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Accounting 311 Chapter 13-15 notes

Accounting 311 Chapter 13-15 notes - Accounting 311 Chapter...

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Accounting 311 Chapter 13 1) What is a liability? a. preferred stock : difficult to classify, an ownership claim & should be part of SE but also has many elements of debt (may have a specific period of time similar to repayment of principle); dividend at may times is guaranteed & may look like interest (cumulative provision) b. Liabilities : 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 c. 3 characteristics of liabilities: i. it is a present obligation that entails settlement by probable future transfer or use of cash, goods or services ii. it is an unavoidable obligation iii. transaction or other event creating the obligation has already d. An important feature of Liabilities: date on which they are payable bc they involve future disbursements of assets or services e. Can be current or long term debt 2) What is a current liability? a. Current liabilities: obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of current liabilities; this definition recognizes operating cycles of varying lengths & considers relationship between CA & CL b. Operating cycle: period of time elapsed between the acquisition of goods & services involved in the manufacturing process & the final cash realization resulting from sales & subsequent collections i. Operating cycle over one yr: businesses that have an aging process & capital extensive industries ii. Some current liabilities (cycles within 1 yr): A/P, N/P, Current maturities of long term debt, short term obligations expected to be refinanced, Dividends payable, customer advances & deposits, Unearned revenues, sales tax payables, income tax payables, employee related liabilities c. Accounts Payable: aka trade accounts payable, balances owed to others for goods, supplies or services purchased on open account; time lag between receipt/acquisition of title & payment i. Terms of sale: 2/10, n/30, or 1/10, EOM, usually state the period of extended credit (30-60 days) ii. Title passage: if title has passed to the purchaser before receipt of goods, company should record transaction at time of title passage iii. Invoices: received from creditor, specify exact date & outlay in money d. Notes payable: aka-trade notes payable, written promises to pay a certain sum of money on a specified future date, may arise from purchases, financing, etc i. Some require notes: as part of sales/purchases transaction in lieu of open account credit ii. Classified as: short term or long term, interest bearing or 0 interest bearing iii. NP to banks or loan companies: generally arise from cash loans iv. Interest bearing notes Ex: castle bank agrees to lend 100K on 3/1/07 to landscape co. landscape signs a 100K 6% 4 month note 1. 3/1 journal entry Cash 100K NP 100K If landscape prepares financial statements semiannually it makes the following adjusting entry 6/30 Interest expense 2K Interest payable 2K
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