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report on liabilities for financial accounting

report on liabilities for financial accounting

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  • Working capital is defined as current assets minus current liabilities. A company can finance its operations from two sources. One is debt. Debt is a borrowing from a creditor, such as a bank. It has a definite due date and in most cases bears an interest rate. Another way a company can finance its operations is through equity. This requires companies to sell additional stock in the company to new or existing shareholders.
  • Liabilities are debts owed from past transactions. Liabilities can be separated into two categories: Current and Non-current. Current liabilities are due to be paid within one year or the normal operating cycle of the business, whichever is longer. For most businesses, one year is longer than the operating cycle. Noncurrent liabilities are due to be paid sometime after one year.
  • Current liabilities are defined as those liabilities that must be paid within one year or within the normal operating cycle, whichever is longer. Accounts payable, also known as trade accounts payable, are obligations to pay for goods and services used in the basic operating activities of the business. It may include: Merchandise inventory invoices, Office supplies invoices, Utility and phone bills, Shipping charges Accrued liabilities, also known as accrued expenses, are obligations related to expenses that have been incurred, but will not be paid until the subsequent period. Notes payable are obligations due supported by a formal written contract. Deferred revenues, also known as unearned revenues, are obligations arising when cash is received prior to the related revenue being earned.
  • When a company borrows money, a formal written contract is usually prepared. Obligations supported by these contracts are called notes payable. Notes payable are obligations due supported by a formal written contract. A note is a written promise to pay a specific amount at a specific future date. A note payable specifies the amount borrowed, the date by which it must be repaid, and the interest rate associated with the borrowing. A note includes the following necessary information about the agreement. The payee on the note is the recipient of the cash at maturity. In this example, the payee is Security National Bank. The maker on the note is the debtor who owes the money. In this example, the maker is Porter Company. Notes also include information about the principal, interest rate, and due date. This note is for $10,000, has an interest rate of 12%, and is due six months from the date of the note. Porter debits Cash and credits Note Payable for $10,000.
  • Interest expense is the compensation to the lender for giving up the use of money for a period of time while the liability is called interest payable . Therefore, to the lender, interest is a revenue and t o the borrower, interest is an expense . To calculate interest, three variables must be considered: the principal, the annual interest rate, and the time period for the loan. Interest is calculated as Principal times the Interest Rate times the Time the note was outstanding. When computing interest for one year, “Time” equals 1. When the computation period is less than one year, then “ Time” is a fraction. For example, if we needed to compute interest for 3 months, “Time” would be 3/12.
  • On December 31 st , Porter Company needs an adjusting entry to record the interest expense. Let’s look at that entry. On December 31 st , Porter debits Interest Expense and credits Interest Payable for $200. The two hundred dollars in interest is calculated as the original note amount of ten thousand dollars times the interest rate of twelve percent times the outstanding time of the note. At December 31 st , the outstanding time for this note is two months.
  • On January 31 st , Porter Company will pay back the principal amount of the note plus the interest for three months. Let’s look at that entry. Porter eliminates the note payable for $10,000 and the interest payable for $200. The company must recognize the interest expense for the month of January of $100. Cash will be credited for the principal plus interest of $10,300. The two hundred dollars in interest is calculated as the original note amount of ten thousand dollars times the interest rate of twelve percent times the outstanding time of the note. At December 31 st , the outstanding time for this note is two months.
  • Ever wondered what happens to the money deducted from your paycheck? Employers do not keep this money; instead it’s remitted to the appropriate entity. For example, money withheld for taxes is remitted to the proper taxing authority. Money voluntarily taken out of your paycheck for retirement funds and insurance is also remitted to the proper place. All of these withholdings are liabilities for employers. They are due and payable to the appropriate entity within certain time periods. All payrolls are subject to a variety of taxes including federal, state, and local income taxes, Social Security taxes, and federal and state unemployment taxes. Employees pay some of these taxes and employers pay others. Employers are required to withhold income taxes for each employee. The amount of income tax withheld is recorded by the employer as a current liability between the date of the deduction and the date the amount is remitted to the government. The Social Security taxes paid by employees are called FICA taxes because they are required by the Federal Insurance Contributions Act. These taxes are imposed in equal amounts on both the employee and the employer. Effective January 1, 2008, the Social Security tax rate was 6.2% on the first $102,000. In addition, a separate 1.45% Medicare tax applies to all income. In addition to these federal taxes, employers also withhold any state and local income taxes that may be applicable. Many employers also offer programs where employees can request amounts be withheld from their compensation and remitted to the designated authority, such as retirement plans, medical insurance plans, and charity organizations. All items withheld from an employee’s compensation create current liabilities for the employer.
