Chapter 13 PPT
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Transcript of Chapter 13 PPT
CURRENT LIABILITIES CURRENT LIABILITIES AND CONTINGENCIESAND CONTINGENCIES
Chapter 13
© 2009 The McGraw-Hill Companies, Inc.
McGraw-Hill /Irwin
Slide 2
Characteristics of LiabilitiesCharacteristics of Liabilities
. . . Resulting from past
transactions or events.
. . . Resulting from past
transactions or events.
. . . Arising from
present obligations
to other entities . . .
. . . Arising from
present obligations
to other entities . . .
Probable future
sacrifices of economic
benefits . . .
Probable future
sacrifices of economic
benefits . . .
McGraw-Hill /Irwin
Slide 3
What is a Current Liability?What is a Current Liability?
LIABILITIESLIABILITIES
Long-term LiabilitiesLong-term Liabilities
Expected to be satisfied with current assets or by
the creation of other current liabilities.
Expected to be satisfied with current assets or by
the creation of other current liabilities.
Current LiabilitiesCurrent Liabilities
Obligations payable within one year or one operating cycle, whichever is longer.
Obligations payable within one year or one operating cycle, whichever is longer.
McGraw-Hill /Irwin
Slide 4
Open Accounts and NotesOpen Accounts and NotesAccounts Payable
Obligations to suppliers for goods purchased on open account.
Trade Notes PayableSimilar to accounts payable, but recognized by a written promissory note.
Short-term Notes PayableCash borrowed from the bank and recognized by a promissory note.
• Credit linesPrearranged agreements with a bank that allow a company to borrow cash without following normal loan procedures and paperwork.
Accounts PayableObligations to suppliers for goods purchased on open account.
Trade Notes PayableSimilar to accounts payable, but recognized by a written promissory note.
Short-term Notes PayableCash borrowed from the bank and recognized by a promissory note.
• Credit linesPrearranged agreements with a bank that allow a company to borrow cash without following normal loan procedures and paperwork.
McGraw-Hill /Irwin
Slide 5
Noninterest-Bearing NotesNoninterest-Bearing Notes
Notes without a stated interest rate carry an implicit, or effective rate.
The face of the note includes the amount borrowed and the interest.
Notes without a stated interest rate carry an implicit, or effective rate.
The face of the note includes the amount borrowed and the interest.
McGraw-Hill /Irwin
Slide 6
Commercial PaperCommercial Paper
Commercial paper is a term used for unsecured notes issued in minimum
denominations of $25,000 with maturities ranging from 30 days to 270 days.
Commercial paper is a term used for unsecured notes issued in minimum
denominations of $25,000 with maturities ranging from 30 days to 270 days.
Normally, commercial paper is issued directly to the lender and is backed by a line of credit with a bank.Normally, commercial paper is issued directly to the lender and is backed by a line of credit with a bank.
Commercial paper is recorded in thesame manner as notes payable.
Commercial paper is recorded in thesame manner as notes payable.
McGraw-Hill /Irwin
Slide 7
Salaries, Commissions, and BonusesSalaries, Commissions, and Bonuses
Compensation expenses such as salaries, commissions, and bonuses
are liabilities at the balance sheet date if earned but unpaid.
These accrued expenses/accrued liabilities
are recorded with an adjusting entry prior to
preparing financial statements.
McGraw-Hill /Irwin
Slide 8
A Closer Look at the Current andA Closer Look at the Current andNoncurrent ClassificationNoncurrent Classification
Current maturities of long-term obligations are usually reclassified and reported as current
liabilities if they are payable within the upcoming year (or operating cycle, if longer than a year).
Current maturities of long-term obligations are usually reclassified and reported as current
liabilities if they are payable within the upcoming year (or operating cycle, if longer than a year).
Debt that is callable (due on demand) by the lender in the coming year, (or operating cycle, if
longer than a year) should be classified as a current liability, even if the debt is not expected to
be called.
Debt that is callable (due on demand) by the lender in the coming year, (or operating cycle, if
longer than a year) should be classified as a current liability, even if the debt is not expected to
be called.
