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Flashcards in Ch 13 Deck (76):


Probable future sacrifices of economic benefits arising
From present obligations of particular entity

To transfer assets or services to other entities in future
As a result of past transactions


3 essential characteristics of a liability

1 present obligation that entails settlement by probable
Future transfer, or use of cash, goods or services

2 unavoidable obligation

3 transaction or event creating obligation has already occurred


Current liabilities

Obligations whose liquidation is reasonably expected to
Require use of current assets or the creation of other
Current liabilities


Operating cycle is the period of time elapsing...

btw acquisitions of goods and services involved in
manufacturing and final cash realization from sale


5 Typical current liabilities that don't end in payable?

1 current maturities on Longterm debt
2 short term obligations expected to be refinanced
3 customer advances and deposits
4 unearned revenues
5 employee related liabilities


Accounts payable AKA Trade accounts payable

Balances owed to others for goods, services or supplies
Purchased on open account

Arise b/c time lag between receipt of product or service
And transfer of payment


Notes Payable AKA Trade notes payable

Written promises to pay certain sum of money on specified
Future date

May arise from purchases, financing or other transactions


Zero interest bearing note 4 things (note 3 and 4 are same thing)

1 Does not state an interest rate on face of note
2 interest is still charged
3 at maturity, borrower must pay back amount greater
Than received on issuance day
4 borrower receives in cash present value of note


Discount on notes payable

Contra account to notes payable

Subtracted from notes payable on balance sheet

Represents interest expense charged in future periods


Current maturities on long term debt

Current liabilities on portion of bonds, mortgage notes,
Other Longterm indebtedness that matures within year


Companies exclude Longterm debts maturing currently
As current liabilities if... 3 things

1 retired by assets accumulated for this purpose that
Properly haven't been shown as current assets

2 refinanced, or retired from proceeds of new debt issue

3 converted into capital stock


When only a part of Longterm debt is to be paid within the next 12 months the company reports...

The maturing portion of Longterm debt as current liability


Due on demand, callable

Any liability should be classified as current if callable by
Creditor or due on demand in operating cycle

Callable Brought on by violation of agreement


Short term obligations that are expected to be refinanced on long term basis

Will not require use of working capital over next year


2 refinancing criteria for exclusion of short term obligation from current liabilities

1 intend to refinance obligation on long term basis

2 demonstrate ability to consummate refinancing


Intention to refinance on Longterm basis means?

Company intends to refinance short term obligations
So it won't require use of working capital in fiscal year


2 ways company demonstrates ability to consummate refinancing?

1 actual refinancing

2 entering financing agreement


Ability to consummate the refinancing: Actual refinancing

by issuing long term obligation or Equity securities after date
of balance sheet but before It is issued


Ability to consummate the refinancing: Entering a financing agreement

That clearly permits company to refinance debt on long term
Basis on terms readily determinable


IFRS requires that the current portion of long term debt be classified as...

Current unless agreement to refinance on Longterm basis
Is completed before date of financial statements


Cash dividends payable

Amount owed by corporation to stockholders as result
Of board of directors' authorization


Preferred dividends in arears

Companies don't recognize accumulated but undeclared
Dividends on cumulative preferred stock as liability

B/c not obligation til board of directors authorizes payment


Stock dividends

Dividends payable in form of additional shares of stock

Not recognized as liability


Returnable cash deposits

Received from customers and employees

Guarantees performance of contract or service
Or guarantees to cover payment of expected future obligations


Unearned revenues, how are they accounted for (2 steps)

1 when company receives advanced payment, it debits cash
Credits unearned revenues

2 when company recognizes revenue it debits unearned
revenue and credits revenue account


3 types of employee related liabilities

1 payroll deductions

2 compensated absences

3 bonuses


Payroll deductions, 4 most common types?

Taxes, insurance premiums, employee savings, union dues


To the extent that a company has not remitted the amounts deducted to the proper authority at the end of the accounting period...

It should be recognized as a current liability


Old age, Survivor, and Disability Insurance (OASDI) tax
AKA FICA (federal insurance contribution act)

Social security taxes levied from employees and employers gross pay

Benefits for certain individuals and their families

6.2% tax


Medicare AKA federal hospital insurance tax

2 part program alleviates high cost of medical care
For those over 65

1.45% tax


Social security tax

Combination of FICA and federal hospital insurance tax


Companies should report the amount of unremitted employee and employer Social security tax on...

Gross wages paid as current liability


All employers who meet the 2 criteria are subject to the Federal Unemployment Tax Act (FUTA)

1 those who paid wages of over $1500 during calendar
Quarter in year of proceeding year

2 those who employed 1 individual on at least 1 day in each
20 weeks during current or preceding calendar year


Merit rating

Reduces state contribution rate for unemployment tax
Paid by employers


Companies should record the amount of accrued but unpaid employer contributions as...

