Chapter 12 - Chapter 12 Current Liabilities LO 1 Management...

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Chapter 12 “Current Liabilities”
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LO 1 – Management Issues Related to Current Liabilities Current liabilities are incurred to meet cash needs during the operating cycle The proper identification and management of current liabilities requires an understanding of how they are: Recognized Valued Classified Disclosed
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LO 1 If we don’t pay our current liabilities, Suppliers may not ship A bankruptcy may result if we continually fail to pay our current liabilities
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LO 1 Amount of time creditors are willing to give a company to pay its accounts payable Common measures of this time Payables turnover Average days’ payable See p. 527
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LO 1 Current liabilities Expected to be satisfied within one year or within the normal operating cycle, whichever is longer Paid out of current assets or with cash generated from operations Long-term liabilities Due beyond one year or beyond the normal operating cycle Used to finance long-term assets
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LO 1 It is important to distinguish between current and long-term liabilities because of their effect on liquidity.
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LO 2 – Categories of Current Liabilities Two major groups of current liabilities Definitely determinable liabilities Set by contract or by statute (law) and can be measured exactly Estimated liabilities Definite debts or obligations whose exact dollar amount cannot be known until a later date
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LO 2 Types of definite accounts payable Bank loans and commercial paper Notes payable Accrued liabilities Dividends payable Sales and excise taxes payable Current portions of long-term debt Payroll liabilities Unearned or deferred revenues
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LO 2 Accounts Payable are short-term obligations to suppliers for goods and services. Also called trade accounts payable Amount in Accounts Payable account in the general ledger is generally supported by an Accounts Payable subsidiary ledger Accounts Payable subsidiary ledger contains an individual account for each person or company to which money is owed
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LO 2 Bank Loans : A line of credit may be established with a bank Allows a company to borrow funds when needed to finance current operations The bank may require the company to meet certain financial goals: Maintain specific profit margins Maintain current ratios Maintain debt to equity ratios
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LO 2 Commercial paper is a way of borrowing money by using unsecured (without a collateral) short-term loans sold directly to the public.
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LO 2 Short-term notes payable are obligations represented by promissory notes Can be used to: Secure bank loans Pay suppliers Obtain other credit Interest may be: Stated separately on the face of the note Deducted in advance by discounting it from the face value of the note
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Two Promissory Notes: One with Interest Stated Separately; One with Interest in Face Amount
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Aug.31
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Chapter 12 - Chapter 12 Current Liabilities LO 1 Management...

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