Accounting Ch.10

Liabilities

Obligations created when a company buys on credit, borrows money, or issues debt.

Current liabilities

Short-term obligations paid within 12 months or the operating cycle (whichever is longer).

Long-term liabilities

Obligations not due within one year.

Classified balance sheet

Financial statement separating current and long-term liabilities.

Initial measurement of liability

Amount of cash needed to settle the obligation immediately after creation.

Increase in liabilities

Occurs when additional obligations arise (purchases, deposits, interest).

Decrease in liabilities

Occurs when payments or services are provided.

Interest recognition rule

Interest is recorded only as time passes.

Accounts payable

Amounts owed for goods or services purchased on credit.

Accrued liabilities

Expenses incurred but not yet paid at period end.

Examples of accrued liabilities

Salaries, wages, taxes, advertising, interest, warranties.

Gross earnings

Pay calculated as hours worked × pay rate.

Payroll deductions

Amounts withheld from employee earnings (taxes, donations, etc.).

Net pay

Gross earnings minus payroll deductions.

FICA taxes

Medicare and Social Security taxes withheld from employees.

Employer payroll taxes

Employer matching FICA plus unemployment taxes (FUTA & SUTA).

Accrued income taxes

Corporate taxes owed based on taxable income.

Federal corporate tax rate

21%.

Notes payable

Amounts owed from issuing promissory notes.

Interest formula

Interest = Principal × Rate × Time.

Interest payable

Interest incurred but not yet paid.

Sales tax payable

Sales tax collected from customers but owed to the government.

Deferred revenue

Cash received before goods or services are provided.

Current portion of long-term debt

Amount of long-term debt due within the next year.

Bonds

Financial instruments promising future payments in exchange for cash now.

Maturity date

Date bonds must be fully repaid.

Face value

Amount repaid at maturity (usually $1,000 per bond).

Stated interest rate

Rate used to calculate periodic interest payments.

Bond premium

Amount received above face value.

Bond discount

Amount received below face value.

Interest expense

Cost of borrowing recognized over time.

Contingent liabilities

Potential obligations depending on future events.

Debt-to-Assets Ratio

Total Liabilities ÷ Total Assets.

Purpose of debt-to-assets ratio

Measures financial risk and reliance on debt financing.

Times Interest Earned Ratio

(Net income + Interest expense + Income tax expense) ÷ Interest expense.

Purpose of times interest earned ratio

Measures ability to cover interest payments.