AEM2100- FINAL - Financial Accounting FINAL Michael Kazley...

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Financial Accounting FINAL Michael Kazley CHAPTER 9 Acquisition is funded by two sources: (1) creditors, through debt (2) owners, through equity Capital Structure- when a business uses a mixture of debt and equity Liabilities- are probable debts or obligations that result from past transactions, which will be paid in assets or services Current Liabilities- are short-term obligations that will be paid within the current operating cycle or one year, whichever is longer Liquidity- the ability to pay current obligations Current Ratio = Current assets / Current Liabilities High ratio good liquidity Too High inefficient use of resources... that is, assets cannot be easily converted into cash Accounts Payable Turnover = Cost of goods sold / Average Accounts Payable Measures how quickly management is paying trade accounts A high ratio suggests that a company is paying its suppliers in a timely manner Accrued Liabilities- expenses that have been incurred but have not been paid at the end of the accounting period -Includes property taxes, electricity, and salaries Accrued compensation and related costs Consider a firm which has accrued vacation time Make this entry at end of fiscal year: Compensation Expense 100,000 Accrued Vacation Liability 100,000 Make this entry when vacations are taken: Accrued Vacation Liability 100,000 Cash 100,000 Employee income taxes- Employers are required to withhold income taxes for employees -withheld income is reported as a current liability
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-Federal Income Tax Withheld is referred to as FITW Employee FICA taxes- social security taxes paid by employees (federal insurance contributions act) -these taxes are imposed equal amounts on the employee and the employer RECORDING PAYROLL *usually made in two entries -first entry records amounts paid to employees or withheld from amounts they have earned Compensation expense 1,800,000 Liability for income taxes withheld 275,000 FICA payable 105,000 Cash 1,420,000 -the second entry records the FICA tax that employers must pay from their own funds Compensation Expense 105,000 FICA payable 105,000 Time value of Money- is interest that is associated with the use of money over time -the longer money is held, the larger the total dollar amount of the interest expense Interest = Principal x Interest Rate x Time 2000 = 100,000 x .12 x (2/12) To record interest expense: Interest Expense 2,000 Interest Payable 2,000 Company pays of $5,000 of interest. $2,000 accrued and reported in 2009 plus the $3,000 interest accrued in the beginning of 2010: Interest expense 3,000 Interest payable 2,000 Cash 5,000 -if a liability will not generate a cash outflow in the next accounting period, then GAAP requires that it is NOT listed as a current liability Deferred Revenues: (or unearned revnues) are revenues that have been collected but not earned; they are liabilities until the goods or services have been provided -Deferred Revenues are a liability
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Contingent Liability- a potential liability that has arisen as the result of a past event; not an effective liability until some future event occurs
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