MGMT 351 1st Edition Lecture 1Outline of Last Lecture (N/A)Outline of Current Lecture I. Fundamental Accounting Model and its Derivatives II. Accounting Based Company Valuation Model III. Three Fundamental Questions IV. Current Liabilities- DefinitionV. What Are Current LiabilitiesVI. Measuring and Reporting Current LiabilitiesVII. Estimated LiabilitiesCurrent LectureAccounting Numbers and Company Value I. The fundamental accounting model and its derivatives- basic balance sheet equation (Assets= Liabilities + Equity)Owner’s Equity can be: -Invested Capital (by owners)- price owner’s pay to purchase stock -Accumulated Income (RE)- capital carried by doing the business over time II. Accounting-Based Company Valuation Model A. Valuation (Value = Value Invested + Value Added (Created)B. Valuation Model: V= BV+ (Future E-rBV)/r- V= value of company now; BV=book value of OE- from balance sheet; E=Accounting earnings- expected NI; r= cost of capital (discount rate)- required rate of return C. Derivatives: P/B ratio and P/E ratio These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.III. Three Fundamental Questionsi) What are the two most important (bottom-line) accounting numbers in view of company valuation?^ Owner’s Equity and NI ii) How does each accounting even (transaction) affect the two bottom-line numbers?iii) How does the result of the event likely affect the value of the company through thosetwo bottom-line numbers? (Increase vs. Decrease) ^ Keep these Questions in mind Current LiabilitiesIV. Definition of liability: probable future sacrifice of economic resources (assets) to fulfill present obligations that result form past events. They are claims by non-owners for the economic resources (assets) of an entity. a. 3 characteristics (conditions)i. Probable future sacrifice of economic resources (assets)ii. Present obligations – must do it iii. Result of a past event-Types: Determinable, Estimable, and ContigentV. What are current liabilities: liabilities that are to be cleared of paid by (1) sacrificing economic resources OR (2) creating other liabilities in one year of operating cycle, whichever is Longer^should be reported as noncurrent if they are to repaid with a long-term financing – issuing stocks or bonds VI. Reporting/Measuringa. Present Value (PV) in theory; at FV (Face Value) if Face=PVDeterminable current liabilities- no need to estimate- amounts are already knownb. EX: Accounting Payable, Notes Payable, accrued expenses payables (interest, rent), income, property, sales taxes payable, current portion of L-T debt -Line of Credit: a special financing arrangement with a lender, which allows a borrower to use the lender’s money (up to pre-negotiated credit limit) without going through the usual credit/loan approval process*only the used amount of LOC is recognized as a liability VII. Estimated Liabilities: current liabilities whose amount is not determined now but can be estimated with accuracy--- “reasonably” accuracy (P 19-47)-Record an Estimated Warranty Liability at the point of sale-Warrant Liability (EX HP 19-1)- you don’t know total warranty until all the warranty claims have gone through (at time of sale)- so Accounting says: you must estimate expenses of providing a warranty in the year of sale JE: Debit Warranty Expense//Credit Estimated Warranty Liability -If warranty service is actually performed later: -Debit Estimated Warranty Liability/ Credit Parts, Cash, Wages