McGraw-Hill /Irwin
Slide 9
The ability to refinance on a long-term basiscan be demonstrated by an: existing refinancing agreement, or actual financing prior to issuance of the financial statements.
The ability to refinance on a long-term basiscan be demonstrated by an: existing refinancing agreement, or actual financing prior to issuance of the financial statements.
Short-Term Obligations ExpectedShort-Term Obligations Expectedto be Refinancedto be Refinanced
A company may reclassify a short-term liability as long-term only if two conditions are met:
A company may reclassify a short-term liability as long-term only if two conditions are met:
It has the intent to refinance on a long-term basis.
It has the intent to refinance on a long-term basis.
It has demonstrated the ability to refinance.
It has demonstrated the ability to refinance.
and
McGraw-Hill /Irwin
Slide 10
ContingenciesContingencies
A loss contingency is accrued only if a loss is probable and the amount can reasonably be estimated.
A loss contingency is accrued only if a loss is probable and the amount can reasonably be estimated.
McGraw-Hill /Irwin
Slide 11
Product Warranties and GuaranteesProduct Warranties and Guarantees
Product warranties inevitably entail costs.The amount of those costs can be reasonably
estimated using commonly available estimation techniques.
The estimate requires the following entry:
Product warranties inevitably entail costs.The amount of those costs can be reasonably
estimated using commonly available estimation techniques.
The estimate requires the following entry:
McGraw-Hill /Irwin
Slide 12
Extended WarrantiesExtended Warranties
Extended warranties are sold separately from the product.
The related revenue is not earned until: Claims are made against the extended
warranty, or The extended warranty period expires.
Extended warranties are sold separately from the product.
The related revenue is not earned until: Claims are made against the extended
warranty, or The extended warranty period expires.
McGraw-Hill /Irwin
Slide 13
Litigation ClaimsLitigation Claims
The majority of medium and large-size corporations annually report loss contingencies due to litigation.
The most common disclosure is a note to the financial statements.
The majority of medium and large-size corporations annually report loss contingencies due to litigation.
The most common disclosure is a note to the financial statements.
McGraw-Hill /Irwin
Slide 14
Subsequent EventsSubsequent Events
Events occurring between the year-end date and report date can affect the
appearance of disclosures on the financial statements.
Events occurring between the year-end date and report date can affect the
appearance of disclosures on the financial statements.
Fiscal Year Ends Financial Statements
ClarificationCause of Loss Contingency
McGraw-Hill /Irwin
Slide 15
Unasserted Claims and AssessmentsUnasserted Claims and Assessments
Is a claimIs a claimor assessmentor assessment
probable?probable?
Is a claimIs a claimor assessmentor assessment
probable?probable?No
Yes
NoNodisclosuredisclosure
neededneeded
NoNodisclosuredisclosure
neededneeded
UnassertedUnassertedclaimclaim
UnassertedUnassertedclaimclaim
Evaluate (a) the likelihood of an unfavorable outcome andEvaluate (a) the likelihood of an unfavorable outcome and(b) whether the dollar amount can be estimated.(b) whether the dollar amount can be estimated.
An estimated loss and contingent liability would beaccrued if an unfavorable outcome is probable and the
amount can be reasonably estimated.
Evaluate (a) the likelihood of an unfavorable outcome andEvaluate (a) the likelihood of an unfavorable outcome and(b) whether the dollar amount can be estimated.(b) whether the dollar amount can be estimated.
An estimated loss and contingent liability would beaccrued if an unfavorable outcome is probable and the
amount can be reasonably estimated.
McGraw-Hill /Irwin
Slide 16
Gain ContingenciesGain Contingencies
As a general rule, we As a general rule, we never record never record GAINGAIN
contingenciescontingencies..
Note that the prior rules have Note that the prior rules have supported the recording of supported the recording of LOSSLOSS
contingencies.contingencies.
McGraw-Hill /Irwin
End of Chapter 13End of Chapter 13
© 2009 The McGraw-Hill Companies, Inc.