Financial Accounting Chapter 8: Current Liabilities

Vocabulary practice flashcards based on lecture notes covering current liabilities, payroll accounting, contingencies, and liquidity ratios.

Liability

An obligation of a company to transfer some economic benefit in the future, most of which require the payment of cash.

Current Liability

A liability that is usually payable within one year from the balance sheet date, or within the operating cycle if the cycle is longer than one year.

Long-Term Liability

A liability that is payable in more than one year from the balance sheet date.

Operating cycle

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

Notes Payable

A note signed by a firm promising to repay the amount borrowed plus interest.

Interest calculation formula

$$\text{Interest} = ext{Face value} imes ext{Annual interest rate} imes ext{Fraction of the year}$$

Line of credit

An informal agreement that permits a company to borrow up to a prearranged limit and is recorded similarly to notes payable.

Commercial paper

A form of borrowing from another company rather than a bank, often featuring lower interest rates and maturities ranging from $30$ to $270$ days.

Accounts Payable

Amounts owed to suppliers of merchandise or services, often referred to as trade accounts payable.

FICA taxes

Social Security and Medicare taxes collectively; for employees, Social Security is $6.2\%$ up to a maximum base and Medicare is $1.45\%$ with no maximum, totaling $7.65\%$, which must be matched by the employer.

Unemployment taxes

Federal ($FUTA$) and state ($SUTA$) taxes paid solely by the employer on behalf of employees.

Fringe benefits

Additional employee benefits paid for by the employer, such as health insurance premiums and contributions to retirement or savings plans.

Deferred revenue

A liability account used to record cash received in advance from a customer for products or services to be provided in the future.

Sales Tax Payable

A current liability representing sales tax collected from customers by the seller on behalf of the government.

Current portion of long-term debt

The amount of a long-term debt that will be paid within one year from the balance sheet date.

Contingent liability

An existing uncertain situation that might result in a loss for a company.

Probable

A term used in contingency accounting to describe a likelihood of payment that is likely to occur.

Reasonably possible

A likelihood of payment that is more than remote but less than probable.

Remote

A term used to describe an uncertain situation where the chance of payment is slight.

Warranty

The most common example of a contingent liability; it is recorded as an expense and liability in the period of sale if the cost is probable and reasonably estimable.

Contingent gain

An existing uncertain situation that might result in a gain, which is not recorded until the gain is known with certainty.

Liquidity

A company's ability to have sufficient cash or other current assets to pay currently maturing debts.

Working capital

$$\text{Current assets} - ext{Current liabilities}$$

Current Ratio

$$\frac{\text{Current assets}}{\text{Current liabilities}}$$

Quick assets

Current assets that include only cash, current investments, and accounts receivable.

Acid-test ratio

$$\frac{\text{Quick assets}}{\text{Current liabilities}}$$