ACCOUNTING
Third FINANCIAL Canadian Edition
LIBBY, LIBBY, SHORT, KANAAN, GOWING
Preparedby: RobertG.Ducharme,MAcc,CA UniversityofWaterloo,SchoolofAccountingandFinance
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Chapter 10
Reporting and Interpreting Current Liabilities
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Business Background
The acquisition of assets is financed from two sources:
Debt - funds from creditors
Equity funds from owners
The mix of debt and equity for a company is called the capital structure.
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Understanding the Business
Debt is considered riskier than equity.
Interest is Interest a legal obligation. obligation. Creditors Creditors can force bankruptcy. bankruptcy.
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Liabilities Defined and Classified
Defined as probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services.
Maturity = 1 year or less
Maturity > 1 year
Current Liabilities
Noncurrent Liabilities
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Liabilities Defined and Classified
Liabilities are measured at their current cash equivalent (the equivalent amount a creditor would accept to cancel the debt) at the time incurred.
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Liabilities Defined and Classified
An important indicator of a companys ability to meet its current obligations. Two commonly used measures:
Current Ratio = Current Assets Current Liabilities Working Capital = Current Assets - Current Liabilities Working
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Current Ratio
An important indicator of a companys ability to meet its current obligations.
Current Ratio = Current Assets Current Liabilities
Petro-Canada has current assets of $2,826 and current liabilities of $3,348.
2006 Current Ratios PetroSuncor Imperial Canada Energy Oil 0.84 1.07 0.99
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Current Liabilities
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Accounts Payable Turnover Ratio
Measures how quickly management is paying trade accounts. Accounts Payable = Turnover Turnover
Petro-Canada has cost of goods sold of $9,649 and average accounts payable of $3,107.
2006 Accounts Payable Turnover Ratios
Cost of Average Cost Goods Accounts Sold Payable
PetroCanada 3.11
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Suncor Energy 2.40
Imperial Oil 4.70
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Accrued Liabilities
Accrued liabilities are expenses that have been incurred before the end of an accounting period but have not yet been paid.
Income taxes payable arise since corporations must pay taxes on income from active business operations, property income and capital gains arising from the sale of assets. Taxes other than income taxes such as GST and PST are added to the sales price, collected from customers, and then remitted to the federal and provincial governments. Employee deductions such as personal income tax, EI and CPP are withheld from the employees gross earnings and the employee receives a pay cheque for the net pay.
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Notes Payable
The time value of money is interest that is associated with the use of money over time.
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Notes Payable
A note payable specifies the interest rate associated with the borrowing. Interest is the compensation to the lender for giving up the use of their money for a period of time.
To
the lender, interest is a revenue. To the borrower, interest is an expense.
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Notes Payable
The interest formula includes three variables that must be considered when computing interest: Interest = Principal Interest Rate Time
When computing interest for one When year, Time equals 1. When computation the period is less than one year, then Time is a fraction. one
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Notes Payable
Petro-Canada borrows $100,000 for 2 months at an annual interest rate of 12%. Compute the interest on the note for the loan period.
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Current Portion of Long-Term Debt
Any portion of a note payable that is due within one year, or the operating cycle, whichever is longer.
Current Notes Payable Total Notes Payable
Noncurrent Notes Payable
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Deferred Revenues and Service Obligations
Cash is collected from the customer before the revenue is actually earned.
Cash is received in advance.
Deferred revenue is recorded.
Deferred revenue is a liability account.
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Deferred Revenues and Service Obligations
Cash is collected from the customer before the revenue is actually earned.
As the earnings process is completed . . . Cash is received in advance. Deferred revenue is recorded. Earned revenue is recorded.
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Contingent Liabilities
Potential liabilities that arise because of events Potential or transactions that have already occurred. or
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Working Capital Management
Working Capital = Current Assets - Current Liabilities Changes in working capital accounts affect cash flows as indicated in the following table.
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Chapter Supplement A
Future Income Tax Assets and Liabilities
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Future Income Taxes
GAAP is the set of rules for preparing financial statements. Results in . . . The Income Tax Act is the set of rules for preparing tax returns. Usually. . . Results in . . .
Financial statement income tax expense.
ITA income taxes payable.
The difference between tax expense and tax payable is recorded in an account called a Future Income Tax Liability or Asset.
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Future Income Taxes
Assume the following financial information for Suncor Energy.
The company uses straight-line amortization for financial reporting and CCA for income tax reporting. The company has a 30% tax rate.
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Future Income Taxes
Compute Suncor Energys income tax expense and income tax payable.
Income Statement
Revenues $ 1,000,000 Less: Amortization 200,000 Other expenses 650,000 I ncome before taxes $ 150,000 Tax rate Income taxes 30% 45,000
Tax Return
Difference
$
The income tax amount computed based on financial statement income is income tax expense for the period.
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Future Income Taxes
Compute Suncor Energys income tax expense and income tax payable.
Income Statement
Revenues $ 1,000,000 Less: Amortization/CCA 200,000 Other expenses 650,000 I ncome before taxes $ 150,000 Tax rate Income taxes
Tax Return
$1,000,000 320,000 650,000 $ 30,000 30% 9,000
Difference
$
30% 45,000 $
Income taxes based on tax return income are the income taxes payable for the period.
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Future Income Taxes
The Future Tax Liability f $36,000 Compute General Millsoincome tax for the period is the tax payable. expense and income difference
between income tax expense of $45,000 andIncome tax payable of income Tax $9,000. Statement Return Difference
$ 1,000,000 320,000 650,000 30,000 $ (120,000) 120,000 30% 36,000
Revenues $ 1,000,000 Less: Amortization 200,000 Other expenses 650,000 I ncome before taxes $ 150,000 Tax rate Income taxes
$
$
$
30% 45,000 $
30% 9,000 $
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End of Chapter 10
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