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Financial Accounting 1 Week 5 Summary
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Financial Accounting 1 Week 5 Summary including readings
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Week 5 :Preparation : Chap 10 : Current
Liabilities
Liabilities: Creditors’ claims on total assets / existing debts and obligations.
A Current liability is expected to be payed within one year or the operating cycle.
However: Non-current liabilities.
Notes payable: if due within one year of the statement of financial position date =
current liabilities.
Consumption taxes: either value-added tax (VAT) or sales tax. VAT collected every
time a business purchases product from another one (≠ sales tax, the business is a
collection agent)
Unearned revenue: when payment received in advance: current liability credited
identifying the source. When recognize the revenue: debits unearned revenue and
credits revenue account.
Salaries and Wages: reported as a current liability + Payroll deductions and bonuses.
°Benefits provided by
governments are funded from
taxes assessed on both
employers and employees. ->
Social Security Taxes / Social
welfare taxes. Companies should report the amount of unremitted employee and
employer Social Security tax on gross wages paid as a current liability.
°Income tax laws require employers to withhold the applicable income tax due to
employees’ wages.
° Bonuses can be given, depending on the company yearly profit. Additional to wages
and salaries and must be included in the yearly net income. Bonuses can reward
outstanding individual performance but be careful to not prevent a considerable
teamwork (objective is to motivate but must be careful about unethical behaving it
could lead to).
Long-term debt -> Liability. Its current maturities also referred as Long-term Debt
Due within One Year.
Provision = liability of uncertain timing or amount (=estimated liability). Can be
current or not, regarding to the due date. Provision has greater uncertainty about the
timing or amount of the future expenditure required to settle the obligation.
Accruing of an expense and related liability for a provision by a company if:
- Has a present obligation due to past event
- Obligation fulfillment will probably (more likely than not to occur >50%,
otherwise not recognized) require an outflow of resources.
- The obligation amount allows reliable estimation.
The estimated cost of honoring product warranty contracts should be recognized as
an expense in the period in which the sale occurs.
, Current liabilities are reported after non-current ones on the statement of financial
position. Notes payable are also before accounts payable.
Current and non-current classification -> Liquidity analyze (the ability to pay
maturing obligations and meet unexpected needs for cash). The relationship of
current assets to current liabilities is critical in this analyze. Relationship expressed
with currency amount (working capital) and ratio (the current ratio).
Excess of current assets over current liabilities = working capital.
Current ratio allows the comparation of different-sized companies and a single
company liquidity at ≠ times. Current ratio = Current Assets ÷ Current Liabilities.
Chap 11: Non-Current Liabilities
Principle types of non-current liabilities obligations: Bonds or long-term notes.
Bonds: form of interest-bearing note payable issued by companies, universities,
governmental agencies. Sold in small denominations ($1,000 or mltpls $1,000) so
attract many investors. When issued = borrowing of money by the bondholder (who
buys it).
≠ types:
- Secured and unsecured: Secured have specific asserts of the issuer pledged as
collateral for the bonds. If secured by real estate: mortgage bond. If by
specified assets set aside= sinking fund bond. Unsecured bonds (=
debentures bonds) are issued against the general credit of the borrower.
- Convertible and Callable: Convertible if can be converted into ordinary shares
at the bondholder’s option. Usually attractive. If the issuing company can buy
back (redeem) the bond at a stated currency amount prior to maturity =
callable bonds.
Governmental laws grant the bonds issuing power to companies. When authorizing
the bond issue, the board of directors must stipulate the number of bonds
authorized, total face value, contractual face interest rate. Often Total bond
authorization > Number bonds usually issued = Flexibility.
Face value: amount of principal the issuing company must pay at maturity date. T
he contractual interest rate (=stated rate) : rate used to determine the amount of
cash interest the issuing company pays and the investor receives. Usually an annual
rate.
Bond indenture: bond’s terms, summarize of the bondholders’ rights and trustees,
and the issuing company obligations. The trustee (usually a financial institution)
keeps each bondholder records, maintains unissued bonds’ custody, hold pledged
property conditional title.
A bond certificate is printed by the issuing company.
Bondholders can at any time sell their bonds to get cash at the current market price
on national securities exchanges. Quoted as a percentage of the face value of the
bond (worth usually $1,000).
A company makes journal entries only when issuing or buying back bonds, or when
converted to ordinary shares.
To determine the price of a bond: time value of money principle. Market price is a
function of three factors: the amount to be received, the length of time until the
amounts are received and the market interest rate (the rate investors demand for
loaning funds).
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