AFM 101 Chapter 10 Notes.docx
AFM 101 Chapter 10 Notes.docx

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University of Waterloo
Accounting & Financial Management
AFM 101
Donna Psutka

AFM 101 Chapter 10 NotesChapter 10 Reporting and Interpreting Current LiabilitiesLiability Debts or obligations that a company has from past transactions that will be paid through assets or services ie Notes payable accounts payableWhen a liability is first recorded it is measured in terms of its current cash equivalent which is the cash amount that a creditor would accept to settle the liability immediatelyLiabilities are very important from an analytical perspective because they affect a companys future cash flows and risk characteristicsDifferent types of liabilities are categorized differently ieShortterm notes payable income tax payableMost liabilities are recorded as they occur others need to be adjusted Some are exact values but some must be estimated because their exact value cannot be determined until a later timeie A liability for product warranty will not be known until the repair work is carried out in the futureCurrent Cash Equivalent The cash amount that a creditor would accept to settle the liability immediatelyIn terms of different types of notes payable there is usually an interest expenseInterest payable in the future is not included in the amount of the liability because it accrues increases over time and becomes a liability with the passage of timeCurrent Liabilities Shortterm obligations that will be paid within the normal operating cycle or one year on the balance sheet whichever is longer ie Trade payable HST payable shortterm notes payable current portion of longterm debt unearned revenue accrued liabilitiesLiquidity The ability to pay current obligationsCompanies that do not settle their current obligations in a timely manner quickly find that suppliers of goods and services may not be prepared to grant them credit for their purchases and may be forced to seek shortterm financing through banks Current Ratio measurement of liquidityCurrent RatioCurrent AssetsCurrent LiabilitiesAnalysts use the current ratio as an indicator of the amount of current assets available to satisfy current liabilitiesAnalysts use the current ratio to answer Does the company currently have the resources to pay its shortterm debt x0 is good
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