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NBJ11e_IM_ch13 - 13 CURRENT LIABILITIES AND CONTINGENCIES...

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13-1 13 CURRENT LIABILITIES AND CONTINGENCIES CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 1. Explain the characteristics of a liability. 2. Define current liabilities. 3. Account for compensated absences. 4. Understand and record payroll taxes and deductions. 5. Record property taxes. 6. Account for warranty costs. 7. Explain the terms "probable," "reasonably possible," and "remote" related to contingencies. 8. Record and disclose a loss contingency. 9. Disclose a gain contingency.
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13-2 SYNOPSIS Conceptual Overview of Liabilities 1. In its Conceptual Framework , the FASB defined liabilities as the probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past transactions or events. 2. Liabilities include both legal and nonlegal (but not illegal) obligations. Legal liabilities, such as accounts payable, notes payable, and sales taxes payable, arise from contractual transactions. Consequently, the company is legally required to pay cash or provide goods or services. With nonlegal liabilities (accounting liabilities) payments are expected as part of the company's normal operations, even though they are not legally required. 3. There are three essential characteristics of a liability for a company: (a) A liability involves an obligation that will be settled by a probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand. (b) The obligated company has little or no discretion to avoid the future sacrifice. (c) The transaction or other event obligating the company has already happened . 4. Two other points are made about liabilities: (a) The company does not need to know the identity of the recipient for a liability to be recorded. (b) The obligation need not be legally enforceable to qualify as a liability. Nature and Definition of Current Liabilities 5. Current liabilities are obligations of a company that it expects to liquidate by using existing current assets or creating other current liabilities within one year or an operating cycle, whichever is longer. An operating cycle is the time normally required to convert cash into inventory, sell the inventory, and collect the resulting receivables. 6. Information about liquidity (how quickly a company can convert its assets to cash to pay its liabilities) is important to users because in part the prediction of future cash flows is based on the nearness to cash of liabilities and assets. The FASB discussed alternative methods of reporting liquidity and examined useful liquidity ratios. The AICPA Special Committee on Financial Reporting stated that internal and external sources of liquidity and significant unused sources of liquid assets should be identified in a company's MD&A.
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