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Management accounting
Objective is to provide relevant and timely information for managers' and employees' decision making needs, this information is often sensitive and not distributed outside the business
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Financial Accounting
The area that provides External users with information
To provide relevant and timely information for the decision-making needs of external users
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business entity concept
a concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business
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Sole Proprietorship
owned by one individual
Advantages: easy to start and control because of only 1 owner
Disadvantages: Unlimited personal liability for business liabilities
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Partnership
owned by two or more individuals
Advantages: more resources from multiple owners, simple formation
Disadvantages: Unlimited personal liability for business debts for all owners
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Corporation
organized under state or federal statutes as a separate legal table entity
Advantages: Separate Legal Entity, Can raise more money for the company with the additional owners, Easy to sell interest, Owners not liable for business debts
Disadvantages: Legal set-up costs, taxes can be higher
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Limited Liability Company (LLC)
combines the attributes of a partnership and a corporation
Advantages: Separate Legal entity, more favorable for tax purposes
Disadvantages: legal set up costs, differences among state laws
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Cost Concept
amounts are initially recorded in the accounting records at the cost or purchase price
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Assets
resources owned by a business
has to help us in the next period
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Liabilities
Rights of the creditors, or debts of the business
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Stockholders' Equity
The owners' equity in a corporation
Retained Earnings + Common/Capital Stock
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Accounting Equation
Assets = Liabilities + Stockholder's Equity
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Dividends
Are distributions of earnings to stockholders
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Retained Earnings
the stockholders' equity created from business operations through revenue and expense transactions
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Financial Statements
Financial reports that summarize the effects of events on a business
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Statement of Cash Flows
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Income Statement
a summary of the revenue and expenses for a specific period of time, such as a month or a year
Revenues - Expenses = Net Income
Purpose: To show Net Income
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Statement of Retained Earnings
A summary of the changes in the retained earnings for a specific period of time, such as a month or a year
- Beginning RE
- + Net Income
- - Dividends
- = Ending RE
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Balance Sheet
A list of assets, liabilities, and stockholders' equity as of a specific date, usually at the close of the last day of a month or a year
- Assets = Liabilities
- + Stockholders Equity
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Statement of Cash flows
A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year
How a company is using their cash
3 types: Operating, Investing and Financing
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Management Discussion & Analysis (MD&A)
Written by management to describe financial and non financial trending, a narrative about what happened during the period
Not objective information because the report is prepared by management
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Notes to the Financial Statement
Legend to the financial statements
states the principles and methods used to account for transactions
Qualitative and Quantitative
provide additional descriptions and disclosures
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ADE
Assets Dividends and Expenses
are increased with a debit!
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Cash Method
Revenue is when we receive cash, and expense is when we pay it
Not used in this class
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Accrual Method
GAAP requires that we use this
Revenue is recognized when it is earned, and Expenses are recognized when incurred
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Revenue Recognition Concept
Revenue is recognized when it is earned
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Matching Principle
Recognize expenses in the same period which we used item to generate revenue
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Adjusting Entries
The journal entries that bring the accounts up to date at the end of the accounting period
Will always involve a revenue or an expense account and an asset of liability account
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Accrued Expense
unrecorded expenses that have been incurred and for which cash has yet to been paid
Ex: Electric Bill for the month of September, received in October, We used the electric to bring in revenue, must post this in September
Expense and Liability
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Prepaid Expenses
Are the Advance Payment of future expenses and are recorded as assets when cash is paid
Ex: Paid $600 in advance for 6 months of insurance, at the end of each month, a portion needs to be moved over to an expense account because we needed the insurance to generate revenue
Asset and expense
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Accumulated Depreciation
How much we've charged to expense since we have owned the asset
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Depreciation Expense
How much we've charged to expense this period
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Unearned Revenues
Advance receipt of future revenues and are recorded as liabilities when cash is received
Ex: Paid Down Payment on service in September, not expecting to perform service till October, Recorded in September as a liability(unearned revenue), at the end of October moved from unearned revenue to fees earned
Liability and Revenue
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Accrued Revenue
unrecorded revenues that have been earned for which cash has yet to be received
Ex: Preformed service for customer in September, billed in October, we record the revenue in September because we have already earned it
Asset and Revenue
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Book Value of an asset
The amount we have yet to move to expense
Cost of the asset minus the accumulated depreciation of the asset
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Asset (4 Categories) Classified Balance Sheet
- Current Assets- Expected to be used up in one year
- - Cash
- - accts receivable
- - supplies
- - prepaid expenses
- - inventory
- Long Term Investments - more than one year
- - Investments in Stocks or bonds
- - Investments in subsidiaries
- Property, Plant, and Equipment
- - Land
- - Equipment
- - Vehicles
- - Buildings
- - (Accumulated Depreciation)
- Intangible Assets
- - Copyrights
- - Trademarks
- - Patents
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Liabilities (2 Categories) Classified Balance Sheet
