Liabilities (Chapter 8) Flashcards

Flashcards covering the fundamentals, classification, recognition, measurement, and financial analysis of liabilities as presented in the Chapter 8 lecture notes.

Liabilities

Present obligations of an entity to transfer economic resources as a result of past events.

Current (Short-term) Liabilities

Obligations whose liquidation is reasonably expected to require the use of existing current assets or the creation of other current liabilities within one year or one operating cycle, whichever is longer.

Noncurrent (Long-term) Liabilities

Obligations maturing beyond one year that do not qualify as current.

Measurement of Current Liabilities

Valued and reported at their face amount.

Measurement of Noncurrent Liabilities

Measured and reported at present value (discounted amount).

Determinable Liabilities

Obligations that can be precisely measured, where the cash required and the payment date are reasonably certain.

Accounts Payable (Trade Payable)

Obligations owed to others for goods, supplies, or services purchased on open account, recorded when legal title passes or goods are received.

Interest bearing notes

Notes payable that are reported at face amount

Noninterest-bearing Notes

Notes reported at present value, where the hidden interest expense is the difference between the face value and the present value.

Accrued Liabilities

Expenses already incurred but not yet paid at year-end, requiring adjusting entries to increase both expenses and liabilities.

Unearned Revenue

Cash received in advance from customers for future services or merchandise, recorded as a liability rather than income.

Accrued Liabilities

Expenses already incurred but not yer paid at year-end

Provision (Estimated Liability)

A liability of uncertain timing or amount recorded if a present obligation exists, an outflow of resources is probable, and a reliable estimate can be made.

Present obligation from a past event, is probable, and reliable estimate can be made

What are the 3 criteria for recognition of provisions

Warranty Expense (Matching Principle)

Expense that must be recognized in the period the sale is made based on estimates of costs to correct deficiencies in product quality or performance.

Contingent Liabilities

Possible obligations whose existence is confirmed only by uncertain future events not wholly within the entity's control; they are disclosed in footnotes rather than recognized on the Statement of Financial Position.

Product warranties

A promise by a seller to correct deficiencies in a product's quality or performance. Warranty expense must be recognized in the period the sale is made (matching principle) based on estimates. 

Bonds Payable

A formal obligation to pay a sum of money at a designated maturity date plus periodic interest at a specified rate, accounted for using the effective interest method.

Premiums and coupons

Offered to stimulate sales. The expense is recorded in the period of the sale that benefits from the plan. 

Mortgage Payable

A long-term bank loan used to purchase property, where the acquired property serves as collateral for the loan.

Secured Bonds

Bonds backed by specific assets of the issuing corporation pledged as collateral, such as Mortgage Bonds or Collateral Trust Bonds.

Unsecured Bonds (Debenture Bonds)

Bonds backed solely by the general creditworthiness and reputation of the issuing entity without specific assets pledged as collateral.

Term Bonds

Bonds where the entire principal amount (face value) matures and becomes due for repayment on a single, specific future date.

Serial Bonds

Bonds that mature in periodic, staggered installments over a series of years.

Registered Bonds

Bonds issued in the name of the owner, where the corporation keeps a registry and sends interest payments directly to the registered owner.

Bearer (Coupon) Bonds

Bonds not registered in any person's name; the physical holder is presumed the owner and must detach coupons to receive interest.

Convertible Bonds

Bonds that give the holder the option to exchange their bonds into shares of the corporation's common stock at a predetermined ratio.

Callable Bonds

Bonds that give the issuing corporation the right to buy back and retire the bonds before their scheduled maturity date at a specified call price.

Cutoff Problems

A type of misstatement involving early or late recording of transactions, often to artificially boost earnings by pushing current period expenses into the next period.

Security

Secured and unsecured bonds are what type of bonds?

Maturity

Term and serial bonds are what type of bonds?

Ownership and payment method

Registered and unregistered bonds are what type of bonds?

Special contractual features

Convertible and callable bonds are what type of bonds?

Working capital

It measures a company’s short-term liquidity

Current ratio

Compares short-term assets against short-term debts

Debt to asset ratio

Measures solvency and the percentage of assets financed by debt

Times interest earned ratio

Measures a firms ability to protect long-term creditors by paying periodic interest obligations out of earnings.