chapter 13

chapter 13 - CHAPTER Current Liabilities and Contingencies...

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CHAPTER Current Liabilities and Contingencies OBJECTIVES After reading this chapter, you will be able to: 1. Explain the characteristics of a liability. 2. Define current liabilities. 3. Account for compensated absences. 4. Understand and record payroll taxes and deductions. 5. Record property taxes. 6. Account for warranty costs. 7. Explain the terms “probable,” “reasonably possible,” and “remote” related to contingencies. 8. Record and report a loss contingency. 9. Disclose a gain contingency. 13-1
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SYNOPSIS Conceptual Overview of Liabilities 1. In its Conceptual Framework , the FASB defined liabilities as probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services to other entities in the future as a result of past transactions or events. 2. Liabilities include both legal and nonlegal (but not illegal) obligations. Legal liabilities, such as accounts payable, notes payable, and sales taxes payable, arise from contractual transactions. Consequently, the company is legally required to pay cash or provide goods or services. With nonlegal liabilities (accounting liabilities), payments are expected as part of the company’s normal operations, even though they are not legally required. 3. There are three essential characteristics of a liability for a company: (a) A liability involves a present obligation that will be settled by a probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand. (b) The obligated company is left little or no discretion to avoid the future sacrifice. (c) The transaction or other event obligating the company has already happened . 4. Two other points are made about liabilities: (a) The obligated company does not need to know the identity of the recipient to record a liability, as long as a transfer of assets to settle an existing obligation is probable. (b) If the company has a duty or responsibility to pay cash, transfer assets, or provide services, the obligation need not be legally enforceable to qualify as a liability. Nature and Definition of Current Liabilities 5. Current liabilities are obligations whose liquidation is expected to require the use of existing current assets or the creation of other current liabilities within one year or an operating cycle, whichever is longer. An operating cycle is the time normally required for a company to convert cash into inventory, sell the inventory, and collect the resulting receivables. 6. Information about liquidity (how quickly a liability can be paid, or its nearness to cash) is important to users because in part the prediction of future cash flows is based on the nearness to cash of liabilities and assets. The FASB discussed alternative methods of reporting liquidity and examined useful liquidity ratios. The AICPA Special Committee on Financial Reporting stated that a company should
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This note was uploaded on 08/19/2010 for the course AC 313 taught by Professor Nilolai during the Fall '10 term at Emporia.

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chapter 13 - CHAPTER Current Liabilities and Contingencies...

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