Flashcards in Chapter 13 Deck (82):
From a financial reporting perspective, a liability has three essential characteristics:
1. Are probable, future sacrifices of economic benefits
2. Arise from present obligations to other entities
3. Result from past transactions or events
__________ are expected to require current assets and usually are payable within one year.
Classifying liabilities as either current or long-term helps investors and creditors assess:
the relative risk of a business's liabilities
Current liabilities ordinarily are reported at their:
Accounts payable are obligations to suppliers of merchandise or of services purchased on:
Buying merchandise on account in the ordinary course of business creates:
Trade notes payable differ from accounts payable in that they are formally recognized by a:
written promissory note
A _________ allows a company to borrow cash without having to follow formal loan procedures and paperwork.
line of credit
Interest on notes is calculated as:
Face Amount * Annual Rate * Time to Maturity
Non interest-bearing loans actually do bear interest, but the interest is:
deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower
When interest is discounted from the face amount of a note, the effective interest rate is __________ than the stated discount rate.
__________ or __________ often are pledged as security for short-term loans.
Large, highly rated firms sometimes sell commercial paper to:
borrow funds at a lower rate than through a bank loan
Liabilities accrue for expenses that are:
incurred but not yet paid
What are the conditions for accrual of paid future absences?
1. The obligation is attributable to employee's services already performed.
2. The paid absence can be taken in a later year - the benefits vests (will be compensated even if employment is terminated) or the benefit can be accumulated over time.
3. Payment is probable.
4. The amount can be reasonably estimated.
When the necessary conditions are met, compensated future absences are accrued in:
the year the compensation is earned
__________ should be considered when deciding whether an obligation exists.
Accrual of __________ is not required, but may be appropriate in some circumstances.
__________ sometimes take the place of permanent annual raises.
When a deposit becomes nonrefundable, inventory should be:
reduced to reflect the fact that the inventory won't be returned
A customer advance produces an obligation that is satisfied when:
the product or service is provided
Sales taxes collected from customers represent __________ until __________.
Amounts collected from employees in connection with __________ also represent liabilities until remitted.
The currently maturing portion of a __________ must be reported as a current liability.
Short-term obligations can be reported as non current liabilities if the company:
1. intends to refinance on a long-term basis
2. demonstrates the ability to do so by a refinancing agreement or by actual financing
Under __________, liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before the date of issuance of the financial statements.
Under __________, liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before the balance sheet date.
A __________ involves an existing uncertainty as to whether a loss really exists, where the uncertainty will be resolved only when some future event occurs.
Likelihood that a Liability Exists:
__________. Confirming event is likely to occur.
__________. The change of the confirming event will occur is more than remote but less than likely.
__________. The chance the confirming event will occur is slight.
Journal Entry for Accrual of a Loss Contingency - Liability:
Debit: Loss (or expense)
Journal Entry for Accrual of a Loss Contingency - Asset Impairment:
Debit: Loss (or expense)
Credit: Asset (or valuation account)
A loss contingency is disclosed in notes to the financial statements if there is:
at least a reasonable possibility that the loss will occur
If the likelihood of a loss contingency is probable and the dollar amount of potential loss is known, what is the appropriate accounting treatment?
Liability accrued and disclosure note
If the likelihood of a loss contingency is probable and the dollar amount of potential loss is reasonably estimable, what is the appropriate accounting treatment?
Liability accrued and disclosure note
If the likelihood of a loss contingency is probable and the dollar amount of potential loss is not reasonably estimable, what is the appropriate accounting treatment?
Disclosure note only
If the likelihood for a loss contingency is reasonably possible, what is the appropriate accounting treatment?
Disclosure note only
If the likelihood of a loss contingency is remote, what is the appropriate accounting treatment?
No disclosure required
Most consumer products are accompanied by a __________.
The contingent liability for product warranties almost always is __________.
The costs of satisfying guarantees should be recorded as expenses in the same accounting period the:
products are sold
SFAC No. 7 provides a framework for:
using future cash flows in accounting measurements
Some __________ are not contractual obligations and may not be payable in cash.
