MGMT 212 Exam 3

What is a liability?

A company's obligation to provide assets, services, or other forms of payment in the future due to past transactions or events.

Current liabilities

Obligations expected to be settled within one year or the operating cycle, whichever is longer.

Examples of current liabilities

Accounts payable, accrued expenses, and short-term notes payable.

Long-term liabilities

Obligations not due within the next year, such as bonds payable and long-term leases.

Accounts Payable

Recorded when a company receives goods/services on credit.

Accrued Liabilities

Recorded for expenses incurred but not yet paid, like wages or utilities.

Short-term Notes Payable

Recorded for loans due within one year, along with interest accrued.

Interest recording

Interest is recorded as an expense in the period it is incurred to accurately reflect the cost of borrowing.

Interest formula

Interest = Principal × Rate × Time (in years).

Calculating interest for a $10,000 loan at 5% for 6 months

Interest = $10,000 × 0.05 × 0.5 = $250.

Payroll withholdings required by law

Income tax, Social Security, Medicare.

Employer payroll costs required by law

Employer's share of Social Security and Medicare, unemployment taxes (FUTA/SUTA).

Unearned Revenue accounting initial entry

Debit Cash, Credit Unearned Revenue.

Contingency

A potential liability depending on a future event.

Liquidity

Measures a company’s ability to meet short-term obligations.

Capital Structure

The mix of debt and equity used for financing.

Leverage

The use of debt to increase potential returns to shareholders.

Installment Notes repayment structure

Interest expense decreases over time, fixed payments consist of a decreasing interest portion and an increasing principal portion.

Lease definition

A contract granting the right to use an asset in exchange for payments.

Simple Interest

Interest calculated on the principal only.

Compound Interest

Interest calculated on principal and previously earned interest.

Present Value

The value today of a future cash flow, discounted at a specific rate.

Annuity

A series of equal payments made at regular intervals.

Sole Proprietorship features

Simple, full control, unlimited liability.

Partnership features

Shared resources, potential disputes, unlimited liability.

Corporation features

Limited liability, complex regulation.

Preferred Stock features

Dividend preference, convertibility to common stock, callable by the company.

Dividend Process - Declaration Date

Date when dividend liability is recorded.

Retained Earnings

Cumulative net income less dividends distributed.

Cash Flow Operating Category

Day-to-day business activities.

Types of financial ratio comparisons

Intracompany, Intercompany, Industry Averages.

Horizontal Analysis

Year-to-year changes in accounts.

Conservative Accounting

Minimizes earnings and assets, maximizes liabilities.