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Chapter 9

COM 270 Chapter 9: PDF COM 270 Notes - Ch. 9

Course Code
COM 270
Graham Chris

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liability: a item that will require the outflow or sacrifice of economic resources in the future in order to settle a present obligation that exists as a result of a
transaction that has already taken place
provision: liabilities where there is an uncertainty about the timing or amount of future expenditures
current liabilities: expected to be settled within the next 12 months
-help to assess liquidity
-indicate short-term cash requirements
-measurement of current financial health
-normally recorded at their fair value, because the difference between this & their present value is not material
the liability that we incur is the liability we owe (i.e. it doesn’t “depreciate” like assets)
current liabilities with lenders — 3 common current liabilities that arise from transactions with lenders
(1) bank indebtedness: allows for a company to overdraw from its account, which then becomes a loan that must be repaid
-bank overdraft: high interest rate & stand by fee (charged even if you don’t use it)
-line of credit: cheaper than bank overdraft, only charged if used
-demand loan: can be “called” with 3 days notice, requiring the cash back in 3 days
lower interest rate compromises for uncertainty
-revolving credit facility: an agreement between a company & bank, enabling the company to borrow up to a negotiated limit
whenever is needed, & to repay the credit as finds are available
-helps with short-term cash shortages or timing differences
-usually listed as the first item in the current liabilities account
(2) short-term loans (working capital loans): arranged with a bank to cover short-term cash shortages on a demand basis
-secured: specific assts have been pledged to guarantee repayment of the loan
often secured by inventory &/or accounts receivable
the loan has to be paid down, as the secured asset get used up (i.e. using the revenue from the asset to pay off the debt)
-collateral: the assets that have been pledged as security for debt
-usually listed as the first item in the current liabilities account
(3) current portion of long-term debt: principle portion of the blended payments for the LTD due within the next 12 months
-remaining part that will not be paid off in the next year remains LTD
-blended payments: payments on LTD that include both principle & interest components
the principle portion is considered the liability - interest component is just an expense
-reclassification entry: journal entry to reclassify a long-term liability as current !
[debit Long-Term Loan Payable $$$]!
[credit Current Portion of Long-Term Debt $$$]
-usually listed as the last item in the current liabilities account
represents 12 months worth of liabilities/payments, therefore it will most likely be paid off last
current liabilities with suppliers — occur when a company buys goods or services on credit from a supplier (i.e. B2B transactions)
-(trade) accounts payable (supplier credit): amount bought on credit from suppliers
-generally need to paid within 30-60 days
-commonly thought of as “free debt” - do not carry explicit interest charges (unless overdue)
are essentially “borrowing” something without having to pay for it up front
-can have provisions for early payment discounts (e.g. 2/10, net 30 = “2% discount if paid within 10 days, otherwise total due in 30 days”)
current liabilities with customers — a number of current liabilities that arise from ordinary transactions between a company & its customers/clients
-unearned revenue (gift cards, deposits, etc.): has received payment in advance to actually providing the good or service
(a) when the customer makes the pre-payment:!
[debit Cash $$$]!
[credit Unearned Revenue/Gift Card Liability $$$]
(b) when the good/service is provided (often in subsequent accounting period): !
[debit Unearned Revenue/Gift Card Liability $$$]!
[credit Sales Revenue $$$]
other current liabilities —
(1) warranties: if a product proves to be defective, the company must repair, replace, or refund the customer
-a liability to do something
(2) payroll liabilities: liabilities owed to the government
(i) unpaid wages: wages owed to employees for hours worked
(ii) payroll taxes:
pensions - CPP (employee & employer portions)
employment insurance - (employee & employer portions)
income tax - collected by employer on behalf of the government
(iii) sale taxes collected: revenue collected, but not recorded on the F.S’s, because they do not belong to us
PST (7%), GST (5%), etc.
(iv) share holder obligations:
shareholder loans - loans from shareholders to the firm
dividends payable - dividends owing (declared, but not yet payed)
COM 270 - Chapter 9: Current Liabilities
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