Probabilities are associated with possible:
The probability-weighted cash outcomes provide the:
expected cash flows
The present value of the expected cash flows is the:
Because the earnings process for an extended warranty continues over the entire warranty period, revenue should be recognized:
over the same period
The purpose of premium offers is to:
The costs of promotional offers should be recorded as expenses in the:
same accounting period the products are sold
The alternative for reporting contingencies is __________, which does not incorporate probability into determining whether to recognize a loss but rather considers probability when:
measuring the amount of loss
U.S. GAAP views guarantees in two parts:
1. a certain "stand ready obligation" to meet the terms of the guarantee
2. the uncertain contingent obligation to make future payments depending on future events
The "stand ready obligation" is recorded initially at __________, while the contingent obligation i handled as:
an ordinary contingent loss
While companies may accrue estimated layer fees and other legal costs, the usually do not record a litigation loss until:
after the ultimate settlement has been reached or negotiations for settlement are substantially completed
Accounting Period Timeline:
Cause of Loss Contingency
Fiscal Year Ends
Clarification (clarifying event can be used to determine how the contingency is reported)
If an event giving rise to a contingency occurs after the year-end, a liability should:
not be accrued (because it didn't exist at the end of the year)
After the acquisition of a company, the contingent liabilities the acquirer takes on should be measured at __________ if it can be determined.
If the acquirer cannot determine the __________, the contingent liability is accrued if:
1. available information indicates that it is probable a liability has been incurred as of the acquisition date
2. the amount of the liability can be reasonably estimated
It must be probable that an unasserted claim or assessment or an unfiled lawsuit will occur before considering:
whether and how to report the possible loss
IFRS refers to accrued liabilities as __________ and refers to possible obligations that are not accrued as __________.
The term __________ is used for all of these obligations in U.S. GAAP.
IFRS requires disclosure (but not accrual) of two types of contingent liabilities:
1. possible obligations whose existence will be confirmed by some uncertain future events that the company does no control
2. a present obligation for which either it is not probable that a future outflow will occur or the amount of the future outflow cannot be measured with sufficient reliability
IFRS defines "probable" as ___________, which is a lower threshold than typically associated with "probable" in U.S. GAAP.
more likely than not (greater than 50%)
If a liability is accrued, IFRS measures the liability as:
the best estimate of the expenditure required to settle the present obligation
If there is a range of equally likely outcomes, __________ would use the midpoint of the range, while __________ requires use of the low end of the range.
If the effect of the time value of money is material, IFRS requires the liability to be stated at __________.
U.S. GAAP allows using __________ under some circumstances, but liabilities for loss contingencies like litigation typically are not:
discounted for the time value of money
IFRS recognizes provisions and contingencies for __________.
"onerous" contracts (defined as those in which the unavoidable costs of meeting the obligations exceed the expected benefits)
Under U.S. GAAP we generally don't disclose or recognize losses on such money-losing contracts, although there are some exceptions such as:
1. losses on long-term construction contracts are accrued
2. losses on contracts that have been terminated are accrued
The FASB recently removed from its agenda a project to reconsider the _____________________, and has postponed further work on a project intended to:
recognition and measurement of contingent losses
enhance note disclosure of contingent losses
The IASB has a project ongoing that would eliminate the requirement that:
an amount be "probable" to be recognized, such that amounts now are only disclosed in the notes would be accrued and included as expenses and liabilities
_________ contingencies are not accrued.
Under __________, gain contingencies are never accrued.
Under __________, gain contingencies are accrued if their future realization is "virtually certain" to occur.
Both U.S. GAAP and IFRS disclose contingent gains when future realization is __________.
__________ refers to a company's cash position and overall ability to obtain cash in the normal case of business.
A risk analyst should be concerned with a company's ability to:
meet its short-term obligations
A manager should actively monitor a company's __________.
A __________ ratio is but on indication of a company's liquidity.
By eliminating current assets such as inventories and prepaid expenses, the __________ ratio provides a more rigorous indication of a company's short-term solvency than does the __________ ratio.
__________ is probably the best long-run indication of liquidity.
Some companies maintain a relatively high __________ as part of a cash-management strategy.
Analysts should be alert for efforts to:
manipulate measures of liquidity