Chapter 8: Current Liabilities

Liability

An obligation of a company to transfer some economic benefit in the future

Payables

Payments of cash in the future, required by most liabilities

Deferred Revenue

When a company receives payment in advance from customers; represents an obligation of the company to transfer inventory/services to those customers in the future

Current Liabilities

Due within one year from the balance sheet date

Long-Term Liabilities

Due in more than one year from the balance sheet

Operating Cycle

The length of time from spending cash to provide goods/services a customer until collection of cash from that customer

Interest = Face Value x Annual Interest Rate x Fraction of the Year

Interest on Notes Payable Equation

Line of Credit

Permits a company to borrow up to a prearranged limit

Commercial Paper

Borrowing from another company rather than a bank, usually with lower interest rates

Employee Payroll Costs

Federal and State Income Taxes (FUSA and SUSA); Portion (at least 7.65%) for Social Security and Medicare (FICA); Contributions for Health, Dental, Disability, and Life Insurance; Investments in Retirements and Savings Plans

Employer Payroll Costs

Federal and State Unemployment Taxes (FUTA and SUTA); Portion (at least 7.65%) for Social Security and Medicare Taxes; Fringe Benefits

Fringe Benefits

Additional employee benefits paid for by the employer (like health/dental/disability/life insurance or contributions to retirement/savings plans)

Sales Tax = Total Cash Paid - [ Total Cash Paid / (1 + Sales Tax Rate) ]

Sales Tax Equation

Current Portion of Long-Term Debt

Debt that will be paid within one year from the balance sheet date

Contingencies

Uncertain situations that can result in a gain or loss for a company

Contingent Liability

An existing uncertain situation that might result in a loss, such as a lawsuit, warranty, or environmental problem

Likelihood and Amount of Payment

Criteria for reporting a contingent liability

Warranty

Represents a liability for a company at the time of the sale if contingency is probable and reasonably estimable

Contingent Gain

An existing uncertain situation that might result in gain; not recorded until gain is known with certainty

Liquidity

Refers to having sufficient cash or other current assets to pay currently manufacturing debts

Working Capital

A measure of current assets remaining after paying current liabilities

Working Capital = Current Assets - Current Liabilities

Working Capital Equation

Current Ratio

The amount of current assets available for every $1 of current liabilities—a higher ratio indicates higher liquidity

Current Ratio = Current Assets / Current Liabilities

Current Ratio Equation

Acid-Test Ratio

The amount of “quick assets” available for every $1 of current liabilities

Acid-Test Ratio = (Cash + Current Investments + Accounts Receivables) / Current Liabilities

Acid-Test Ratio Equation

Quick Assets

Cash, current investments, and accounts receivable; provides a better overall indication of a company’s liquidity