Chapter 9

Chapter 9 - Chapter 9: Current Liabilities, Contingencies,...

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Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
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LIABILITIES Definition: Probable debts or obligations that result from past transactions, which will be paid with assets or services. Classification: Current liabilities, non-current liabilities, contingent liabilities. Capital structure decisions.
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Current Liabilities Accounts payable Accrued liabilities Taxes Wages and salaries Other expenses Notes payable – short term A more formal agreement than an accounts payable Current portion of long-term debt Pay off principal periodically Deferred revenues
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Exercise 9-1: Current Liabilities The items listed below are accounts on Smith’s balance sheet of December 31, 2007: Taxes Payable Accounts Receivable Notes Payable, 9%, due in 90 days Investment in Bonds Capital Stock Accounts Payable Estimated Warranty Payable in 2008 Retained Earnings Trademark Mortgage Payable ($10,000 due every year until 2024) Required Identify which of the above accounts should be classified as a current liability on Smith’s balance sheet. For each item that is not a current liability, indicate the category of the balance sheet in which it would be classified.
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The treatment of the items should be as follows: Taxes payable—Current liability Accounts receivable—Current asset Notes payable, 9%, due in 90 days—Current liability Investment in bonds—Long-term asset Capital stock—Stockholders’ equity Accounts payable—Current liability Estimated warranty payable in 2008—Current liability Retained earnings—Stockholders’ equity Trademark—Intangible asset Mortgage payable—$10,000 due in 2008 should be current liability. The remaining portion should be long-term liability.
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Analysis of liabilities Analysis of liquidity: Working capital Current assets – current liabilities Current ratio Current assets / Current liabilities Accounts payable turnover ratio COGS / Average accounts payable Link to operating cycle
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Contingent liabilities Estimated liabilities: Probable and reasonable estimate Included on balance sheet Warranty liabilities Possible Disclose in footnotes only Pending lawsuits Remote No disclosure required
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Chapter 9 - Chapter 9: Current Liabilities, Contingencies,...

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