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Canada (158,276)
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ADM1340 (150)
Chapter 10

ADM1340 Chapter 10: The Purpose and Use of Financial Statements - Lamia Chorou

by Bruna
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University of Ottawa
Lamia Chourou

Chapter 10 - Reporting and Analysing Liabilities Reporting and Analysing Liabilities • Current Liabilities o Operating line of credit o Sales taxes o Property taxes o Payroll o Short-term notes payable o Current maturities of non -current debt o Provisions and contingent liabilities • Non-Current Liabilities: Instalment Notes Payable o Fixed principal payments plus interest o Blended principal and interest payments o Current and non-current portions • Statement Presentation and Analysis o Presentation o Analysis Current Liabilities • There are to basic classifications of liabilities o Current liabilities • This is when a debt is paid within one year from the date on the statement of financial position • Most companies pay off their current liabilities with current assets , like cash, instead of creating more liabilities o Non-current liabilities • This is when a debt is paid off after more than a year from the date on the statement of financial position • Users of the financial posit ion want to know the obligations that the company has, current and non -current o If a company has some current liabilities than current assets they often lack liquidity • Which is the ability to pay short -term debt o Users may also look at non-current liabilities in total to assess a company's solvency • Which is the ability to pay its interest and total debt when due • Operating line of credit o Current assets do not always turn into cash at the same time that current liability must be paid, th at’s why more companies have an operating line of credit o Operating line of credit - A pre-arranged agreement to borrow money at a bank, up to an agreed -upon amount • These are usually done on a short term basis o A floating interest rate changes as market interest rates change and is usually based on the prime borrowing rate • These are given when a company uses an operating line of credit o Collateral - Assets pledged as security for the payment of a debt • This is often required by banks as p rotection if the borrower defaults on the loan o Just because a company has a line of credit, it doesn’t • Sales taxes o Sales tax are expressed as a percentage of the sales price o They may take many forms • Goods and Services Tax (GST) - 5% • Provincial Sales Tax (PST) - 0% to 10% • Harmonized Sales Tax (HST) - 13% • Quebec Sales Tax (QST) o When a tax is collected, the retailer normally send them monthly to the sales tax collecto • Tax is rung up in the cash register, so the consumer can know the price of the product i tself o Ex. • Assuming that the March 25 cash register reading for the Islander Corporation show sales of $10,00, and HST is 13%... Cash 11,300 Sales 10,000 Sales Tax Payable 1,300 o When sales are sent, Sales Tax Payable account is debited and Cash is credited • Property taxes o Any business that have property, pay taxes each year o These are charged by municipal and provincial governments, and are calculated at a specific rate for every $100 of the assessed value of the property o This tax is covered for the whole year o Ex. • Tamara Ltd. Owns land and a building, and at the end of the calendar year, March 31, gets a property tax bill for $6,000, payable on May 31 • When the company rec eives the bill, two months have passed… Property Tax Expense ($6,000 * 2/12) 1,000 Property Tax Payable 1,000 • Since the payment is being made for the remaining seven months of the year, prepaid expenses are added… Property Tax Payable 1,000 Property Tax Expense 1,500 Prepaid Property Tax 3,500 Cash 6,000 • During the months where the tax is prepaid another entry is needed Property Tax Expense 3,500 Prepaid Property Tax 3,500 • Payroll o Employers incur three types of liabilities related to the employees' salaries or wages • The net pay owed to employees § This is the amount of salary owed to employees § These are usually paid weekly, biweekly, or monthly § Part-time are paid by the hour or work produced § The gross pay is the total compensation earned by an employee • Employee payroll deductions § This is required to be deducted by law, from the employees' gross pay § A part of their pay is taken about to pay various other parties • Some examples are • Employment Insurance • Canada Pension Plan • Income Tax • Charity • Union Dues • Health and Pension Plans • Some might be mandatory, but some are voluntary § The Net pay is the gross pay minus the payroll deductions • Employer payroll obligations § This is an employer obligation § The employer is expected to pay various payroll costs § The Employee Benefits are the payments made by an employer for pension, insurance, health, and/or other benefits paid on behalf of its employees § Ex. • The accrual of $100,000 weekly payroll Salaries Expense 100,000 CPP Payable 4,950 EI Payable 1,780 Income Tax Payable 20,427 United Way Payable 2,395 Union Dues Payable 1,037 Salaries Payable 69,411 • The company also has to record the employee benefits Employee Benefits Expense 11,947 CPP Payable 4,950 EI Payable 2,492 Workers' Compensation Payable 1,575 Health Insurance Benefit Payable 2,930 • The employer cannot forget to make sure to enter the salaries Salaries Payable 69,411 Cash 69,411 • Short-term notes payable o A promissory note, is a promise to repay a specified amount of money, at a fixed date or on demand • These are used instead of accounts payable, because it gives the lender a written documentation of the obligation o A fixed interest rate is a constant rate for the entire term of th e note o A notes payable is a stronger legal claim o Ex. Cash 100,000 Bank Loan Payable 100,000 • Since notes payable also have rates, it has to be added
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