1121 review - Joshua Segal Chapter 09 Businesses finance...

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Joshua Segal Chapter 09 Businesses finance the acquisition of their assets from two sources funds supplied by creditors (debt) funds provided by owners (equity) Liabilities Defined Liabilities - Probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services Current Liabilities – defined as short-term obligations that will be paid within the current operating cycle of the business or within one year of the balance sheet date, whichever is longer noncurrent; all other liabilities Liquidity – A company is said to have liquidity if it has the ability to pay its current obligations , a number of financial ratios can measure this, including the current ratio Current ratio = Current Assets ÷ Current Liabilities Current Ratio and Liquidity: What does this mean? 1.0-2.0 is an odd rule of thumb many strong companies today use sophisticated management techniques to minimize funds invested in current assets and, as a result, have current ratios below 1.0 too high of a ratio suggests inefficient use of resources Current Liabilities Have a direct relationship to the operating activities of a business. Means of financing operating activities. Financial Accounting Review 1
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Joshua Segal Accounts payable (sometimes trade accounts payable) Most companies don’t produce all goods/services for basic operating activities but rather they purchase those goods from other businesses. These transactions are made on credit with cash payments made after the goods and services have been provided. Effectiveness in Managing Payables: Accounts payable turnover = COGS ÷ Average Accounts Payable How quickly management is paying trade accounts High raitio = company is paying suppliers in timely manner 365 ÷ ratio = average age of payables Accrued Liabilities : are expenses that have been incurred but have not been paid by the end of the accounting period (property taxes, electricity, salaries) Recorded as adjusting entries at year-end 2
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Under Matching Concept – cost must be recorded when employees perform the service not when they take the vacation Making an accrued adjusting entry at end of fiscal year : example; estimation of accrued vacation cost Compensation expense (+E, -SE) xxx,xxx Accrued vacation liability (+L) xxx,xxx When vacations are taken (during summer) Accrued vacation liability (-L) xxx,xxx Cash (-A) xxx,xxx Payroll Taxes – payrolls subject to variety of federal, state and local income taxes, SS taxes, and federal and state unemployment taxes FICA- SS taxes paid by employees Entry to record payment of payroll to employees and amounts withheld Compensation expense (+E, -SE) 1,800,000 Liability for income taxes withheld (+L) 275,000 FICA payable (+L) 105,000 Cash (-A) 1,420,000 Second entry records FICA tax employers must pay equal to what employees pay Compensation expense (+E,-SE) 105,000 FICA payable (+L) 105,000 Notes payable: when a company borrows money, a formal contract is prepared. Creditors will lend you case b/c of interest
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1121 review - Joshua Segal Chapter 09 Businesses finance...

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