acc304_w7_ch13 - ACC 304 Week 7: Current Liabilities and...

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ACC 304 Week 7: Current Liabilities and Contingencies Slide # Topic Narration 1 Introduction Welcome to Intermediate Accounting Two. In this lesson, we will discuss current liabilities and contingencies. Please go to slide number 2. 2 Objectives When you complete this lesson, you will be able to: Describe the nature, type, and valuation of current liabilities; Explain the classification issues of short-term debt expected to be refinanced; Identify types of employee-related liabilities; Identify the criteria used to account for and disclose gain and loss contingencies; Explain the accounting for different types of loss contingencies; And indicate how to present and analyze liabilities and contingencies. Please go to slide number 3. 3 What is a Liability? FASB has defined liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” A liability has three essential characteristics: It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services; It is an unavoidable obligation; And the transaction or other event creating the obligation has already occurred. Please go to slide number 4. 4 What is a Current Liability? Current liabilities are “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current
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liabilities.” This definition has gained acceptance because it acknowledges differing operating cycles and the relationship between current liabilities and current assets. The operating cycle is the period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections. While some industries have operating cycles that are greater than one year, most retail and service establishments have several operating cycles within a year. In practice, current liabilities are usually recorded in accounting records and reported in financial statements at their full maturity value. Because the time period is less than one year, the difference between the present value and the maturity value is not large. Accounts payable, or trade accounts payable, are balances owed to others for goods, supplies, or services purchased on open account. Most accounting systems are designed to record liabilities for purchases of goods when the goods are received or when the invoices are received. Measuring the amount of an account payable poses no particular difficulty because the invoice received from the creditor specifies the due date and the exact outlay in money that is necessary to settle the account. Please go to slide number 5.
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This note was uploaded on 08/17/2008 for the course ACC 304 taught by Professor Hendren during the Summer '08 term at Strayer.

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acc304_w7_ch13 - ACC 304 Week 7: Current Liabilities and...

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