Chapter 9 Reporting and Interpreting Liabilities The acquisition of assets is financed from two sources Debt funds from creditors Equity funds from owners Account Name Also Called Accounts Payable Trade Accounts Payable Accrued Liabilities Accrued Expenses Notes Payable N A Deferred Revenues Unearned Revenues Definition Obligations to pay for goods and services used in the basic operating activities of the business Obligations related to expenses that have been incurred but will not be paid until the subsequent period Obligations due supported by a formal written contract Obligations arising when cash is received prior to the related revenue being earned Payroll taxes Gross Pay Deductions Net Pay Deductions Social Security tax Medicare tax Federal Income Tax State and Local Income taxes and Voluntary Deductions Estimated Liabilities Contingent Liabilities Potential liabilities that result from past actions eventual disposition depends on 1 or more future events Definition Probable Subject to estimate Record as liability Not subject to estimate Disclose in note The chance that the future event or events will occur is high GAAP Greater than 70 chance of occurring IFRS More than a 50 chance of occurring Reasonably possible The chance that the future event or events will occur is more than remote but less than likely Disclose in note Disclose in note Remote The chance that the future event or events will occur is slight Disclosure not required Disclosure not required Relatively small debt needs can be filled from single sources banks insurance companies pension plans Significant debt needs are often filled by issuing bonds to the public Working Capital Current Assets Current Liabilities Changes in working capital accounts are important to managers and analysts because they have a direct impact on cash flows from operating activities reported on the statement of cash flows Quick Ratio Quick Assets cash marketable securities and accounts receivable Current Liabilities While a high quick ratio normally suggests good liquidity too high a ratio suggests inefficient use of resources Present Future Value Concepts Money can grow over time because it can earn interest Future value sum to which an amount will increase as the result of compound interest If we invest 1 000 today earning 10 interest compounded annually how much will it be worth in three years The annual investment amount is 1 000 i 10 n 3 years Using the future value of an annuity table the factor is 3 3100 1 000 3 3100 3 310 Future Value of an Annuity Equal payments are made each period The payments and interest accumulate over time If we invest 1 000 each year at an interest rate of 10 compounded annually how much will we have at the end of three years The invested amount is 1 000 i 10 n 3 years Using the future value of a single amount table the factor is 1 331 1 000 1 331 1 331 Present Value of a Single Amount The present value of a single amount is the worth to you today of receiving that amount some time in the future How much do we need to invest today at 10 interest compounded annually if we need 1 331 in three years The required future amount is 1 331 i 10 n 3 years Using the present value of a single amount table the factor is 7513 1 331 7513 1 000 rounded Present Values of an Annuity What is the value today of a series of payments to be received or paid out in the future What is the present value of receiving 1 000 each year for three years at an interest rate of 10 compounded annually The consecutive equal payment amount is 1 000 i 10 n 3 years Using the present value of an annuity table the factor is 2 4869 1 000 2 4869 2 486 90 Income Taxes and Retirement Benefits Deferred Taxes exist because of timing differences caused by reporting revenues and expenses according to GAAP on a company s income statement and according to the Internal Revenue Code on the tax return Temporary Differences Timing differences that cause deferred income taxes and will reverse or turn around in the future Pension planes Some pension plans create obligations during employees service periods that must be paid during their retirement periods The amounts contributed during the employment period are determined using present value computations of the estimate of the future amount to be paid during retirement
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