aquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections
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typical current liabilities
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accounts 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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balances owed to others for goods, supplies or services purchased on open account
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trade accounts payable
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most companies record liabilities for purchases of goods upon
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receipt of the goods
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if title has passed to the purchaser before receipt of the goods the company should record the transaction when
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at time of title passage
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written promises to pay a certain sum of money on a specified future date are
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notes payable
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Discount on notes payable is a _____ account to _________ and therefore is subrracted from _______ on the balance sheet
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contra; notes payable, notes payable
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discount on notes payable balance represents
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interest expence chargable to futre period
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portion of bonds, mortgage notes and other long-term indebtedness that matures within the next physical year
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current maturities of long term debt
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conpanies exclude long term debts maturing currently as current liabilities if they are to be
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retired by assets accumullated for this purpose that properly have not been shown as current assets
refinanced, or retired from the proceeds of a new debte issue or converted into capital stock |
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When only a part of long term debt is to be paid, a company reports this how?
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the maturing portion is reported as a current liability and the remaining is reported as a long term debt
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any bill that is due on demand should be classified as
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current liability
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A company is required to exclude a short-term obligation from current liabilites if BOTH of the following conditions are met:
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must INTEND TO REFINANCE the obligation on a long term basis
must DEMONSTRATE THE ABILITY to consummate the refinancing |
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A Company may demonstrate the ABILITY to consummate the refinancing by:
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Actually refinancing the short term obligation by issuing a long term obligation or equity securities after the date of the balance sheet but before it is issued or
entering into a financing agreement that clearly permits the company to refinance the debt on a long term basis on terms that are readily determinable |
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an amount owed by a corporation to its stockholders as a result of board of directors authorization
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cash dividend payable
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because companies always pay cash deividneds within one year of declaration (gernerally within three months) they are generally classified as
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current liabilities
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Why don't companies recognize accumulated but undeclared dividentds on cumulative preferred stock as a liabiliby
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preferred dividends in arreards are not an obligation until the board of directors authorizes the payment
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Companies generally recognize dividends payable in the form of additional shares of stock in the _____ section of the balance sheet because they
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stockholders equity; represent retained earnings in the process of transfer to paid-in capital
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received from customers to guarantee performance of a contract or service or as gurarantees to cover payment of futre obligations
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returnable cash deposits
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how do you account for unearned revenu
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debit cash, credit current liability accout of the unearned revenue
debit unearned revenue and credit earned revenue |
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When the sales tax collections credited to the liability account are not equal to the liability as computed by the governmental formula GAP
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recognizees a gain or loss on sales tax collections
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income tax liabilities _______appear on the financial statements of proprietorships and partnerships because;
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do not; individual propritors and the members of partnerships are liable for income tax on their share of the business's taxsable income
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If in a later year the taxing aurthority assesses an additional tax on th eincome of an earlier year, the company should
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credit income taxes payable and charge the related debit to current operations
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employee related current liabilities can include
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salaries and wages owed
payroll deductions compensated absences bonuses |
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payroll deductions are
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social security taxes
unemployment taxes income tax witholding |
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THe government taxes employer and the employee at ____% of the employee's gross pay up to _________annual limit
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6.2%;$90,000
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Employees who meet this criteria are subject to the Federal Unemployment Tax Act
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1) Those who paid wages of $1,500 or more during the calendar year
or 2) those who employeed at least one individual on at least one day in each of 20 weeks during the current or preceeding calendar year |
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The unemployment tax is ___% on the first ____ of compensation paid to each employee during the calendar year
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6.2%;$7,000
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The employer may receive a tax credit not to exceed ___% for unemployment taxes paid to the stae
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5.4%
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all stated provide for some kind of _______ which reduces the the state contribution rate for employer's when they display by their benefit and contribution experience that they provide steady employment
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merit rating
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Companies pay federal unemployment tax ____ and file a unemployment tax form ____
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quarterly; annually
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Companies should record the amount of accrued but unpaid employer contributions as
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an operating expense and as a current liablity at year end
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The employer should record all unremitted employer FICA taxes as
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payroll tax expense and payroll tax payable
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Companies should accrue a liability for the cost of compensation for future absences if ALL of these conditions exist
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a) the employer's obligation relating to employees' rights to recieve compensation for future absences is attributable to employees' services ALREADY RENDERED
b) the obligations relates to the rights that VEST OR ACCUMULATE c) Payment of the compensation is PROBABLE d) The amount can be REASONABLY ESTIMATED |
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___ exist when an employer has an obligation to make payment to an employee even after terminating his or her employment
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vested rights
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rights that employees carry forward to future periods if not used in the period in which earned.
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Accumulated rights
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If sick pay benefits vest, a company must ____ them
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accrue
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If sick pay benefits accumulate but do not vest, a company must
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can choose whether or not to accrue them
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Companies should recognize the expense and related liablity for compensated absences when?
