Chapter 13: Liabilities – Key Concepts

A set of practice flashcards covering the core concepts from the liability-focused lecture, including definitions, current vs. long-term classifications, revenue recognition, warranties, contingencies, credit lines, and related accounting treatments.

What is the formal definition of a liability as discussed in the lecture?

A probable future sacrifice of economic benefits arising from a present obligation resulting from past events.

In liability terminology, what does the word 'probable' mean?

The future sacrifice of economic benefits is likely to occur.

What is deferred revenue?

Unearned revenue; a liability representing cash received before goods or services are delivered.

In the airline prepaid flight example, what event satisfies the liability?

Providing the service (the flight) to satisfy the obligation.

How does the matching principle relate to deferred revenue and expenses?

Revenue is not recognized until the service is performed, and the associated costs are recognized when incurred to matching the revenue.

Name typical liabilities that are paid in cash (cash-satisfied).

Accounts payable, salaries payable, interest payable, and taxes payable.

How are current liabilities defined?

Liabilities payable within one year (or within the operating cycle, whichever is longer).

How are long-term liabilities defined?

Liabilities payable beyond one year.

What is a credit line and its main advantage?

An open revolving line of credit that allows you to withdraw funds as needed and pay interest only on what you use.

Should signing a credit line agreement be recorded as an economic event?

No; it is not an economic event until funds are actually drawn from the line.

What is an 'economic event' in accounting terms?

A transaction that involves a change in assets, liabilities, or equity with a dollar value.

How does a noninterest-bearing note affect proceeds and the effective interest rate?

Proceeds are less than face value; the implicit interest (discount) makes the effective rate higher; the discount is amortized to interest expense.

How is the 'discount on bonds' concept similar to a noninterest-bearing note?

You receive proceeds less than the face value; the discount is amortized to interest expense, similar to bonds.

How should vacation and sick pay be treated for accrual purposes?

Accrue if there is a probable future sacrifice per policy; if the policy forfeits benefits or pays upon termination, apply accordingly; otherwise, no accrual.

How should sales tax be treated in the accounts?

Sales tax collected is a liability (sales tax payable) to be remitted to the government; it is not revenue for the company.

What is the accounting treatment for warranty liabilities?

Record warranty expense and a warranty liability at the point of sale using historical data; adjust as actual claims occur; extended warranties may be a separate obligation and may be deferred revenue.

What is the 'expected cash flow approach' to warranty estimation?

A methodology using probability-weighted cash flows to produce a more refined estimate of warranty costs.

What is a loss contingency and when do you accrue it under US GAAP?

A potential loss that is accrued if the loss is probable and estimable; remote or unestimable losses are not accrued; if asserted, treat as probable and estimable once the claim is made.

How are unasserted loss contingencies handled?

Use a two-step process: (1) assess if it is probable you will incur a loss; if not, do not accrue; (2) if probable, assess and accrue after assertion or adjust once the claim is asserted.

What is a gain contingency and can you accrue it?

A potential gain; you do not accrue it; you may disclose. Under IFRS, recognition may occur if virtually certain, but generally not accrued.

How does debt refinancing affect current vs. long-term classification?

If you can refinance by the balance sheet date (or show intent and ability), you may reclassify some current debt as long-term; IFRS requires completion before the balance sheet date for reclassification.

What factors influence whether a debt is considered callable and affects classification?

If the creditor has the right to demand payment (callable) due to covenants or events, it can affect whether the debt is current; refinancing ability/intent can move it to long-term.

What is the impact of debt covenants on classifications?

Violation of covenants can make debt callable, potentially shifting it to current liability unless refinanced or renegotiated.

What is the difference between US GAAP and IFRS regarding loss contingencies and virtually certain vs probable?

US GAAP uses a probability threshold (probable and estimable); IFRS uses a higher threshold (virtually certain for some recognition) and has nuances around refinancing and timing.

How are extended warranties treated differently from manufacturer warranties?

Extended warranties are usually a separate performance obligation and are recognized as deferred revenue; manufacturer warranties are typically bundled with the product and accrue as warranty liability.

What is the role of the clarification period in loss contingencies?

The period after the balance sheet date during which new information can cause adjustments to estimates before issuing financial statements; used to adjust or disclose contingency amounts.