What is a liability?
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 transactions
What is a current liability?
obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities
How does the operating cycle affect current assets and current liabilities?
Current liabilities may be longer than one year if the operating cycle is longer than one year.
What are some typical current liabilities
- 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
A company is required to exclude a short-term obligation from current liabilities if it INTENDS to refinance and can DEMONSTRATE AN ABILITY to do so.
Demonstration of ability is to actually refinance or enter into a financing agreement
How are dividends in arrears and stock dividends classified?
They are not recognized as current liabilities
an existing condition, situation or set of circumstances involving uncertainty as to a possibly gain or loss to an enterprise
Any claims or rights to receive assets whose existence is uncertain but which may become valid eventually
- possible receipts of money
- possible refunds from tax disputes
- pending court cases with favorable outcomes
- tax loss carryforwards
NOT RECORDED unless there is a high probability for realizing them and then they are disclosed in the notes
possible losses that can be classified as PROBABLE (likely to occur), REASONABLY POSSIBLE (less than likely, more than remote) or REMOTE (slight chance)
When should loss contingencies be accrued?
If info available prior to ISSUANCE of the financial statements indicate that the liability is PROBABLE and REASONABLY ESTIMABLE
- payroll deductions
- compensated absences
- bonus agreements
How are warranty claims, premiums, coupon offers and rebates treated?
The expenses are accrued and charged to the period of sale
Distinguish between the cash-basis and accrual methods of accounting for warranty expenses
The cash-basis method expenses warranty costs as incurred and does not match them with the period of sale.
The accrual method is used when warranty expenses are PROBABLE and ESTIMABLE and charges this amount to warranty expense and credits warranty liability.
Describe the sales warranty method
When warranties are sold independent of the item, then it is recorded as unearned warranty revenue. As the warranties expire and haven't been used, the company can make this earned warranty revenue.
The interest rate written in the terms of the bond indenture is known as the...
coupon rate, nominal rate or stated rate
How is "discount on notes payable" presented on the balance sheet?
as a deduction from notes payable