  • Some liabilities must be estimated when recorded. These liabilities are known to exist, but the exact dollar amount is uncertainSome recorded liabilities are based on estimates because the exact amount will not be known until a future date. For example, an estimated liability is created when a company offers a warranty with the products it sells. The cost of providing future repair work must be estimated and recorded as a liability (and expense) in the period in which the product is sold. Liabilities are reported on the balance sheet at a specific dollar amount because they involve the probable future sacrifice of economic benefits. Some transactions or events create only a reasonably possible (but not probable) future sacrifice of economic benefits. These situations create contingent liabilities, which are potential liabilities that are created as a result of a past event. A contingent liability may or may not become a recorded liability depending on future events. A situation that produces a contingent liability also causes a contingent loss. Whether a situation produces a recorded or a contingent liability depends on two factors: the probability of a future economic sacrifice and the ability of management to estimate the amount of the liability. The table on this screen illustrates the probabilities.
  • If you rent an apartment, you probably have an operating lease. You have the right to use the property, within certain limits, but the landlord still owns the property. You probably make monthly rent payments and at the end of your rental period, you will move out of the apartment. This typical rental agreement involves the lessee recording rent expense as rent payments are made. When a company leases an asset on a short-term basis, the agreement is called an operating lease. No liability is recorded when an operating lease is created. Instead, a company records rent expense as it uses the asset. However, there are situations that may look like a rental agreement but that are more like a purchase of the assets being rented. These are called capital leases, and in these situations the lease agreement transfers risks and benefits associated with ownership to the lessee. Because the lessee basically becomes the owner of the property, the lessee must record an asset and a liability. For a number of reasons, a company may prefer to lease an asset on a long-term basis rather than purchase it. This type of lease is called a capital lease. In essence, a capital lease contract represents the purchase and financing of an asset even though it is legally a lease agreement. Capital leases are accounted for as if an asset had been purchased by recording an asset and a liability.
  • Additional Info of Capital Lease: If the lease meets any of the following criteria, it is considered a capital lease: Lease term is 75% or more of the asset’s expected economic life. Ownership of asset is transferred to lessee at end of lease. Lease permits lessee to purchase the asset at a price that is lower than its fair market value. The present value of the lease payments is 90% or more of the fair market value of the asset when the lease is signed.
  • Present value is the current value of an amount to be received in the future. It is a future amount discounted for compound interest. The basis of the present value concept is that money can grow over time because of the interest it can earn. Example, $1,000 invested today at 10% will be worth $1,610.51 in five years and worth $10,834.71 in twenty-five years. Manual computation shown in next slide. The present value concept is used to price bonds. Bonds are priced at the present value of their future cash flows.
  • This is the manual computation of Future Value: We can avoid the detailed arithmetic by referring to Future Value Table (shown in next slide)
  • To determine the present value of a future amount, three things must be known: the future amount to be received, the interest rate, and the number of interest compounding periods or the time period. For a bond, the future amount may take two forms. First, a bond typically has a lump sum payment for principal due on a maturity date in the future. Second, bonds may also have periodic interest payments made during the life of the bond. For a bond, the calculated present value would be its selling price.
  • A present value problem is one where you know the dollar amount of a cash flow that occurs in the future and need to determine its value now.
  • Example: Using the present value of a single amount table, we find the factor for 10% and 3 periods, which is .7513.
  • Using the present value of a single amount table, we find the factor for 10% and 3 periods, which is .7513. We then multiply this factor times the future value of $1,331 to arrive at a present value of $1,000. So, if we invest $1,000 today at 10% for 3 years, we will have $1,331 at the end of the 3 years.
