review08 - CHAPTER 8 Current Liabilities and the Time Value...

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CHAPTER 8 Current Liabilities and the Time Value of Money 0REVIEWING THE CHAPTER Objective 1: Identify the management issues related to current liabilities. 10. Liabilities, one of the three major parts of the balance sheet, are legal obligations for the future payment of assets or the future performance of services. The primary reason for incurring current liabilities is to meet needs for cash during the operating cycle. 20. If a company’s cash flows are inadequate to meet its current liabilities, the company could be forced into bankruptcy; thus, careful management of cash flows related to current liabilities is critical. Another issue in managing cash flows and current liabilities is the length of time creditors allow for payment. Common measures of this time are payables turnover and days’ payable. Payables turnover (measured in number of “times”) shows the relative size of a company’s accounts payable. The formula for calculating it is as follows: Cost of Goods Sold ± Change in Merchandise Inventory Average Accounts Payable Days’ payable shows the average length of time a company takes to pay its accounts payable. It is computed as follows: 365 days Payables Turnover 30. Ethical reporting of liabilities requires that they be properly recognized, valued, classified, and disclosed. A liability should be recognized (recorded) at the time it is incurred. However, for accrued and estimated liabilities, it is necessary to make adjusting entries at the end of an accounting period. Contracts representing future obligations are not recorded as liabilities until they become current obligations. 40. Liabilities are valued at the actual or estimated amount of money necessary to satisfy the obligation or at the fair market value of the goods or services that must be delivered. 50. Current liabilities are obligations expected to be satisfied within one year or the normal operating cycle, whichever is longer. They are normally paid out of current assets or with cash generated from operations. Long-term liabilities are obligations due beyond one year or the normal operating cycle. 60. Supplemental disclosure of some liabilities may be required in the notes to the financial statements—for example, when a company has special credit arrangements that can influence potential investors’ decisions.
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Objective 2: Identify, compute, and record definitely determinable and estimated current liabilities. 70. Current liabilities consist of definitely determinable liabilities and estimated liabilities. 80. Definitely determinable liabilities are obligations that can be measured exactly. They include accounts payable, bank loans and commercial paper, notes payable, accrued liabilities, dividends payable, sales and excise taxes payable, current portions of long-term debt, payroll liabilities, and unearned revenues.0 a0. Accounts payable, sometimes called trade accounts payable, are obligations currently due to suppliers of goods and services. b0.
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This note was uploaded on 06/10/2009 for the course ACG 2021 taught by Professor Magoulis,b during the Spring '08 term at Pasco-Hernando Community College.

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review08 - CHAPTER 8 Current Liabilities and the Time Value...

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