chapter 13 outline fall 2010 - Copy

chapter 13 outline fall 2010 - Copy - Chapter 13 Outline on...

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Chapter 13 Outline on Current Liabilities Accounting 340: Howard Bunsis Chapter 13: Liabilities: Fall 2010 Current Liabilities Concept of Liabilities In general, liabilities involve future disbursements of assets or services. According to the FASB, a liability has three essential characteristics: o (a) it is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services; o (b) it is an unavoidable obligation; and o (c) the transaction or other event creating the obligation has already occurred. Liabilities are classified on the balance sheet as current obligations or long-term obligations. Current liabilities are those obligations whose liquidation is reasonably expected to require use of existing resources classified as current assets or the creation of other current liabilities. Current ratio = Current Assets / Current Liabilities o The benchmark is not 1.0 o The benchmark is specific by industry Acid Test Ratio = (Cash + Marketable Securities + Net Receivables) / Current Liabilities Accounts Payable Accounts payable represents obligations owed to others for goods, supplies, and services purchased on open account. These obligations, commonly known as trade accounts payable, should be recorded to coincide with the receipt of the goods or at the time title passes to the purchaser. Example: Congo uses the periodic method and the gross method to account for purchase discounts. On 7/1, Purchased 40,000 on account, terms 2/10, n/30, FOB shipping. Paid freight costs of 1,200. On 7/3, returned 6,000 of damaged goods. On 7/10, paid for the goods. 7/1: Db. Purchases 40,000 Cr. Accounts Payable 40,000 Db. Freight-In 1,200 Cr. Cash 1,200 7/3: Db. Accounts Payable 6,000 Cr. Purchase returns & allowances 6,000 7/10 Db. Accounts Payable 34,000 Cr. Cash 33,320 (34,000 * .98) Cr. Purchase Discounts 680 1
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Chapter 13 Outline on Current Liabilities Notes Payable Notes payable are written promises to pay a certain sum of money on a specified future date and may arise from sales, financing, or other transactions. Notes may be classified as short-term or long-term, depending on the payment due date. Short-term notes payable resulting from borrowing funds from a lending institution may be interest-bearing or zero-interest-bearing. o Interest-bearing notes payable are reported as a liability at the face amount of the note along with any accrued interest payable. o A zero-interest-bearing note does not explicitly state an interest rate on the face of the note. Interest is the difference between the present value of the note and the face value of the note at maturity. Interest-Bearing Note Example . Borrowed 50,000 on 11/1/10 by signing a 50,000, 9%, 3- month note. 11/1/10
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chapter 13 outline fall 2010 - Copy - Chapter 13 Outline on...

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