  • Instead of a single payment, many business problems involve multiple cash payments over a number of periods. An annuity is a series of consecutive payments characterized by an equal dollar amount each interest period, interest periods of equal length, and an equal interest rate each period. Examples of annuities include monthly payments on automobiles or homes, yearly contributions to savings accounts, and monthly pension benefits. The present value of an annuity is the value now of a series of equal amounts to be received (or paid out) for some specified number of periods in the future
  • The present value is $2,486.90. Using the present value of an annuity table, we find the factor for 10% and 3 periods, which is
  • The present value is $2,486.90. Using the present value of an annuity table, we find the factor for 10% and 3 periods, which is 2.4869. We then multiply this factor times the annuity payments of $1,000 to arrive at a present value of $2,486.90. So, if we invest $2,486.90 today at 10% for 3 years, we can receive payments of $1,000 each of the next 3 years.

Liabilities.fa Presentation Transcript

  • 1. Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities Group 5 Austria, JeffreyAustria, Jeffrey Calubayan, ElsieCalubayan, Elsie Dela Cruz, AlvinDela Cruz, Alvin Granado, Ma. EuniceGranado, Ma. Eunice Minaballes, LizaMinaballes, Liza Delete text and place photo here. Dr. Maria P. IshiiDr. Maria P. Ishii Financial AccountingFinancial Accounting
  • 2. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities The acquisition of assets is financed from two sources: Funds from creditors, with a definite due date, and sometimes bearing interest. Funds from owners DEBTDEBT EQUITYEQUITY
  • 3. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities probable debts or obligations of an entity arising from past transactions or events which will be paid with assets or services probable debts or obligations of an entity arising from past transactions or events which will be paid with assets or services Current Liabilities Noncurrent Liabilities I.O.U. Maturity = 1 year or less Maturity > 1 year
  • 4. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities
  • 5. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities PROMISSORY NOTE Location Date after this date promises to pay to the order of the sum of with interest at the rate of per annum. signed title Miami, Fl Nov. 1, 2007 Six months Porter Company Security National Bank $10,000.00 12.0% John Caldwell treasurer
  • 6. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities A note payable specifies the interest rate associated with the borrowing. To the lender, interest is a revenue. To the borrower, interest is an expense.. A note payable specifies the interest rate associated with the borrowing. To the lender, interest is a revenue. To the borrower, interest is an expense.. Interest = Principal × Interest Rate × Time When computing interest for one year, “Time”When computing interest for one year, “Time” equals 1. When the computation period is lessequals 1. When the computation period is less than one year, then “Time” is a fraction.than one year, then “Time” is a fraction. When computing interest for one year, “Time”When computing interest for one year, “Time” equals 1. When the computation period is lessequals 1. When the computation period is less than one year, then “Time” is a fraction.than one year, then “Time” is a fraction.
  • 7. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities $10,000 × 12% × 2 /12 = $200$10,000 × 12% × 2 /12 = $200 What entry would Porter Company make on December 31, the fiscal year-end? What entry would Porter Company make on December 31, the fiscal year-end?
  • 8. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities What entry would Porter Company would make on January 31, 2008 when they pay the note? What entry would Porter Company would make on January 31, 2008 when they pay the note? $10,000 × 12% × 1 /12 = $100$10,000 × 12% × 1 /12 = $100
  • 9. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities Gross Pay Net Pay Medicare Tax State and Local Income Taxes Social Security Tax Federal Income Tax Voluntary Deductions Less Deductions:
  • 10. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities Contingent Liability Examples
  • 11. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities Operating LeasesOperating Leases Capital LeasesCapital Leases Lease agreement transfers risks and benefits associated with ownership to lessee. Lease agreement transfers risks and benefits associated with ownership to lessee. Lessee records a leased asset and lease liability. Lessee records a leased asset and lease liability. Lessor retains risks and benefits associated with ownership. Lessor retains risks and benefits associated with ownership. Lessee records rent expense as incurred. Lessee records rent expense as incurred.
