chapter 10

Question 1

what are liabilities?

Answer 1

present obligations to transfer economic resources as a result from past transactions

Question 2

what are the 2 kinds of liabilities?

Answer 2

current and non-current

Question 3

what is a financial liability?

Answer 3

types of liabilities that have a contractual obligation to pay cash in the future

Question 4

what are deferred revenue?

Answer 4

the obligation is settled by the provision of goods/ services in the future

Question 5

what are current liabilities?

Answer 5

liabilities that are expected to be paid or settled within one year of the date on the statement of financial position or within the operating cycle

Question 6

what are the 8 types of current liabilities?

Answer 6

bank indebtedness from operating lines of credit
accounts payable & accrued liabilities
refund liabilities
deferred revenue
sales and property taxes
payroll
notes payable
current portion of bank loans and mortgages

Question 7

what are lines of credit?

Answer 7

demand loans that require monthly interest payments and can be called for payment at any time

Question 8

when would a credit line be used?

Answer 8

for bridging capital needs or an overdraft of cash

Question 9

what are the 3 kinds of sales tax?

Answer 9

federal goods and services tax (GST)
provincial sales tax (PST or QST)
combination into one sales tax (HST)

Question 10

how would you record a sale that has sales tax?

Answer 10

dn cash 11,300
cr sales 10,000
cr sales tax payable 1,300

Question 11

why is sales tax always payable?

Answer 11

because you are just holding it for the government and you are responsible to remit it to them

Question 12

if the tax is included in the sale price how would you find the tax payable amount for a sale of 11,300 and a tax rate of 13%?

Answer 12

11,300/ 1.13= 10,000 sales revenue

Question 13

what is salary?

Answer 13

or wages is based on an hourly rate and owed to employees known as gross pay

Question 14

when payroll deductions are made what is it made from?

Answer 14

it is made from gross pay

Question 15

once payroll deductions are made what is that called?

Answer 15

net pay

Question 16

if a company goes bankrupt do they have to pay their payroll?

Answer 16

no they cannot

Question 17

what are the 3 mandatory deductions from payroll?

Answer 17

CPP- canada pension plan, company matches 1 to 1
EI- employment insurance, company matches 1-1.4
income tax

Question 18

what are the 3 voluntary payroll deductions?

Answer 18

benefits such as health and pension
union dues
charitable donations

Question 19

what are contingent liabilities?

Answer 19

events with uncertain outcomes, that are dependant upon some future event

Question 20

what are the 3 things to know for contingent liabilities?

Answer 20

to who the obligation is owed
when the obligation may have to be settled
what amount is needed to settle obligations

Question 21

what are provisions?

Answer 21

uncertainty around timing of when it is due or the amount

Question 22

when should provisions be recorded as a liability?

Answer 22

when present obligation exists

the outflow of reserves to settle that obligation is probable or likely

amount can be estimated reliably

Question 23

under IFRS what percentage is considered probable for a provision?

Answer 23

more than 50%

Question 24

under ASPE what percentage is considered probable for a provision?

Answer 24

likely is used instead of probable and implies a higher level of certainty

Question 25

what are contingent liabilities?

Answer 25

possible obligations that are dependant upon some future events

Question 26

how are contingent liabilities recorded?

Answer 26

they are not recorded, only in the notes to financial statements if one of these conditions are present: the outcome is not probable the outcome Is not determinable an estimate of the outcome cannot be made

Question 27

what are interest-bearing liabilities?

Answer 27

indebtedness to a creditor requiring more than a short period of time to pay the amount owed

Question 28

what is principle?

Answer 28

the original amount borrowed of the interest-bearing liability

Question 29

what are 3 types of interest bearing liabilities?

Answer 29

operating lines of credit that have no set date for repayment of principle notes with a single principle payment on maturity loans that require instalment payments of principle and interest on a schedule

Question 30

what is an operating line of credit?

Answer 30

a pre-arranged agreement between a company and a lender to allow the company to borrow up to a pre-authorized limit whenever required to help manage temporary cash shortfalls

Question 31

when does a company repay an operating line of credit?

Answer 31

company repays whatever portion of the borrowed fund it chooses whenever it is able to

Question 32

how is interest charged on an operating line of credit?

Answer 32

it is charged using a floating interest rate and security (collateral) may be required by the bank

Question 33

how is an operating line of credit record?

Answer 33

dn cash cr bank indebtedness

Question 34

what kind of liability are liabilities with instalment payments?

Answer 34

normally non-current liabilities and obligations to be paid after one year or more (bank loans payable, mortgages payable)

Question 35

if there is a loan for 120,000 for 5 years at 6%, with a payment of 2,320, what is the interest payment an loan payment?

Answer 35

interest payment= 600 principle payment= 1,720

Question 36

how is a bank loan with instalments recorded on a balance sheet?

Answer 36

the principal portion of the loan that will be repaid during the next year is a current liability the portion that will be repaid after the next year is a non-current liability

Question 37

how would a lease liability be recorded?

Answer 37

if it is a lease on a short term asset the lease is a current liability if the lease is on a long term asset the lease is a non-current liability

Question 38

what are the 3 advantages of debt financing?

Answer 38

in most cases easier than equity financing and dont have to give up portion of ownership borrowing may allow companies to grow faster interest expense is tax deductible

Question 39

what are the 3 disadvantages of debt financing?

Answer 39

principle and interest must be paid back on certain dates when incurring debt, companies must earn a rate of return that exceeds interest rate on that debt often security must be pledged for debt financing

Question 40

what are 3 liquidity ratios?

Answer 40

current ratio inventory turnover ratio receivables turnover ratio

Question 41

what do liquidity ratios measure?

Answer 41

measure short-term ability to pay maturing obligations and meet unexpected cash needs within the next year

Question 42

what are 2 solvency ratios?

Answer 42

debt to total assets times interest earned

Question 43

what does debt to total assets ratio measure?

Answer 43

indicates the extent to which a company's assets are financed by debt

Question 44

what is the debt to total assets ratio?

Answer 44

debt to total assets= total liabilities/ total assets

Question 45

what is good for debt to total assets ratio?

Answer 45

lower is typically better

Question 46

what does times interest earned measure?

Answer 46

provides an indication of a company's ability to meet interest payments as they come due

Question 47

what is the formula for times interest earned?

Answer 47

net income earned+interst expense +( income tax expense/interest expense)

Question 48

what is better for times interest earned ratio?

Answer 48

higher is better