- Current Liabilities - Expected to be paid out within a year
- - Accts payable
- - wages payable
- - unearned revenue
- - Current Maturities of Log term debt
- Long-term Liabilities - more than a year
- - loans payable
- - notes payable
- - bonds payable
Notes payable and Loans payable may be in either category depending on the term
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Closing the books
Process of zeroing out all temporary accounts and transferring them to permanent accounts
- Temporary accounts
- Need to be reset every period, they only relate to that period
- revenue and expense accounts
- Permanent Accounts
- Roll over from year to year
- Assets, Liabilities, all balance sheet accounts
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Closing Process
- 1. Zero Out Revenue Balances
- 2. Zero Out Expense Balances
- 3. Zero Out Income Summary
- 4. Zero Out Dividends
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Income Summary
a temporary account that is only used during the closing process
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Internal Financial Statement Users
Marketing, Production, Human resources, Finance, Management
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External Financial Statement Users
Investors, Creditors, Government, Competitors, Suppliers
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Correlation Between Financial Statements
- Must Complete in Order
- Net Income also appears on Statement of Retained Earnings
- Retained Earnings Balance also appears on Balance Sheet
- Ending Cash balance on Statement of Cash Flows must agree to Balance Sheet
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Double Entry Accounting
Whenever a Transaction occurs, it must affect at least 2 accounts
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Accounting Cycle
- 1. Transactions are analyzed and recorded in the Journal
- 2. Transactions are posted to the ledger
- 3. an unadjusted trial balance is prepared
- 4. Adjustment data are assembled and analyzed
- 5. Spread Sheet is prepared
- 6. Adjusting entries are journalized and posted to the ledger
- 7. An Adjusted trial Balance is prepared
- 8. Financial statements are prepared
- 9. Closing entries are journalized and posted to the ledger
- 10. A post-closing trial balance is prepared
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Auditor's Report
- independent party
- Certified public accountant (CPA)
- reports opinion if financial statements are prepared in accordance with GAAP
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Perpetual inventory System
- Inventory balance and COGS is always updated
- Journal Entries are required upon sale of goods
- Improved inventory Control
- Facilitated by bar code system
- high cost to maintain
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Periodic inventory system
- Inventory balance is updated at the end of the period
- COGS is recorded at the end of the period
- journal entries are required upon the end of the period
- smaller companies
- low-cost inventory
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Sales returns and allowances
are granted by the seller to customers for damaged or defective merchandise
contra revenue
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Sales discounts
granted by the seller to customers for early payment of amounts owed
contra revenue
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merchandise available for sale
The cost of merchandise available for sale to customers calculated by adding the beginning merchandise inventory to net purchases
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Income from operations
determined by subtracting operating expenses from gross profit
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Freight
The cost to get the product to us
Included in cost for the perpetual system
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New Accounts for Perpetual System
- Merchandise inventory - A
- Sales - R
- Sales returns and allowances - CR
- Sales Discounts - CR
- Cost of Merchandise Sold - COGS - E
- Delivery Expense - E
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Cost of Goods Sold
COGS
The cost of finished goods available for sale minus the ending finished goods inventory
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New accounts for Periodic System
- Purchases - E
- Purchases returns and allowances - E
- Purchases Discounts - E
- Freight in - E
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Freight In
Cost of transportation
Periodic System
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FOB Shipping Point
Ownership changes when goods are shipped
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FOB destination
Ownership changes when they reach the buyers
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Consignment
selling goods on someone else's behalf
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Internal Control
defined as the procedures and processes used by a company to:
- safeguard its assets
- process information accurately
- ensure compliance with laws and regulations
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Elements of internal control
- control environment
- risk assessment
- control procedures
- monitoring
- information and communication
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control environment
overall attitude of management and employees about the importance of controls, factors influencing a company's control environment are:
- management's philosophy and operating style
- the company's organizational structure
- the company's personnel policies
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Control Procedures
- 1. Competent personnel, rotating duties, and mandatory vacations
- 2. separating responsibilities for related operations
- 3. separating operations, custody of assets, and accounting
- 4. proofs and security measures
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Issues regarding receivables
- criteria to extent credit, run credit checks
- establish credit terms
- collection
- factoring - sell receivables
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Direct Write-off method
We right off an account when we know a particular customer cannot pay
this is easy, mostly used for small companies
Doesn't have the best results, doesn't follow the matching principle of GAAP
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Allowance Method
We estimate the amount that is uncollectible when we think it's uncollectible
Accounts are then valued at NRV- Net realizable Value - How much you think you're actually going to collect
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Conservatism
Don't want to overstate our income or assets because it could mislead financial statement users
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Revenue Expenditures
Costs that only benefit the current period
- c:repairs and maintenance expense 300
- d:cash 300
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Capital expenditures
Costs that improve the asset or extend it's useful life
- Asset improvements
- c:delivery truck 5500
- d:cash 5500
- Extraordinary repairs
- c:accum dep - forlift 4500
- d:cash 4500
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Salvage Value
residual value
value of the asset at the end of it's life
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Straight Line Depreciation
Annual Depreciation = (cost-salvage value)/life
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Unite of production Method
find depreciation per unit = (cost - residual value)/total units of production
depreciation expense = depreciation per unit * total units of production used
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Double declining balance method
