Download to read offline
Uploaded byDr. Ahmed Hassan, PhD, DBA, PMP
chapter_09.ppt
This document provides a summary of key concepts related to liabilities from Chapter 9 of an accounting textbook. It defines current and noncurrent liabilities, and discusses specific current liability accounts like accounts payable, accrued liabilities, and notes payable. It also covers liability ratios like the current ratio and accounts payable turnover ratio. Additionally, it discusses long-term liabilities such as notes payable, bonds, and capital versus operating leases. The chapter explores the time value of money concept of present value as it applies to liabilities.
More Related Content
More from Dr. Ahmed Hassan, PhD, DBA, PMP
chapter_09.ppt
- 1. Copyright © 2007by The McGraw-Hill Companies, Inc. All rights reserved. Reporting and Interpreting Liabilities Chapter 9
- 2. 9-2 Understanding the Business Theacquisition of assets is financed from two sources: Debt - funds from creditors Equity - funds from owners
- 3. 9-3 Understanding the Business Debtis considered riskier than equity. Interest is a legal obligation. Creditors can force bankruptcy.
- 4. 9-4 Learning Objectives Define, measure,and report current liabilities.
- 5. 9-5 Liabilities Defined andClassified Defined as probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services. Maturity = 1 year or less Maturity > 1 year Current Liabilities Noncurrent Liabilities
- 6. 9-6 Liabilities Defined andClassified Liabilities are measured at their current cash equivalent (the amount a creditor would accept to cancel the debt) at the time incurred.
- 7. 9-7 Current Liabilities Account Name Also Called Definition Accounts Payable Trade Accounts Payable Obligationsto pay for goods and services used in the basic operating activities of the business. Accrued Liabilities Accrued Expenses Obligations related to expenses that have been incurred, but will not be paid until the subsequent period. Notes Payable N/A Obligations due supported by a formal written contract. Deferred Revenues Unearned Revenues Obligations arising when cash is received prior to the related revenue being earned.
- 8. 9-8 Net Pay Medicare Tax State and LocalIncome Taxes Social Security Tax Federal Income Tax Voluntary Deductions Gross Pay Payroll Taxes Less Deductions:
- 9. 9-9 Learning Objectives Use thecurrent ratio.
- 10. 9-10 Current Ratio Current Ratio= Current Assets ÷ Current Liabilities An important indicator of a company’s ability to meet its current obligations. Current Ratio = Current Assets ÷ Current Liabilities 1.52 = $924.00 ÷ $608.70 Starbucks has current assets of $924 and current liabilities of $608.7. Starbucks Panera Bread Krispy Kreme 1.52 1.53 1.94 2003 Current Ratios
- 11. 9-11 Learning Objectives Analyze theaccounts payable turnover ratio.
- 12. 9-12 Accounts Payable TurnoverRatio Accounts Payable Turnover Measures how quickly management is paying trade accounts. Accounts Payable Turnover = Cost of Goods Sold ÷ Average Accounts Payable 11.06 = $1,685.90 ÷ $152.50 Starbucks has cost of goods sold of $1,685.9 and average accounts payable of $152.5. Cost of Goods Sold Average Accounts Payable = ÷ Starbucks Panera Bread Krispy Kreme 11.00 9.29 N/A 2003 Accounts Payable Turnover Ratios
- 13. 9-13 Learning Objectives Report notespayable and explain the time value of money.
- 14. 9-14 Notes Payable A notepayable 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” equals 1. When the computation period is less than one year, then “Time” is a fraction.
- 15. 9-15 Notes Payable Starbucks borrows $100,000for 2 months at an annual interest rate of 12%. Compute the interest on the note for the loan period. Interest = Principal × Interest Rate × Time Interest = 100,000 $ × 12% × 2 /12 Interest = 2,000 $
- 16. 9-16 Learning Objectives Report contingentliabilities.
- 17. 9-17 Contingent Liabilities Probability offuture sacrifice . . . Reasonably Probable Possible Remote Record Disclose Amount contingent liability in the No Can be liability. notes to the action. Estimated financial stmts. Disclose Disclose Amount liability in the liability in the No Cannot be notes to the notes to the action. Estimated financial stmts. financial stmts. Potential liabilities that arise because of events or transactions that have already occurred.
