introduction to liabilities: economic consequences, current liabilities, and contingencies
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Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies. Presentations for Chapter 10 by Glenn Owen. Key Points. Definition of a liability. Economic consequences associated with reporting liabilities on the financial statements. - PowerPoint PPT PresentationTRANSCRIPT
Introduction to Liabilities:Introduction to Liabilities:Economic Consequences, Economic Consequences,
Current Liabilities, and Current Liabilities, and ContingenciesContingencies
Presentations for Chapter 10 by Glenn Owen
Key PointsKey PointsDefinition of a liability.Economic consequences associated with
reporting liabilities on the financial statements.Determinable and contingent liabilities.Current liabilities.Bonus systems and profit-sharing arrangements
and the reporting incentives they create.Methods used to account
for contingencies.
What is a Liability?What is a Liability?
“Probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”
Present obligations. Unavoidable obligations. Transaction or event must
have already happened.
Liabilities as a Percentage Liabilities as a Percentage of Total Assetsof Total Assets
Company (Industry)
Liabilities /Total Assets
General Electric (Manufacturing) .88
Chevron Oil (Oil drilling and refining) .52
Super Value (Grocery) .73
Tommy Hilfiger (Clothing) .46
Yahoo (Internet search engine) .16
Cisco (Internet systems) .19
SBC Communications (Telcom services) .69
Wendy’s (Restaurant services) .43
Bank of America (Banking services) .93
Merrill Lynch (Investment services) .95
Reporting Liabilities on the Balance Reporting Liabilities on the Balance Sheet: Economic ConsequencesSheet: Economic Consequences
Stockholders and investors Creditors Management Auditors
Current Liabilities as a Percentage Current Liabilities as a Percentage of Total Liabilitiesof Total Liabilities
Company (Industry)
Current Liabilities /Total Liabilities
General Electric (Manufacturing) .41
Chevron Oil (Oil drilling and refining) .36
Super Value (Grocery) .56
Tommy Hilfiger (Clothing) .29
Yahoo (Internet search engine) .91
Cisco (Internet systems) .82
SBC Communications (Telcom services) .45
Wendy’s (Restaurant services) .47
Bank of America (Banking services) .88
Merrill Lynch (Investment services) .82
Current LiabilitiesCurrent Liabilities
Valuing current liabilities on the balance sheet– Ignore present value– Report at face value
Reporting current liabilities– Primary problem is ensuring that all existing current
liabilities are reported on the balance sheet.
Determinable Current LiabilitiesDeterminable Current Liabilities
Accounts payable Short-term debts
– Short-term notes– Current maturities of long-term debts
Dividends payable Unearned revenues Third-party collections Income taxes Incentive compensation
Accrued LiabilitiesAccrued Liabilities
Normal accrued liabilities– Wages payable– Salary payable– Interest payable– Rent payable– Insurance payable– Property taxes payable
Conditional accrued liabilities– Income tax liabilities– Incentive compensation
Contingencies and Contingencies and Contingent LiabilitiesContingent Liabilities
Alternatives to loss contingencies– Ignore– Disclose– Accrue
Warranties– Uncertain future costs– Record expense and liability when
products are sold (matching concept)– As costs are incurred, charge expenditure
to warranty liability
Accounting for ContingenciesAccounting for Contingencies
Contingent Loss
Probability ofOccurrence
Accounting Treatment
High Reasonable Remote
Disclose Ignore
NoYes
Estimable?
DiscloseAccrue
Contingent Gain
Probability ofOccurrence
Accounting Treatment
High Reasonable Remote
Ignore IgnoreDisclose
Accounting for ContingenciesAccounting for Contingencies
Current Assets Current Liabilities
Review Problem
Beg. Bal. $69,000 $38,000 1.82
Current Ratio
(1) Inventory (+A) 5,000Accounts Payable (+L) 5,000
To record merchandise in-transit.
Current Assets Current Liabilities
Journal Entries and T-accounts
Beg Bal $69,000 $38,000 1.82(1) +5,000 +5,000 1.72
Current Ratio
(2) Interest Expense (E, -SE) 500Discount on Note (+L) 500
To accrue interest on note.
Current Assets Current Liabilities
Journal Entries and T-accounts
Beg Bal $69,000 $38,000 1.82(1) +5,000 +5,000 1.72(2) +500 1.70
Current Ratio
(3) No entry required for future payment on long-term debt obligation.
Current Assets Current Liabilities
Journal Entries and T-accounts
Beg Bal $69,000 $38,000 1.82(1) +5,000 +5,000 1.72(2) +500 1.70(3) 1.70
Current Ratio
(4) Unearned Revenue (-L) 1,000Earned Revenue (R, +SE) 1,000
To record earned revenue.
Current Assets Current Liabilities
Journal Entries and T-accounts
Beg Bal $69,000 $38,000 1.82(1) +5,000 +5,000 1.72(2) +500 1.70(3) 1.70(4) -1,000 1.74
Current Ratio
(5) Wage Expense (E, -SE) 4,000Wages/Tax Payable (+L) 4,000
To record wages and taxes owed.
Current Assets Current Liabilities
Journal Entries and T-accounts
Beg Bal $69,000 $38,000 1.82(1) +5,000 +5,000 1.72(2) +500 1.70(3) 1.70(4) -1,000 1.74(5) +4,000 1.59
Current Ratio
(5) Tax Expense (E, -SE) 400Tax Payable (+L) 400
To record accrued taxes.
Current Assets Current Liabilities
Journal Entries and T-accounts
Beg Bal $69,000 $38,000 1.82(1) +5,000 +5,000 1.72(2) +500 1.70(3) 1.70(4) -1,000 1.74(5) +4,000 1.59
+400 1.58
Current Ratio
(6) Income Tax Expense (E, -SE) 2,000Income Tax Payable (+L) 2,000
To record income tax liability.
Current Assets Current Liabilities
Journal Entries and T-accounts
Beg Bal $69,000 $38,000 1.82(1) +5,000 +5,000 1.72(2) +500 1.70(3) 1.70(4) -1,000 1.74(5) +4,000 1.59
+400 1.58(6) +2,000 1.51
Current Ratio
(7) Contingent Loss (E, -SE) 8,000Contingent Liability (+L) 8,000
To record contingent loss on lawsuit.
Current Assets Current Liabilities
Journal Entries and T-accounts
Beg Bal $69,000 $38,000 1.82(1) +5,000 +5,000 1.72(2) +500 1.70(3) 1.70(4) -1,000 1.74(5) +4,000 1.59
+400 1.58(6) +2,000 1.51(7) +8,000 1.30
Current Ratio
C O P Y R I G H T
C o p y r i g h t © 2 0 0 3 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d .R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .