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ACCT Chapter 9 Condensed (Day 1).docx

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ACCT 1201
Ronen Gal-or

Chapter 9 Condensed (Day 1) I. Liabilities Defined and Classified II. Quick Ratio III. Short-Term Liabilities A. Income Taxes Payable B. Accrued Compensation C. Payroll Taxes Payable**** D. Notes Payable E. Current Portion of Long-Term Debt F. Deferred Revenues IV. Contingent Liabilities V. Working Capital Management VI. Long-Term Notes Payable and Bonds VII. Lease Liabilities VIII. Present Value Concepts IX. Future Value Concepts I. Liabilities Defined and Classified A. Liabilities - are probable debts or obligations that result from past transactions, which will be paid with assets or services examples: A/P, N/P, Deferred/Unearned Revenue, payables… 1. The liability is recorded at the cash amount a creditor would accept to settle the liability immediately 2. Classifications of liabilities on the balance sheet: i. Current liabilities – defined as short-term obligations that will be paid within the current operating cycle of the business or within one year of the balance sheet date, whichever is longer. ii. Noncurrent liabilities – include all other liabilities 3. Liquidity – the ability to pay current obligations (ratio we have already learned is the current ratio) II. Quick Ratio A. Liquidity Ratio – Similar to Current Ratio, the only difference is the numerator Quick Ratio = Quick Assets ÷ Current Liabilities Quick Assets = Cash + Marketable Securities + Accounts Receivable High quick ratio normally suggests good liquidity; too high a ratio suggests inefficient use of resources. 1 Which of the following accounts would not be considered when calculating the quick ratio? A. Marketable securities. B. Inventory. C. Accounts receivable. D. Accounts payable. A company has a quick ratio of 1.9 before paying off a large current liability with cash. As a result, what happens to the quick ratio? A. It is greater than 1.9. B. It is less than 1.9. C. It remains equal to 1.9. D. It is either greater than 1.9 or less than 1.9 depending upon the dollar amount involved. Dr. A/P (current liabilities) goes down Cr. Cash (asset) goes down Quick Assets go down / Current liabilities go down 1.9 - .5 = 1.4 1 - .5 = .5 ratio = 2.8 III. Short-Term Liabilities Multi-Step Income Statement 12/31/XX Gross Sales Less: Credit Card Discounts, Sales Returns & Allowances, Sales Discounts = Net Sales Less: Cost of Goods Sold = Gross Profit (gross profit percentage = gross profit/net sales) Less: Operating Expenses (SG&A: rent, utilities, salaries/wages, supplies, Bad Debt, Depreciation & Amortization) = Income from Operations Less: Peripheral Activities (asset/goodwill impairment, gain/loss on sale) Less: Interest Expense = Income Before Taxes A. Income Taxes Payable = Income before Taxes * Corporate Tax Rate 1) Like individuals, corporations must pay taxes on the income they earn 2) Corporate tax rates are graduated; large corporations paying a top federal tax rate of 35% 3) Corporations may also pay state and local income taxes and, in some cases, foreign income taxes Adjusting Entry Dr. Income Tax Expense Cr. Income Taxes Payable 2 B. Accrued Compensation 1) At the end of each period, there are usually wages and salaries not yet paid Adjusting Entry Dr. Wage and Salary Expense Cr. Wage and Salary Payable 2) Companies must also report the cost of unpaid benefits, including retirement programs, vacation time, and health insurance = compensation Eg. Accrued Vacation Liability – On 12/31/2010, Starbucks estimates the cost of accrued vacation time to be $125,000 12/31/ 2010 Dr. Compensation Expense 125,000 Cr. Accrued Vacation Payable 125,000 In 2011, Vacation Days taken by employees 2011 Dr. Accrued Vacation Payable 125,000 Cr. Cash 125,000 C. Payroll Taxes Payable 1) All payrolls are subject to a variety of taxes, including federal, state, and local income taxes, Social Security taxes, and federal and state unemployment taxes - Employees pay some; employers pay others 2) Calculating payroll tax i. Employers are required to withhold income taxes for each employee and pay the government directly. ii. Social Security taxes are required by the Federal Insurance Contributions Act (FICA). FICA taxes are imposed in equal amounts on both the employee and the employer iii. Employer Unemployment Taxes are required by the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Acts (SUTA). FUTA and SUTA only paid by the employer. Example: Starbucks accumulated the following info in its records for the first two weeks of June 2011: Salaries and wages earned $1,800,000 Income taxes withheld 275,000 FICA taxes (employees’ share) 105,000 FUTA taxes (aka unemployment tax) 2,300 The entries to record payroll: a. Amounts paid to employees or withheld from their earnings Dr. Compensation Expense 1,800,000 Cr. Liabilities for Taxes Withheld (Income Taxes Withheld) 275,000 Cr. FICA Payable 105,000 Cr. Cash * PLUG 1,420,000 3 Amounts employers pay from their own funds Dr. Compensation Expense * PLUG 107,300 Cr. FICA Payable 105,000 Cr. FUTA Payable 2,300 D. Notes Payable - formal written contract that specifies the amount
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