Current Liabilities, Contingent Liabilities, Non-Operating Liabilities Flashcards
When analyzing the accounting equations from a uses and sources standpoint, assets are
uses because they are investments that management has made
When analyzing the accounting equations from a uses and sources standpoint, liabilities and equity are
sources because they inform us how those assets were financed
What are the three essential characteristics of a liability?
- probable future sacrifices of economic benefits
- present obligations to other entities
- resulting from past transactions or events
The type of liability that requires sacrifice of inventory or services, rather than cash, is
deferred revenue
Financial leverage (increases/decreases) when a company acquires assets and finances them with liabilities.
increases
The more liabilities you have, the less likely it becomes that you’ll be able to pay all of them. This principle is called…
default risk
Accounts payable, accrued liabilities and deferred performance liabilities are examples of what kind of liability?
current operating liabilities
Short-term interest-bearing debt and current maturities of long-term debt are examples of what kind of liability?
current non-operating liabilities
When a liability is current, it…
is due within a year and generally not interest-bearing
True or false: all liabilities are certain.
FALSE!
When an existing uncertain situation might result in a future loss depending on the outcome of a future event, like a lawsuit, this liability becomes…
contingent
Contingent liabilities are ONLY RECORDED IF…
- a loss is probable
- the amount of the loss is reasonably estimable
What is the journal entry for recording a contingent liability?
Dr. Expense
Cr. Liability
If the contingent liability is REMOTE, then you do the following…
no footnote disclosure and no recognition
If the contingent liability is REASONABLY PROBABLE, then you do the following…
if it cannot reasonable be estimated, then you disclose in footnotes and apply no recognition
