MGMT 351 1st Edition Lecture 2Outline of Last 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 LiabilitiesOutline of Current Lecture I. Current Liabilities Cont’d- Contingent LiabilitiesII. Fair Value Option III. Long-Term LiabilitiesIV. Valuing and Reporting LiabilitiesV. Long-Term Notes Payable Current LectureI. . Contingent Liabilities : these are not real liabilities now by may become real liabilities if something (a contingent event) happens in the future—pending lawsuit; win=gain, loss is a loss -gain contingency is not recognized as an asset Unless its likelihood is HIGHLY LIKELYConditions for Loss: 1. Likelihood: of event happening as you see it now a. Probable b. Reasonable Possible c. Remote- Do nothing2. Estimability – of gain/lossa. For probable—reasonable estimable--- recognize as a loss and liability --- Not estimable—Disclose in notesThese 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.b. For reasonably possible—Disclose in Notes - Info included in disclosure :o Nature of liability (what is it about)o Amount o Timing o Attorney and Management’s opinion o Possible consequences - Requires professional judgment -A gain contingency is treated similarly but more conservatively*Main difference: must be MORE THAN probable to be recognizedII. Fair Value Option: companies have an option to report financial (assets and) liabilities at their B/S datefair values on the B/S BV does not equal FVIII. Long-Term Liabilities-Liabilities other than Current Liabilities- more than one year or operating cycle EX: Mortgages Payable, Long-term notes payable – Accounted the same except for the name; Bonds Payable, Lease, Pension, Deferred income taxes, Others (certain Short term liabilities—those that are to be repaid with the long-term financing—issuance of stocks or bonds) IV. Valuing and Reporting- Book Value= Initial Cost (historical cost/ acquisition cost)+ Sum of Discounted Amortization OR – Sum of Premium Amortization - Also BV= Face Vale – Discounted balance remaining or + premium balance remainingo BV may or may not be the same as the present value - Fair Value= market value of a given point in time - V. Long-term Notes PayableA. Types of Notes Payable i) Short or Long term -Long term can be trading or non-trading- if sold on the market there is a prevailing interest rate on similar notes= effective rate-market wide average rate constantly changes -If no market= its own interest rate= stated/printed/coupon rateII) Interest or non-interest bearing B. Measuring N/P- Reported at Present Value -- * Time Value of Money Concept is huge here- refresh in ch. 6 of this book -If note is non-interest bearing then the PV is less than the Face Value ^ Once you have measured it you must record