This document summarizes key topics in Chapter 9 including current liabilities, contingent liabilities, and analyzing financial health. It defines current liabilities as amounts due within one year and outlines major types like accounts payable. It discusses accounting for items like notes payable, product warranties, and accrued payroll. The document also explains how to compute current ratios and working capital to assess a business's liquidity and ability to pay obligations. Finally, it defines contingent liabilities and how they are accounted for depending on the likelihood and ability to estimate a potential loss.
This document summarizes key topics in Chapter 9 including current liabilities, contingent liabilities, and analyzing financial health. It defines current liabilities as amounts due within one year and outlines major types like accounts payable. It discusses accounting for items like notes payable, product warranties, and accrued payroll. The document also explains how to compute current ratios and working capital to assess a business's liquidity and ability to pay obligations. Finally, it defines contingent liabilities and how they are accounted for depending on the likelihood and ability to estimate a potential loss.
This document summarizes key topics in Chapter 9 including current liabilities, contingent liabilities, and analyzing financial health. It defines current liabilities as amounts due within one year and outlines major types like accounts payable. It discusses accounting for items like notes payable, product warranties, and accrued payroll. The document also explains how to compute current ratios and working capital to assess a business's liquidity and ability to pay obligations. Finally, it defines contingent liabilities and how they are accounted for depending on the likelihood and ability to estimate a potential loss.
This document summarizes key topics in Chapter 9 including current liabilities, contingent liabilities, and analyzing financial health. It defines current liabilities as amounts due within one year and outlines major types like accounts payable. It discusses accounting for items like notes payable, product warranties, and accrued payroll. The document also explains how to compute current ratios and working capital to assess a business's liquidity and ability to pay obligations. Finally, it defines contingent liabilities and how they are accounted for depending on the likelihood and ability to estimate a potential loss.
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Chapter 9
Current Liabilities and
Contingent Liabilities
Slide 9.1 Chapter 9 Learning Objectives Define the key information needs of decision makers regarding current liabilities. Account for the major types of transactions and events affecting current liabilities. Discuss key control activities for current liabilities including the maintenance of a payroll register. Compute and interpret the current ratio and working capital. Define the key characteristics of, and account for, contingent liabilities.
Slide 9.2 Introducing . . . Current Liabilities
Liabilities: probable future sacrifices of
economic benefits . . . or, more simply, amounts owed to other parties Current liabilities: liabilities that must be paid within one year or an entity’s operating cycle, whichever is longer Two types of current liabilities: 1) those whose $ amount is contractually defined, 2) those whose $ amount must be estimated
Slide 9.3 Current Liabilities on the Corporate Balance Sheet. . . one example The Home Depot, Inc. (in thousands)
Accounts payable $1,089,736
Accrued expenses 249,356 Sales taxes payable 129,284 Other accrued expenses 322,503 Income taxes payable 48,728 Current portion of long-term debt 2,519 Total $1,842,126
Slide 9.4 Current Liabilities: Key Information Needs of Decision Makers
Completeness: decision makers
must be confident that a company has disclosed all of its current liabilities Valuation methods: particularly important for estimated current liabilities Unusual circumstances: such as risk of default
Slide 9.5 Accounting for Current Liabilities
Accounts Payable Notes Payable Current Portion of Long-Term Debt Accrued Liabilities: Product Warranty Liability, Vacation Pay Liability, Accrued Payroll Liabilities
Slide 9.6 Notes Payable . . . obligations documented by a legally binding written commitment known as a promissory note. Key terms . . . Maker: The party who has signed a promissory note and is thus obligated to pay a certain amount to another party by a certain date. Maturity date: The date that the maker of a promissory note must pay its maturity value to the payee. Maturity value: The sum of the principal and interest due on a promissory note on its maturity date. Payee: The party to whom the maker of a promissory note must eventually pay the maturity value. Principal: The amount initially owed by the maker of a promissory note. Term of a note: The number of days from the date a promissory note is signed, not counting the signing date, to the date the note matures.
Slide 9.7 Computing Interest on a Note Payable . . . Interest = Principal x Rate x Time
Year-end adjusting entry for accrued interest expense:
Facts: 12%, $5,000 note with a 120-day term, signed on October 2 Interest = Principal x Rate x Time Interest = $5,000 x 12% x 90/360 Interest = $150
Slide 9.11 Key Control Activities for Current Liabilities
Establish payment priorities
Aggressively negotiate payment terms Keep good payables records, such as a payroll register Review payables records to identify developing problems . . . such as past-due accounts and discounts being forfeited
Slide 9.12 Analyzing Current Liabilities
Current Ratio = Current Assets / Current Liabilities
Working = Current Assets - Current Liabilities Capital
Both of these measures
are used to assess a business’s liquidity. . . that is, its ability to finance its day-to-day operations and pay its liabilities as they come due.
Slide 9.13 Contingent liability. . .
. . . a potential liability that
may become an actual liability if one or more events occur or fail to occur.
Slide 9.14 Accounting for Contingent Liabilities
Potential Loss Likelihood of Subject to Accounting Actual Loss Reasonable Estimation Treatment . Probable Yes Recorded by debiting
an expense account & crediting a liability account
