Ch. 13 - Current Liabilities and Contingencies

Ch. 13 - Current Liabilities and Contingencies - Chapter...

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Chapter 13: Current Liabilities and Contingencies Current Liabilities Liabilities and owners’ equity accounts represent specific sources of a company’s assets Characteristics of Liabilities Liability has three essential characteristics o Are probable, future sacrifices of economic benefits o Arise from present obligations (to transfer goods/provide services) to other entities o Result from past transactions or events Most liabilities obligate the debtor to pay cash at specified times and result from legally enforceable agreements Some liabilities are not contractual obligations and may not be payable in cash What is a Current Liability? Current liabilities are expected to require current assets and are usually payable within one year Classifying liabilities as either current or long term helps investors and creditors assess the relative risk of a business’s liabilities Current liabilities are usually reported at their maturity amounts Open Accounts and Notes Accounts Payable and Trade Notes Payable o Accounts payable are obligations to suppliers of merchandise or of services purchased on open account Key accounting considerations: Determining their existence Ensuring that they are recorded in the appropriate accounting period o Trade notes payable are formally recognized by a written promissory note Longer term than open accounts, bears interest Short-Term Notes Payable o When a company borrows cash from a bank and signs a promissory note, the company’s liability is reported as notes payable o Short-term loans offer lower interest loans than long-term debt This is why small firms don’t use long-term financing o Credit Lines Allows a company to borrow cash without having to follow formal loan procedures and paperwork A noncommitted line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. A committed line of credit is a more formal agreement that usually requires the firm to pay a commitment fee to the o Interest Interest on notes is calculated as : face amount x annual rate x time to maturity Sometimes a bank loan assumes the form of a noninterest-bearing note The interest is deducted from the face amount When interest is discounted from the face amount of a note, the effective interest rate is higher than the stated
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This note was uploaded on 03/12/2012 for the course ACCT 211 taught by Professor Kamlet during the Spring '08 term at Binghamton University.

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Ch. 13 - Current Liabilities and Contingencies - Chapter...

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