This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: LEARNING OBJECTIVES After studying this chapter, you should 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. Indicate how current liabilities and contingencies are presented and analyzed. Users of financial statements generally examine current liabilities to assess a company’s liquidity and overall financial flexibility. This is because many current liabilities such as accounts payable, wages payable, and taxes payable must be paid sooner rather than later. Thus, when these liabilities increase substantially, it raises a red flag about a company’s financial position. This is not always the case for all current liabilities. For example, Microsoft has a current liability entitled “Unearned Revenue” that has increased substantially year after year. Unearned revenue is a liability that arises from sales of Microsoft products such as Windows and Office . At the time of a sale, customers pay not only for the current version of the software but also for future improvements to the software. In this case, Microsoft recognizes sales revenue from the current version of the software and records as a liability (unearned revenue) the value of future upgrades to the software that are “owed” to customers. Market analysts indicate that such an increase in unearned revenue, rather than raising a red flag, often provides a positive signal about sales and profitability. How can information from a liability account provide information about profitability? It works this way: When Microsoft sales are growing, its unearned revenue account increases. Thus, an increase in a liability is good news about Microsoft sales. What happens if the unearned revenue liability declines? After steady increases in recent years, Microsoft’s unearned revenue declined from the second to the third quarter of 1999. In response to this decline in unearned revenue, a number of mutual funds sold part of their Microsoft holdings. Many believed that a decline in Microsoft’s unearned revenue is bad news for investors. As one analyst noted, when the growth in unearned revenues slows or reverses, as it did for Microsoft, it indicates that sales are slowing. Thus, increases in current liabilities can sometimes be viewed as good signs instead of bad. 1 CHAPTER 13 CHAPTER 13 Current Liabilities and Contingencies M icrosoft’s Liabilities—Good or Bad? 615 1 Based on David Bank, “Some Fans Cool to Microsoft, Citing Drop in Old Indica- tor,” Wall Street Journal (October 28, 1999)....
View Full Document
This note was uploaded on 05/31/2009 for the course MBA ACC551 taught by Professor Simon during the Spring '09 term at Keller Graduate School of Management.
- Spring '09