Chapter 7_liabilities

Chapter 7_liabilities - Chapter 7 Liabilities LEARNING...

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Chapter 7 Liabilities LEARNING OBJECTIVES l. Understand the reporling issues related to current and contingent liabilities. 2. Account for the time value of money. 3. Apply time value of money concepts to bonds payable and capital leases. 4. Recognize financial statement disclosures of pensions, other post employment benefits (OPEBs). and deferred income tax liabilities. This chapter covers the liabilities found in the balance sheets of most companies. We begin with a discussion of current and contingent liabilities, but the main focus of the chapter is the measurement and reporting of interest-bearing obligations, often refered to as monetary liabilities. Monetary liabilities are claims by outsiders to a specific amount of the company's cash at any given point in time. Liabilities such as notes, bonds, leases, and pensions are monetary liabilities. They represent contracts between the business and outside interests that require future cash payments to satisfy their terms. These are interest-bearing obligations, and the amount of these liabilities increases as time passes unless the borrower makes cash payments equal to or in excess of the interest incurred during the period. CURRENT LIABILITIES The current liabilities in a typical balance sheet are generally operating accounts, and they are reported at their face value which most often is their net realizable value. Combined with current assets, curent liabilities allow the analyst to measure working capital, defined as current assets minus culrent liabilities. The general idea in managing working capital is to maintain a ratio of cunent assets to cuffent liabilities that will enable the company to pay its obligations on a timely basis but not have more cunent assets than necessary. The following paragraphs regarding the specific cuffent liabilities yoll are likely to see cxtend our previous discussions of the roles cument liabilities play in the company. Chapter I Liabilities
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Accounts Payable Accounts payable represent the obligations that result from buying goods and services on accoLrnt from other businesses. Because of the short-term nature of accounts payable. and the expectation that they will be paid within 30 days. these accounts usually are not interest-bearing obligations. However, sorle vendors provide financial incentives for prornpt payment. For example, a vendor may have credit tetms that include interest of l.5o/o per month for accounts not paid within 30 days. In this case, payments that are made beyond 30 days will increase the amount of the account payable. The extra cost to settle the account payable would be recorded as interest expense. While some vendors provide an incentive for prompt payment by charging interest for late payments, others offer purchase discounts in order to encourage early payment. For example, it is not uncommon for one business to sell to another with terms like: 2/ 10. n/30, which means that a 2To discount may be taken if the payment is made within l0
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This note was uploaded on 10/25/2011 for the course BUS 214 taught by Professor Waker during the Fall '08 term at Cal Poly.

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Chapter 7_liabilities - Chapter 7 Liabilities LEARNING...

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