Operating expenses and current liabilities when preparing
Financial statements at year end


3 Examples of employee payroll deductions

1 withholding taxes payable
2 FICA Taxes Payable
3 Union dues payable


3 examples of employer payroll taxes

1 FICA Taxes Payable

2 FUTA Taxes Payable

3 SUTA Taxes Payable


Compensated absences, examples

Paid absences from employment

Ex: vacations, illness, holidays


Companies should accrue liability for the cost of compensation for future absences if all 4 of the following conditions exist

1 employers obligation to pay employee for future absences
Is attributable to employees' rights to receive compensation services already rendered
2 obligation relates to rights that vest or accumulate
3 payment of compensation is probable
4 amount can be reasonable estimated


Vested rights

Exist when employer has obligation to make payment
To an employee even after terminating his employment

Not contingent on employees' future service


Accumulated rights

Those that employees can carry forward to future periods
If not used in period in which earned


Sick pay benefits vest or not

If sick pay benefits vest, company must accrue them

If sick pay benefits accumulate but do not vest, company
May choose whether to accrue them



Paid to employees depends on company's profit


Examples of contractual agreements for conditional expenses

Agreements covering rents or royalty payments conditional
On amount of revenues recognized

or quantity of product produced/extracted


Contingency, examples

Existing condition, situation or set of circumstances
Of possible gain or loss

Ex. Lawsuits, warranties, default of a loan


Gain contingencies, define, 4 examples

Claims or rights to receive assets who's existence is
uncertain but may eventually become valid

1 possible receipt of monies from gifts, donations, asset sales
2 possible refunds from govt tax disputes
3 pending court cases with favorable outcome
4 tax loss carryovers


Loss contingencies: contingent liabilities

Depend on occurrence of 1 or more future events to
Confirm either amt payable, the payee, the date payable,
It existence



IFRS term for estimated liabilities


FASB'S term: probable

Future event is likely to occur


FASB'S term: reasonably possible

Chance of future event is more than remote but less likely


FASB'S term: remote

Chance of future events occurring is slight


Companies should accrue an estimated loss from a loss contingency by charge to expense liability if both of the following 2 conditions are met...

1 info available prior to issuance of financial statements
Indicates that it is probable that liability has been incurred
At date of financial statements

2 amount of loss can be reasonably estimated


3 loss contingencies that are usually accrued?

1 collectibility of receivables
2 obligations related to product warranties and product defects
3 premiums offered to customers


3 Loss contingencies not accrued

1 risk or loss or damage of enterprise property to fire,
Explosion or other hazards
2 general or unspecified business risks
3 risk of loss from catastrophes assumed by property
And casualty insurance companies including reinsurance


6 loss contingencies that may be accrued

1 threat of expropriation of assets
2 pending litigation
3 actual claims and assessments
4 guarantees of indebtedness of others
5 obligations of commercial banks under standby letters of
6 agreements to repurchase receivables that have been sold


4 of the most common loss contingencies

1 litigation, claims and assessments
2 guarantee and warranty costs
3 premiums and coupons
4 environmental liabilities


Companies must consider the following 3 factors in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments?

1 time period where cause of action occurred

2 probability of unfavorable outcome

3 ability to make estimate of amount of loss


Warranty AKA Product Guarantee

Promise made by seller to buyer to make good on
Deficiency of quantity, quality or performance of product


Warranties: cash basis method

Seller or manufacturer charges warranty costs to period
In which it complies with warranty


Warranty costs: accrual method AKA Expense warranty approach

Companies charge warranty costs to operating expense
In year of sale


Sales warranty approach

Companies defer revenue on the sale of the extended warranty


Printed coupons

Can be redeemed for cash discount on items purchased


cash rebate

Buyer can obtain cash by returning the store receipt, rebate
Coupon and universal product code (bar code) to manufacturer



Additional bonus product when buying another product


Accounting treatment of premiums and coupons?

Companies should charge costs of premiums and coupons
To expense in period of sale


What do warranties and coupons what are they? What do they satisfy the condition for?

Warranties and coupons are loss contingencies that satisfy
Conditions necessary for a liability


A company must recognize an Asset Retirement Obligation (ARO) when it has an...

2) Companies should record ARO at...

Existing legal obligation associated with retirement of a
Long lived asset

And when it can easily estimate the amount of liability

2) at fair value


Examples of ARO's

Decommissioning nuclear facilities

Dismantling, restoring, reclamation of oil and gas properties

Closure of mining, landfills



Not insurance but considered risk assumption

Company that assumes its own risks puts itself in position
Of incurring expense and losses if they happen


Presentation of current liabilities

Recorded and Reported in financial statements at their full maturity value


If a company excludes short term obligation from current liabilities because of refinancing it should include the following note with 3 things in financial statements

1 general description of financing agreement

2 terms of any new obligation incurred or to be incurred

3 terms of any equity security issued or to be issued


If a company has a loss contingency that is either probable or estimable but not both it must disclose the following 2 info items in the notes

1 the nature of the contingency

2 an estimate of possible loss or range of loss or statement
that estimate can't be made


GAAP VS IFRS: contingencies

GAAP provides more guidance on content of disclosures
About contingencies than does IFRS


Companies should disclose 3 other contingent liabilities, even though the possibility of loss may be remote as follows...

1 guarantees indebtedness of others

2 obligations of commercial banks under "standby letters
Of credit"

3 guarantees to repurchase receivables that have been sold
Or assigned


Current ratio AKA Working capital ratio

Current assets/current liabilities


Acid test ratio AKA Quick ratio

Acid test ratio =
(cash + short term investments + net receivables)/current liabilities