ch 13 - 13 CURRENT LIABILITIES AND CONTINGENCIES CHAPTER...

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13 CURRENT LIABILITIES AND CONTINGENCIES CHAPTER OBJECTIVES After careful study of this chapter, students will be able to:  1. Explain the characteristics of a liability.  2. Define current liabilities.  3. Account for compensated absences.  4. Understand and record payroll taxes and deductions.  5. Record property taxes.  6. Account for warranty costs.  7. Explain the terms "probable," "reasonably possible," and "remote" related to contingencies.  8. Record and disclose a loss contingency.  9. Disclose a gain contingency. 13-1
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SYNOPSIS Conceptual Overview of Liabilities  1. In its Conceptual Framework , the FASB defined liabilities as the probable future sacrifices of  economic benefits arising from present obligations of a company to transfer assets or provide  services in the future as a result of past transactions or events.  2. Liabilities include both legal  and nonlegal  (but not illegal) obligations.  Legal liabilities, such as  accounts payable, notes payable, and sales taxes payable, arise from contractual transactions.  Consequently, the company is legally required to pay cash or provide goods or services.  With  nonlegal liabilities (accounting liabilities) payments are expected as part of the company's normal  operations, even though they are not legally required.  3. There are three essential characteristics of a liability for a company: (a) A liability involves an obligation that will be settled by a probable future transfer  or use of   assets  at a specified or determinable date, on occurrence of a specified event, or on  demand. (b) The obligated company has little or no discretion to avoid  the future sacrifice. (c) The transaction or other event obligating the company has already happened .  4. Two other points are made about liabilities: (a) The company does not  need to know the identity of the recipient for a liability to be recorded. (b) The obligation need not  be legally enforceable to qualify as a liability. Nature and Definition of Current Liabilities  5. Current liabilities  are obligations of a company that it expects to liquidate by using existing current  assets or creating other current liabilities within one year or an operating cycle, whichever is longer.  An operating cycle  is the time normally required to convert cash into inventory, sell the inventory,  and collect the resulting receivables.  6. Information about liquidity  (how quickly a company can convert its assets to cash to pay its  liabilities) is important to users because in part the prediction of future cash flows is based on the  nearness to cash of liabilities and assets.  The FASB discussed alternative methods of reporting 
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This note was uploaded on 06/11/2008 for the course ACCT 3023 taught by Professor Fasci during the Spring '08 term at The University of Texas at San Antonio- San Antonio.

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ch 13 - 13 CURRENT LIABILITIES AND CONTINGENCIES CHAPTER...

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