Id module review 1 verizons accounts payable turnover

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ID-MODULE REVIEW 1 Verizon's accounts payable turnover (Cost of goods sold/Average accounts payable) increased from 8.5 in 2007 to 10.7 in 2010. a. Does this change indicate that accounts payable have increased or decreased relative to cost of goods sold? Explain. b. What effect does this change have on net cash flows from operating activities? c. What management concerns, if any, might this change in accounts payable turnover pose? The solution ison page 7-46. crued Liabilities ed liabilities reflect expenses that have been incurred during the period but not yet paid cash. Accrued liabilities can also reflect unearned revenue as explained in Module 5. Verizon rts details of its accrued liabilities (along with accounts payable) in the following footnote its 2010 10-K report. :::Xcessivedelays in payment of payables can result in suppliers charging a higher price for their goods or, ultimately, - . g to sell to certain buyers. Although a hidden "financing" cost is not interest, it is still a real cost. - -::counts payable often carry credit terms such as 2/10, net 30. These terms give the buyer, for example, 2% off the ice price of goods purchased if paid within 10 days. Otherwise the entire invoice is payable within 30 days. By g to take a discount, the buyer is effectively paying 2% interest charge to keep its funds for an additional 20 days. se there are approximately 18 such 20-day periods in a year (365/20), this equates to an annual rate of interest - about 36%. Thus, borrowing funds at less than 36% to pay this liability within the discount period would be cost - rive.
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7-7 Module 7 I Liability Recognition and Nonowner Financing WE 75 WP 75 WE 7sT WP I 75 WP 75 Cash 75 WP 75 I Cash 75 At December 31 ($ in millions) 2010 2009 Accounts payable . Accrued expenses . Accrued vacation, salaries and wages . Interest payable . Taxes payable . $ 3,936 4,110 5,686 813 1,157 $ 4,337 3,486 5,084 872 1,444 $15,223 Total accounts payable and accrued liabilities. . . . . . .. $15,702 Verizon reports one nonoperating accrual: interest payable. Its other accrued liabilities are operar- ing accruals that include miscellaneous accrued expenses, accrued vacation pay, accrued salaries and wages, and accrued taxes. Verizon's accruals are typical. To record accruals, companies rec- ognize a liability on the balance sheet and a corresponding expense on the income statement. This means that liabilities increase, current income decreases, and equity decreases. When an accru liability is ultimately paid, both cash and the liability decrease (but no expense is record because it was recognized previously). Accounting for Accrued Liabilities Accounting for a typical accrued liability such as accrued wages, for two consecutive periods.. follows: Balance Sheet Income Statement ¥"""7 Cash + Noncash _= Liabil- + Contrib. Earned , Rev- _ Expen- Tra~saction Asset Assets ities Capital + Capital •\ enues - ses Penod 1: I Accrued $75 + 75 -75 for employee = Wages Retained ,.' wages earned Payable Earnings \ at period-end J 1 ------:----------.-.- ..---------------------.-.------------------------------_. __ ._-------------------------------~I--------------------------------·--------------------- Penod 2: Paid $75 for - 75 - 75 Cash = Wages I wages earned Payable i in prior period I ._-----------------------------------------------------------------------------------------------.------------------\;.,------------------------------------------------------- '<, Net Income +75 Wages Expense = -75 = The following financial statement effects result from this accrual of employee wages: Employees have worked during a period and have not yet been paid. The effect of this ace
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