- 18. 9-18 Learning Objectives Explain theimportance of working capital and its impact on cash flows.
- 19. 9-19 Working Capital Management Changesin working capital accounts affect cash flows as indicated in the following table. Change in Account Balance During Year Increase Decrease Current Reduce cash Increase cash Assets flows. flows. Current Increase cash Reduce cash Liabilities flows. flows. Working Capital = Current Assets - Current Liabilities
- 20. 9-20 Learning Objectives Report long-termliabilities.
- 21. 9-21 Long-Term Liabilities Creditors oftenrequire the borrower to pledge specific assets as security for the long-term liability. Maturity = 1 year or less Maturity > 1 year Current Liabilities Long-term Liabilities
- 22. 9-22 Long-Term Notes Payableand Bonds Relatively small debt needs can be filled from single sources. Banks Insurance Companies Pension Plans or
- 23. 9-23 Long-Term Notes Payableand Bonds Significant debt needs are often filled by issuing bonds to the public. Cash Bonds
- 24. 9-24 Borrowing in ForeignCurrencies When a company has operations in a foreign country, it often borrows in the local currency. This reduces exchange rate risk. Because interest rates vary from country to country, companies may borrow in the foreign market with the lowest interest rate.
- 25. 9-25 Operating and CapitalLeases Operating Lease Short-term lease; No liability or asset recorded Capital Lease Long-term lease; Meets one of 4 criteria; Results in recording an asset and a liability Capital Lease Criteria 1. Lease term is 75% or more of the asset’s expected economic life. 2. Ownership of asset is transferred to lessee at end of lease. 3. Lease permits lessee to purchase the asset at a price that is lower than its fair market value. 4. The present value of the lease payments is 90% or more of the fair market value of the asset when the lease is signed.
- 26. 9-26 Learning Objectives Compute presentvalues. Apply present value concepts to liabilities.
- 27. 9-27 Present Value Concepts Moneycan grow over time, because it can earn interest. $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!
- 28. 9-28 Present Value Concepts Thegrowth 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.
- 29. 9-29 Present Value Concepts Mostanalysts use present value tables, calculators, or Excel to solve time value of money problems. We will use the present value tables in our illustrations (an explanation of how to use Excel is included in the supplement to this chapter).
- 30. 9-30 Present Value ofa Single Amount The present value of a single amount is the worth to you today of receiving that amount some time in the future. Today Present Value Future Future Value Interest compounding periods
- 31. 9-31 Present Value ofa Single Amount 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
- 32. 9-32 How much dowe 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 Present Value of a Single Amount The required future amount is $1,331. i = 10% & n = 3 years Using the present value of a single amount table, the factor is .7513. $1,331 × .7513 = $1,000 (rounded)
- 33. 9-33 Present Values ofan Annuity An annuity is a series of consecutive equal periodic payments. Today
- 34. 9-34 Present Values ofan Annuity What is the value today of a series of payments to be received or paid out in the future? Today Present Value Interest compounding periods Payment 1 Payment 2 Payment 3
- 35. 9-35 Present Values ofan Annuity 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
- 36. 9-36 What is thepresent 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 Present Values of an Annuity The consecutive equal payment amount is $1,000. i = 10% & n = 3 years Using the present value of an annuity table, the factor is 2.4869. $1,000 × 2.4869 = $2,486.90
- 37. 9-37 Accounting Applications ofPresent Values On January 1, 2006, Starbucks bought some new delivery trucks. The company signed a note agreeing to pay $200,000 on December 31, 2007. The market interest rate for this note is 12%. Future value 200,000 $ PV of $1 (i=12%, n=2) × 0.79720 Present value 159,440 $ Let’s prepare the journal entry to record the purchase.