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In the year earned by employees
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REcording an employee bonus earned in a prior year make the following entries
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in prior year:
Dr Employees Bonus Expense Cr Profit sharing bonus payable Dr in current year: profit sharing bonus payable Cr Cash |
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agreements covering rents or royalty payments conditional on the amount of revenues earned or the quatnity of product produced or extracted
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conditional expenses
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a contingency is
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an existing condition, situation, or set of circumstances involving uncertainty to possible gain or loss
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Typical gain contingencies are
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possible reciepts of monies from gifts, donations, bonuses, and so on
possible refunds from the government on tax disputes pending court cases witha probable favorable outcome Tax loss carryforwards |
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if somehting is likely to occur it is
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probable
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if the chance of something occuring is mor than remote but less than likely it is
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reasonably possible
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if the chance of somehting occurring is slight it is
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remote
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Companies should accrue and estimated loss from a loss contingency by a charge to expense and a liability recorded only if both of the following conditions are met
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informaqtion available prior to the issueance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements
the amount of the loss can be reasonably estimated |
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Example loss contingencies accrued
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loss related to:
collectibility of receivables obligations related to product warranties and product defects premiums offered to customers |
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examples of loss contingencies not accrued
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loss related to:
risk of loss or damage of enterprise property by fire, or other hazards general or unspecified business risks resk of loss from catastrophies assumed by insurance companies |
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May be accrued
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threat of expropriation of assets
pending or threatened litigation actual or possible claims and assessments guarantees of indebtedness of others obligations of commercial banks undr "standby letters of credit" agreements to repurchase receivables that have been sold |
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Some of the more common loss contingencies are
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litigation, claims and assessments
guarantee and warranty costs premiums and coupons environmental liabilities |
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to report a loss and a liability in the financial statements the cause for litigation must have occurred
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on or before the date of the financial statemens
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To evaluate the probability of an unfaborable outcome a company considers the following
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the nature of the litigation
the progress of the case the opinion of legal counsil its own and others' experince managment responses to the lawsuit |
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with respect to unfiled suits and unasserted claims and assesments a company must determine
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the degree of probability that a suit must be filed or a claim may be asserted
the probability of an unfavorable outcome |
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Companies use two basic methods of accounting fro warranty costs
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the cash basis methods
accrual method |
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under the cash basis method of accounting for warranty costs, companies
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expense warranty costs as incurred, and charges warranty costs to the period in which it complies with the warranty
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Which accounting for warranty costs is recognized for income tax purposes
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cash basis
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A company must use the cash-basis method when it does not accrue a warranty liability in the year of sale either becuase
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it is not probable that a liability has been incurred
or it cannot reasonably estimate the amount of the liability |
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If it is probable that customers iwll make warranty claims and a company can reasonable estimate teh costs incurred, the company must use the___ and charge the warranty costs to operating expense when?
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accrual method; in the year of sale
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when the warranty is an integral an inseparable part of the sale and is viewed as a loss contigency it is referred to as the
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expense warranty approach
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REcognition of Warranty expense of items sold is accounted for as
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DR Warranty Expense
Cr Cash, Inventory, Accrued payroll Dr Warranty expense Cr Estimated liability under warrnties Costs in later period are DR estimated liabitiy under warranties CR Cash, inventory, or Accrued Payroll |
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when a seller recognized separately the sale of the item and the sale of the extended warranty this is called
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the sales-warranty approach
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Companies defer revenue on the sale of extended warranties and recognize it on a
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straight line basis over the life of the contract
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The companies that sell extended warranties should ___ costs that vary with and are directly related to the sale of the contracts (mainly commissions)
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defer and amortize
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The companies that sell extended warranties should ___that it would have incurred even if it did not sell a contract
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expenses
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Companies should____ the costs of premiums and coupons to expense in ______
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charge;the period of the sale
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Examples of accounting for asset retirement obligations
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decommissioning nuclear facilities
dismantiling, restoring and reclamation of oil and gas properties certain closure and reclamation fo mining facilities closure of landfills |
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Companies should not record the capitalized asset retirement costs in a separte account because
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there is no future economic benefit that can be associated with these costs alone
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a major exception exists to presentation of current liabilities when
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a company will pay a currently maturing obligation from assets classified as long term
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companies should disclose certrain other contingent liabilities, even thought the possiblity of loss may be remote:
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guarantees of indebtedness of others
Obligations of commercial banks under "standby letters of credit" Guarantees to repurchase receivables that have been sold or assigned |
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The current ratio is
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the ratio of total current assets to total current liablities
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the current ratio is also called the
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working capital ratio
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the acid test ratio is
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(cash+short term investments+net receiveables)/ current liabilities
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