Lecture 10 Liabilities

Lecture 10 Liabilities - LECTURE 10 LIABILITIES 9/13/11...

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Click to edit Master subtitle style 9/13/11 LECTURE 10 LIABILITIES MGCR 211
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9/13/11 Definition of a Liability A liability has the following characteristics Will require the probable future sacrifice of a economic benefit (cash, goods exchange or service to be rendered) The event giving rise to the obligation has already occurred The company has little or no chance to avoid the obligation
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9/13/11 Short Term vs. Long term Liability Short term : Expect to pay in the next 12 months Long Term: Expect to pay in more than one year. Liabilities are an essential part of operations of a business. Timing will not always be perfect between incoming cash flows from revenues and cash
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9/13/11 Importance Liabilities are important to creditors because Shows them who else the company is indebted to. l Can asses leverage of the firm l Can asses a firm’s ability to repay them given current level of indebtedness Liabilities are important to Investors because Common shareholders have residual interest, if company is highly levered, more risky investment l Want to assess company’s ability as a going concern
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9/13/11 Recognition and Valuation Liabilities should be recorded at the present value of the future payments. Present value calculations are generally not used for short term liabilities because the time to maturity is not material.
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9/13/11 Recognition and Valuation Bonds, AP, Notes payable are easy to record because they have fixed amount, fixed rate and fixed maturity However, certain liabilities such as warranty liability, premium or contingent liability cannot be estimated as easily. Estimates will be required to compute and record those liabilities.
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9/13/11 Estimated Liabilities Estimated liabilities are harder to measure because: l Economic benefit to be given up cannot be measure with certainty l Involves a level of judgment l Provides management some margin to assess the value of the liability
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9/13/11 Short Term Liabilities Account payable: Purchase made on credit. The vendor provides you with a certain number of days to make payment after receiving goods or services. Wages and Payroll Liabilities: Depending on the timing of payroll, a company may be in a liability position with its employees at the reporting date. Short Term Notes: More formal than an account payable and can include an
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9/13/11 Unearned Revenues Unearned revenues occur when customers pay a deposit or prepay for certain goods or services to be delivered at a future point in time. At the time of payment, the company does not meet the revenue recognition criteria as the services or goods have not yet been delivered. The company is in a liability position towards the client as the company must
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9/13/11 Commitment Catherine’s Catering Shop (CCS) is a catering company. A request is placed to prepare the food for an upcoming birthday party in December. The items to be provided are selected and outlined in a purchase agreement that is signed by both parties. The payment is to be made on the day of the party.
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This note was uploaded on 09/12/2011 for the course MGCR 211 taught by Professor La rocca during the Fall '08 term at McGill.

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Lecture 10 Liabilities - LECTURE 10 LIABILITIES 9/13/11...

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