Current and Long-Term Liabilities
Current and Long-Term Liabilities MGMT 351
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This 3 page Class Notes was uploaded by Emily McIlhattan on Thursday January 15, 2015. The Class Notes belongs to MGMT 351 at Purdue University taught by Byong Ro in Winter2015. Since its upload, it has received 295 views. For similar materials see Intermediate Accounting II in Accounting at Purdue University.
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Date Created: 01/15/15
MGMT 351 Week 1 Notes Accounting Numbers and Company Value 1 The fundamental accounting model and its derivatives basic balance sheet equation Assets Liabilities Equity Owner s Equity can be lnvested Capital by owners price owner s pay to purchase stock Accumulated Income RE capital carried by doing the business over time 2 AccountingBased Company Valuation Model A Valuation Value Value Invested Value Added Created B Valuation Model V BV Future ErBVr V value of company now BVbook value of OE from balance sheet EAccounting earnings expected NI r cost of capital discount rate required rate of return C Derivatives PB ratio and PE ratio 3 Three Fundamental Questions i What are the two most important bottomline accounting numbers in view of company valuation quot Owner s Equity and NI ii How does each accounting even transaction affect the two bottomline numbers iii How does the result of the event likely affect the value of the company through those two bottomline numbers Increase vs Decrease quot Keep these Questions in mind Current Liabilities 1 De nition of liability probable future sacri ce of economic resources assets to ful ll present obligations that result form past events They are claims by nonowners for the economic resources assets of an entity a 3 characteristics conditions i Probable future sacri ce of economic resources assets ii Present obligations must do it ill Result of a past event Types Determinable Estimable and Contigent 2 What are current liabilities liabilities that are to be cleared of paid by 1 sacri cing economic resources OR 2 creating other liabilities in one year of operating cycle whichever is Longer quotshould be reported as noncurrent if they are to repaid with a longterm nancing issuing stocks or bonds 3 ReportingMeasuring a Present Value PV in theory at FV Face Value if FacePV 4 Determinable current liabilities no need to estimate amounts are already known a EX Accounting Payable Notes Payable accrued expenses payables interest rent income property sales taxes payable current portion of LT debt Line of Credit a special nancing arrangement with a lender which allows a borrower to use the lender s money up to prenegotiated credit limit without going through the usual creditloan approval process only the used amount of LOC is recognized as a liability 5 Estimated Liabilities current liabilities whose amount is not determined now but can be estimated with accuracy reasonably accuracy P 1947 Record an Estimated Warranty Liability at the point of sale Warrant Liability EX HP 191 you don t know total warranty until all the warranty claims have gone through at time of sale so Accounting says you must estimate expenses of providing a warranty in the year of sale JE Debit Warranty ExpenseCredit Estimated Warranty Liability lf warranty service is actually performed later Debit Estimated Warranty Liability Credit Parts Cash Wages Payableetc 6 Contingent Liabilities these are not real liabilities now by may become real liabilities if something a contingent event happens in the future pending lawsuit wingain loss is a loss gain contingency is not recognized as an asset Unless its likelihood is HIGHLY LIKELY Conditions for Loss 1 Likelihood of event happening as you see it now a Probable b Reasonable Possible c Remote Do nothing 2 Estimability of gainloss a For probable reasonable estimable recognize as a loss and liability Not estimable Disclose in notes b For reasonably possible Disclose in Notes Info included in disclosure 0 Nature of liability what is it about 0 Amount 0 Timing o Attorney and Management s opinion 0 Possible consequences Requires professional judgment A gain contingency is treated similarly but more conservatively Main difference must be MORE THAN probable to be recognized Fair Value Option companies have an option to report nancial assets and liabilities at their BS date fair values on the BSl BV does not equal FV LongTerm Liabilities Liabiities other than Current Liabilities more than one year or operating cycle EX Mortgages Payable Longterm notes payable Accounted the same except for the name Bonds Payable Lease Pension Deferred income taxes Others certain Short term liabilities those that are to be repaid with the longterm nancing issuance of stocks or bonds 0 Book Value Initial Cost historical cost acquisition cost Sum of Discounted Amortization OR Sum of Premium Amortization Also BV Face Vale Discounted balance remaining or premium balance remaining 0 BV may or may not be the same as the present value 0 Fair Value market value of a given point in time Longterm Notes Payable A Types of Notes Payable i Short or Long term Long term can be trading or nontrading if sold on the market there is a prevailing interest rate on similar notes effective rate market wide average rate constantly changes If no market its own interest rate statedprintedcoupon rate ll Interest or noninterest bearing B Measuring NP Reported at Present Value Time Value of Money Concept is huge here refresh in ch 6 of this book If note is noninterest bearing then the PV is less than the Face Value quot Once you have measured it you must record it
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