- 38. 9-38 Accounting Applications ofPresent Values Debit Credit Jan. 1 Delivery trucks 159,440 Notes payable 159,440 Date Description GENERAL JOURNAL Now, let’s look at the journal entry at December 31, 2006. Debit Credit Dec. 31 Interest expense 19,133 Notes payable 19,133 Date Description GENERAL JOURNAL Present Value × Interest Rate = Interest $159,440 × 12% = $19,133
- 39. 9-39 Accounting Applications ofPresent Values Now, let’s look at the journal entries at December 31, 2007. Debit Credit Dec. 31 Interest expense 21,429 Notes payable 21,429 31 Notes payable 200,000 Cash 200,000 Date Description GENERAL JOURNAL Present Value × Interest Rate = Interest ($159,440 + $19,133) × 12% = $21,429
- 40. 9-40 Income Taxes andRetirement Benefits Chapter Supplement A
- 41. 9-41 Income Taxes andRetirement Benefits Deferred Taxes Exist because of timing differences caused by reporting revenues and expenses according to GAAP on a company’s income statement and according to the Internal Revenue Code on the tax return. Temporary Differences Timing differences that cause deferred income taxes and will reverse, or turn around, in the future.
- 42. 9-42 Income Taxes andRetirement Benefits Some pension plans create obligations during employees’ service periods that must be paid during their retirement periods. The amounts contributed during the employment period are determined using present value computations of the estimate of the future amount to be paid during retirement.
- 43. 9-43 Federal Income TaxConcepts Chapter Supplement B
- 44. 9-44 Federal Income TaxConcepts Corporations Are separate legal entities and are required to pay income taxes. Tax Obligation Determined by multiplying taxable income by the corporate tax rate.
- 45. 9-45 Revenue and ExpenseRecognition for Income Tax Purposes 1. Interest revenue on state and municipal bonds is generally excluded from taxable income although it is included in accounting income. 2. Revenue collected in advance is included in taxable income when it is collected and in accounting income when it is earned. 3. Proceeds from life insurance policies are excluded from taxable income but included in accounting income. 4. Corporations that own less than 20% of another corporation’s stock may exclude 70% of the dividends received from taxable income, although all dividends are included in accounting income. 5. For tax purposes, depreciation expense is generally based on the Accelerated Cost Recovery System (ACRS) or on the Modified Accelerated Cost Recovery System (MACRS).
- 46. 9-46 Tax Minimization VersusTax Evasion
- 47. 9-47 Present Value Computations UsingExcel Chapter Supplement C
- 48. 9-48 Present Value ComputationsUsing Excel Use the present value of an annuity formula programmed in Excel by selecting the function button (fx). In the drop down menu, under the Select Category heading, pick "Financial" and scroll down under Select Function and click on "PV." In the new drop down box, enter the specific information for your problem and click "OK." = Payment/(1 + i)^n Present Value of A Single Amount Formula Present Value of An Annuity Formula
- 49. 9-49 Future Value Concepts ChapterSupplement D
- 50. 9-50 Future Value ofa Single Amount How much will an amount today be worth in the future? Today Present Value Future Value Interest compounding periods Future value is the sum to which an amount will increase as the result of compound interest.
- 51. 9-51 Future Value ofa Single Amount If we invest $1,000 today earning 10% interest, compounded annually, how much will it be worth in three years? a. $1,000 b. $1,010 c. $1,100 d. $1,331
- 52. 9-52 If we invest$1,000 today earning 10% interest, compounded annually, how much will it be worth in three years? a. $1,000 b. $1,010 c. $1,100 d. $1,331 Future Value of a Single Amount The invested amount is $1,000. i = 10% & n = 3 years Using the future value of a single amount table, the factor is 1.331. $1,000 × 1.331 = $1,331
- 53. 9-53 Future Value ofan Annuity Equal payments are made each period. The payments and interest accumulate over time. Today Interest compounding periods Payment 1 Payment 2 Payment 3
- 54. 9-54 Future Value ofan Annuity If we invest $1,000 each year at an interest rate of 10%, compounded annually, how much will we have at the end of three years? a. $3,000 b. $3,090 c. $3,300 d. $3,310
- 55. 9-55 If we invest$1,000 each year at an interest rate of 10%, compounded annually, how much will we have at the end of three years? a. $3,000 b. $3,090 c. $3,300 d. $3,310 Future Value of an Annuity The annual investment amount is $1,000. i = 10% & n = 3 years Using the future value of an annuity table, the factor is 3.3100. $1,000 × 3.3100 = $3,310
- 56.