ACCT 240 004 11 12 Notes Chapter 9 Reporting and Interpreting Liabilities The acquisition of assets is financed through two sources Debt fund from creditors Equity Funds from owners Debt is riskier that equity because there s a legal obligation for pay Creditors can force bankruptcy When Maturing for an obligation is 1 year or less it s a current liability If it s more than a year then it s non current Quick Ratio Quick Assets Current Liabilities Quick Assets Including cash marketable securities and accounts receivable High quick ratio normally suggests good liquidity but too high a ratio suggests inefficient use of resources Liabilities Recorded at their current cash equivalent the amount a creditor would accept to settle a liability immediately Notes payable To the lender interest is a revenue To a borrower interest is an expense Interest Principle x interest rate x time Assume time is in units of years Starbucks borrows 100k for 2 months at annual rate of 12 Interest 100 000 x 12 x 2 12 2000 Journal Entry 1 Record the note Cash 100 000 Notes Payable 100 000 2 Adjust for interest each month Interest Expense 1000 Interest Payable 1000 3 Payoff Note Interest Notes Payable 100 000 Interest Payable 1000 Interest Expense 1000 For this month Cash 102 000 E 9 4 PxIxT 4 8mil x 8 x 6 12 1 Cash 4 8mil Notes Payable 4 8mil 2 Interest Expense 64k Interest Payable 64k 3 Notes Payable 4 8mil Interest Payable 64k Interest Expense 128k Cash 4 992mil Deferred Revenues Revenues that have been collected but not earned Deferred revenues are reported as a liability Contingent Liabilities are potential liabilitires that are created as a result of a past event In US GAAP probable has been defined as likely which is interpreted as having a 70 chance of occurring In IFRS probably is defined as more likely than not which woud imply more than 50 chance of occurring Working Capital Current Assets Current Liabilities Growing Money Single amounts interest Annuities series of consecutive fixed payments
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