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Unformatted text preview: Chapter 8 Author: Anna Rovira Beavers Needles 2008 8/15/08 1 Financial Accounting Chapter 8 Notes Current Liabilities I. Managing Issues Related to Accounting for Current Liabilities A company operating cycle is the process of converting cash to purchases, to sales, to accounts receivable and back to cash. Most current liabilities are incurred in support of the cycle. Short-term debt is used to raise cash during periods of inventory buildup or while waiting for collection of receivables. A key consideration with managing a companys liquidity position and cash flows is the amount of time its creditors are willing to give to pay its accounts payable. Common measures of current liabilities are payable turnover and the average days payable. Cost of Good Sold +Change of Merchandise Inventory Payable turnover = Average Accounts Payable $2,042.7 50.7 (234.8 +206.4)/2 $1992 $220.6 9.0 means the number of times accounts payable were paid. 365 DAYS Average Day Payable = Payable Turnover How long, on the average, a company takes to pay its accounts payable? In-class Exercise SE2 A. Recognition of Liabilities. As in other accounts timing is very important when recording a liability. Failure to record liabilities properly may understate expenses and overstate income. When should liabilities be recorded? When obligations occur. However, some liabilities do not occur in the process of increasing inventory, some occur at month end such as wages payable or tax 9.0 times 40.6 Chapter 8 Author: Anna Rovira Beavers Needles 2008 8/15/08 2 liability . Adjusting entries at the end of the month should true up the correct value of Accounts Payable. B. Valuation of Liabilities Most liabilities are value at the face value of a loan. A few liabilities, however, need to be estimated, i.e. repair warranty. C. Classification of Liabilities Current liability less than one year or within the operating cycle of the business whichever is longer. Current liabilities are typically paid out of current assets with cash generated from operations. D. Disclosure of Liabilities Some accounts may need to be explained as notes in the financial statements. The disclosure may consist on amount, timing etc. In-class Exercise SE3 II. Common Categories of Current Liabilities Determinable Liabilities Estimated Liabilities A. Determinable Liabilities Accounts Payable Short-term obligations to suppliers for goods and services Bank Loan and Commercial Paper Line of credit a firm establishes with other organizations, such as banks, to cover...
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