MGTB06 Chapter 10 Notes.docx

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University of Toronto Scarborough
Financial Accounting
G.Quan Fun

MGTB06 Chapter 10—Reporting 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 sales—GST and PST are liabilities payable to the government for purchases—GST is a revenue expenditure and thus recoverable whereas PST is a capital expenditure companies may record unpaid salaries with the cost of unpaid benefits which include retirement programs, vacation time, employment insurance, health insurance, etc. employee deductions federal and provincial laws requires the employer to deduct an appropriate amount of income tax each period which is remitted to the government, is a current liability to the company other deductions such as employment insurance (EI), contributions to Canada Pension Plan (CPP), etc., are also liabilities to the company because these are contributions that the company must remit to the other appropriate agencies Notes Payable the time value of money is the interest that is associated with the use of money over time, is the reason why creditors are willing to lend cash, the greater the lending period the greater the interest expense Interest = Principle × Annual Interest Ra
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