ch 9 - Ch 9 Reporting and Interpreting Liabilities Capital...

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Ch 9 Reporting and Interpreting Liabilities 1. C apital structure . 2. R isk vs, Return a. Debt is more risky than equity because principal and interest payments must be made on debt. b. Equity is less risky since dividend payments to owners are not legal obligations until declared by the board of directors. A. Liabilities: 1. Liabilities are probable future sacrifices of economic benefits that arise from past transactions. 2. A liability is measured in terms of its cash equivalent (the cash that the creditor would accept to settle the liability) to settle the liability immediately. a. Interest to be paid on the debt is not included initially because interest accrues over time. b. After it has accrued, interest becomes a liability. 3. Classification: Current vs, Long term liabilities B. Current Liabilities: 1. Current liabilities are short-term obligations that will be paid within the current operating cycle or one year, whichever is longer. 2. Current liability accounts that appear on most balance sheets: a. Accounts Payable (A/P or Trade Payable) b. Accrued Liabilities 1. Accrued liabilities are recorded for expenses that have been incurred but have not been paid by the end of the accounting period. 2. Examples of accrued expenses include: a. Accrued Taxes Payable b. Accrued Compensation and Related Costs i. Salaries and wages payable are incurred but unpaid employee compensation. . ii. Payroll taxes include FICA (Social Security) tax. This liability arises from two sources. This tax is withheld from employees' gross wages based on a statutory percentage. This amount is also "matched" by the employer. Both the withholding and the matching amounts are current liabilities of the company 3. Current Portion of Long-Term Debt
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ch 9 - Ch 9 Reporting and Interpreting Liabilities Capital...

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