depreciation expense = (book value*2)/ life
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Depletion
The cost of natural recourses to an expense account
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Amortization
the amount of an intangible asset to transfer to expense
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Patents
exclusive rights to produce and sell a good with one or more unique features
amortization is computed using the straight-line method
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Copyright
exclusive right to publish and sell literary, artistic or musical compositions
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Trademark
a name, term, or symbol used to identify a business and its products
these are not amortized
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Goodwill
intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill, allows a business to earn a greater rate of return than normal
this is not amortized
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Bond
a form of an interest bearing note, like a note, a bond requires periodic interest payments with the face amount to be repaid at the maturity date
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Bonds issued at face amount
- c: cash xxx
- d: bonds payable xxx
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Paying interest on a bond
- c: interest expense xxx
- d: cash xxx
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Bonds issued at a discount
- c: cash 96406
- c: discount on BP 3594
- d: Bonds payable 100000
When the market interest rate is higher than the bond interest rate
Amortizing a bond discount
- c:interest expense xxx
- d:Discount on BP xxx
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Bonds issued at a premium
- c:cash 104000
- d:Premium on BP 4000
- d:Bonds payable 100000
When the market interest rate is lower than the bond interest rate
Amortizing a bond premium
- c:Premium on BP xxx
- d:interest expense xxx
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Bond Redemption
Loss- acts like an expense, recorded if the price paid for the redemption is above the carrying amount
gain- acts like a revenue, recorded if the price paid for the redemption is below the bond carrying amount
gain/loss on redemption of bond
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Straight line method for amortizing bonds
total of discount or premium/ # of periods
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Stock
Shares of Ownership
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Outstanding Stock
Stock remaining in the hands of the stockholders
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Common Stock
when only one class of stock is issued, each share has equal rights
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Preferred stock
One or more classes of stock with various preference rights, such as preference to dividends
Either stated as dollars per share or as percent of par
Cumulative preferred stock - has a right to receive regular dividends that were not declared paid in prior years, Noncummulative does not have this right
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Par
The monetary amount printed on a stock certificate
Stock is often issued at an amount that is different from par
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Cash Dividends
A cash distribution of earnings by a corporation o its shareholders
- Three conditions for cash dividends
- 1. Sufficient retained earnings
- 2. Sufficient cash
- 3. formal action by the board of directors
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Date of declaration
the date the board of directors formally authorizes the payment of the dividend
- d: cash dividends
- c: cash dividends payable
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date of record
the date the corporation uses to determine which stockholders will receive the dividend
Any investors that purchase stock before the date of record will receive the dividend
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date of payment
the date the corporation will pay the dividend to the stockholders who owned the stock on the date of record
- d: cash dividends payable
- c: cash
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Stock Dividends
a distribution of shares of stock to stockholders
are normally only declared on common stock and are issued to common stockholders
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Treasury Stock
stock that a corporation has issued and then reacquired
- a corporation may purchase its own stock for a variety of reasons including:
- 1. To provide shares for resale to employees
- 2. to reissue as bonuses to employees
- 3. to support the market price of the stock
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Restrictions of retained earnings
board of directors may restrict the use of retained earnings for payment of dividends, they are classified as
- 1. Legal - state laws may require this
- 2. Contractual - a corporation may enter into a contract that requires restrictions
- 3. Discretionary - A corps board of directors may restrict voluntarily
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Stock Split
a process by which a corporation reduces the par or stated value of it's common stock and issues a proportionate number of additional shares
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Inventory Shrinkage
When the physical inventory on hand at the end of the period is lower than then balance of merchandise inventory
adjusting entry in this case
- d: COGS
- c: Merhcandis inventory
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FIFO
First in First out
Gives us a higher net income in a period of increasing prices
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LIFO
last in first out
gives lowest net income in a period of increasing prices
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Risk Assesment
Management shoudl identify any risks(customer requirements, regulatory changes, changes in economic factors) analyze their significance, assess their likelihood of occuring, and take any necessary actions to minimize them
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Monitoring
Monitoring the internal control systems is used to locate weaknesses and improve controls
often includes observing employee behavior and the accouting system for indicators of control problems
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Limitations of internal Control
- 1. the human element of controls - human error can occur
- 2. cost benefit considerations - cost should not exceed their benefits
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Bank reconciliation
an analysis of the items and amounts that result in the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger
- Balance per bank
- + deposits in transit
- - outstanding checks
- +/- bank errors
- Balance per books
- + interest
- + deposits straight to the bank
- - NSF checks, from customers
- - bank service charges
- +/- book errors
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Payroll
- Employee's costs
- c: wages exp
- d: cash
- d: state inc tax pay
- d: federal inc tax pay
- d: FICA pay
- Employer's costs
- health insurance
- works comp ins
- SUTA - state unemployment tax
- FUTA - Federal unemployment tax
- retirement plan
- social security and medicare tax
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Contingent Liabilities
Not certain Liablities
- remote - 1% chance we'll lose, don't do anything
- reasonably possible we'll lose, disclose in notes of financials
- Probable- $ estimate amount (c: exp, d: liab)
- probable- no estimate, disclose in notes
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