  • 12. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities T h e l e a s e t r a n s f e r s o w n e r s h i p t o t h e l e s s e e . T h e l e a s e c o n t a i n s a b a r g a i n p u r c h a s e o p t i o n . T h e l e a s e t e r m i s e q u a l t o o r > 7 5 % o f t h e e c o n o m i c l i f e o f t h e p r o p e r t y . T h e P V o f t h e m i n i m u m l e a s e p a y m e n t s = 9 0 % o f t h e F M V o f t h e p r o p e r t y . A l e a s e m u s t b e r e c o r d e d a s a C a p i t a l L e a s e i f i t m e e t s a n y o f t h e f o l l o w i n g c r i t e r i a .
  • 13. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities $1,000 invested today at 10%. In 5 years it will be worth $1,610.51. In 25 years it will be worth $10,834.71! Present Value Present Value Future Value Future Value Money can grow over time, because it can earn interest.
  • 14. Year Amount at Start of Year + Interest During the Year = Amount at End of Year 1 $1,000 + $1,000 X 10% = $100 = $1,100 2 1,100 + 1,100 X 10% = 110 = 1,210 3 1,210 + 1,210 X 10% = 121 = 1,331 4 1,331 + 1,331 X 10% = 133 = 1,464 5 1,464 + 1,464 X 10% = 146 = 1,610 $1,000 x 1.6105 = $1,610.5 From Future Value Table, Interest rate = 10% n = 10
  • 15. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities The growth is a mathematical function of four variables: 1. The value today (present value). 2. The value in the future (future value). 3. The interest rate. 4. The time period. The growth is a mathematical function of four variables: 1. The value today (present value). 2. The value in the future (future value). 3. The interest rate. 4. The time period.
  • 16. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities The present value of a single amount is the worth to you today of receiving that amount some time in the future. Interest compounding periodsPresent Value Future Value Today
  • 17. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes How much do we need to invest today at 10% interest, compounded annually, if we need $1,331 in three years? a. $1,000.00 b. $ 990.00 c. $ 751.30 d. $ 970.00 How much do we need to invest today at 10% interest, compounded annually, if we need $1,331 in three years? a. $1,000.00 b. $ 990.00 c. $ 751.30 d. $ 970.00 Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities
  • 18. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes How much do we need to invest today at 10% interest, compounded annually, if we need $1,331 in three years? a. $1,000.00 b. $ 990.00 c. $ 751.30 d. $ 970.00 How much do we need to invest today at 10% interest, compounded annually, if we need $1,331 in three years? a. $1,000.00 b. $ 990.00 c. $ 751.30 d. $ 970.00 The required future amount is $1,331. i = 10% & n = 3 years Using the present value of a single amount table, the factor is . $1,331 × = $1,000 (rounded) The required future amount is $1,331. i = 10% & n = 3 years Using the present value of a single amount table, the factor is . $1,331 × = $1,000 (rounded) Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities .7513 .7513
  • 19. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities An annuity is a series of consecutive equal periodic payments. Today Present Value Interest compounding periods Payment 1 Payment 2 Payment 3
  • 20. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes What is the present value of receiving $1,000 each year for three years at an interest rate of 10%, compounded annually? a. $3,000.00 b. $2,910.00 c. $2,700.00 d. $2,486.90 What is the present value of receiving $1,000 each year for three years at an interest rate of 10%, compounded annually? a. $3,000.00 b. $2,910.00 c. $2,700.00 d. $2,486.90 Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities
  • 21. Group 5: Jeffrey Austria, Elsie Calubayan, Alvin Dela Cruz, Ma. Eunice Granado, Liza Minaballes What is the present value of receiving $1,000 each year for three years at an interest rate of 10%, compounded annually? a. $3,000.00 b. $2,910.00 c. $2,700.00 d. $2,486.90 What is the present value of receiving $1,000 each year for three years at an interest rate of 10%, compounded annually? a. $3,000.00 b. $2,910.00 c. $2,700.00 d. $2,486.90 Reporting and Interpreting LiabilitiesReporting and Interpreting Liabilities The consecutive equal payment amount is $1,000. i = 10% & n = 3 years Using the present value of an annuity table, the factor is . $1,000 × = $2,486.90 The consecutive equal payment amount is $1,000. i = 10% & n = 3 years Using the present value of an annuity table, the factor is . $1,000 × = $2,486.90 2.4869 2.4869
  • 22. Share and use Knowledge UNCONDITIONALLY THANK YOU!THANK YOU!