ch 9 - Chapter 9 Reporting and Interpreting Liabilities (c)...

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1 (c) Mikhail Pevzner and George Mason University Chapter 9 Reporting and Interpreting Liabilities (c) Mikhail Pevzner and George Mason University Liabilities • Probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services (Libby, Libby, Short, page 463) . Current liabilities will be paid out in cash within 12 months of a balance sheet date. (c) Mikhail Pevzner and George Mason University Liquidity • Ability of an entity to meet its future or current cash obligations and needs. • Liquidity ratios are: – Current Ratio (Current Assets/Current Liabilities); – Quick Ratio (“Quick” Assets/Current Liabilities); – Times Interest Earned ((Pre-tax Net Income+Interest Expense)/Interest Expense);
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2 (c) Mikhail Pevzner and George Mason University Current liabilities • Accounts Payable (aka trade accounts payable); • Accrued expenses; – Accrued taxes payable; – Accrued payroll/compensation; – Accrued payroll taxes (FICA, etc.); • Short-term Notes Payable; • Short-term Portion of Long-Term Debt; • Deferred Revenues (could also be long-term); (c) Mikhail Pevzner and George Mason University Another look at accrued expenses • As we discussed in Chapter 4, accrued expenses arise for obligations which company has not yet paid for, but for which it received either goods or services, or for which it is contractually or legally obligated. (c) Mikhail Pevzner and George Mason University Accrued Compensation • Vacation Pay: MBP provides 10 days of paid vacation each year to its employees. MBP estimates that each free vacation day is equivalent to $5,000 of total compensation paid. By the end of the year, no employees took vacation. MBP books the following accrual: Payroll Expense $50,000 Accrued Vacation Payable $50,000
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3 (c) Mikhail Pevzner and George Mason University Accrued Compensation • Other types of accrued compensation results from: – Benefit payments (e.g. employer unpaid insurance premiums); – Accrued bonuses; (c) Mikhail Pevzner and George Mason University Accrued Taxes • Any unpaid taxes due also represent an accrued liability. Types of such accrual are: – Accrued Corporate Income Tax (aka “taxes payable”); – Accrued Employee Taxes; • FICA; • Medicare; (c) Mikhail Pevzner and George Mason University Short-term Notes Payable • Short-term Notes Payable represent a type of short-term debt. • They are usually issued for periods longer than accounts payable (which are normally due within 30 days or so). • Short-term Notes Payable usually also bear interest.
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4 (c) Mikhail Pevzner and George Mason University Interest expense on Notes Payable • Interest expense on Notes Payable is computed as follows: Interest Expense=Amount of the Note*Interest Rate*Time where Time=Number of Months Outstanding/12 (c) Mikhail Pevzner and George Mason University Interest Expense on Notes (continued) On July 1, 2007, MBP takes out a note payable for $100,000 from ZZZ bank. The
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ch 9 - Chapter 9 Reporting and Interpreting Liabilities (c)...

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