MGAB02H3 Chapter Notes - Chapter 10: Canada Pension Plan, Current Liability, Unemployment Benefits

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Published on 12 Apr 2013
School
UTSC
Department
Financial Accounting
Course
MGAB02H3
Professor
MGTB06 Chapter 10Reporting and Interpreting Current
Liabilities
capital structure is the mixture of debt and equity that finances short- and long-term operating
requirements of a company
from a firm’s perspective, debt capital is riskier than equity because interest and principal
payments on debt are legal obligations that must be paid and if not paid can be forced by
creditors into bankruptcy
Liabilities Defined and Classified
liabilities are debts or obligations arising from past transactions that will be paid with assets
and services
current liabilities are short-term obligations that will be paid within the normal operating
cycle or one year, whichever is longer
non-current liabilities include all other liabilities
liquidity is the ability to pay current obligations
Current Ratio
Current Ratio = Current Assets ÷ Current Liabilities
measures the amount of current assets available to satisfy current liabilities, high ratio
suggests good liquidity but too high of a ratio suggests inefficient use of resources
working capital is the difference between current assets and current liabilities; if a business
has too little working capital it runs the risk of not being able to meet it obligations to creditors
but too much working capital may tie up resources in unproductive assets and incur additional
costs
liabilities can both be recorded as they occur during the accounting period and can also be
accrued through adjusting entries at the end of the accounting period
Current Liabilities
Trade Payables
trade payables are the purchases of goods and services from other businesses, that usually
finances the purchase of inventory because interest does not normally accrue on trade
payables
trade payables ratio is a measure of how quickly management is paying trade creditors, high
ratio suggests a company is paying its suppliers in a timely manner
Trade Payables Turnover = Cost of Sales (Net Credit Purchases)/Average Net Trade Payables
Average Age of Payables = Average Trade Payables/(Cost of Sales/365))
Accrued Liabilities
accrued liabilities are expenses that have been incurred but have not been paid at the end of
the accounting period
corporations must pay income taxes on income from active business operations, property
income and capital gains arising from the sale of assets; two components:
current portion is payable within the prescribed time limits
deferred portion arises because of differences between the accounting rules used for
financial reporting and the tax rules corporations must use to determine their taxable
income
other taxes such as GST and PST add to cost of producing and selling goods and services and
are eventually passed on to customers through higher sales prices
for salesGST and PST are liabilities payable to the government
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Document Summary

Capital structure is the mixture of debt and equity that finances short- and long-term operating requirements of a company. From a firm"s perspective, debt capital is riskier than equity because interest and principal payments on debt are legal obligations that must be paid and if not paid can be forced by creditors into bankruptcy. Liabilities are debts or obligations arising from past transactions that will be paid with assets and services. Current liabilities are short-term obligations that will be paid within the normal operating cycle or one year, whichever is longer. Liquidity is the ability to pay current obligations. Current ratio = current assets current liabilities. Measures the amount of current assets available to satisfy current liabilities, high ratio suggests good liquidity but too high of a ratio suggests inefficient use of resources. Liabilities can both be recorded as they occur during the accounting period and can also be accrued through adjusting entries at the end of the accounting period.

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