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Canada (162,369)
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BU127 (159)
Chapter 10

BU127 Chapter 10 Notes

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James Moore

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BU127 Chapter 10 Notes Liabilities Defined and Classified • Liabilities: are debts or obligations arising from past transactions that will be paid  with assets or services • Current Liabilities: are short term obligations that will be paid within the normal  operating cycle or one year; whichever is longer • Working Capital: is the difference between current assets and current liabilities Current Ratio Current Ratio = Current Assets / Current Liabilities • Used as an indicator of the amount of current assets available to satisfy current  liabilities Current Liabilities Trade Payables • Managers can destroy relationships with late payments Trade Payables Turnover Ratio Trade Payables Turnover = Cost of Sales / Average Net Trade Payables • Measure of how quickly management is paying trade creditors (liquidity) • Numerator can also be: Purchases = Cost of Sales + Ending Inventory – BI Average Age of Payables = Average Trade Payables / (Cost of Sales / 365) Accrued Liabilities • Are expenses that have been incurred but have not been paid at the end of the  accounting period Income Tax Payable o Companies pay 2 types of income tax,   Current Income Tax: is payable within prescribed time limits.   Deferred Income Tax: The difference between tax laws and  accounting methods to be paid at a later date Taxes Other than Income Taxes o Companies are often required to pay other types of taxes and fees.  These  taxes add to the cost of production and are eventually passed on to  customers through higher sales prices o All the GST and PST collected from customers are accumulated in the two  accounts. The balance of the account GST payable is reduced by the  amount of GST that the company pays on its own purchases.  The net  amount is then remitted to the federal government. Payroll Liabilities o Unpaid salaries may be reported as a separate item or as accrued  liabilities.  Companies also must report the cost of unpaid employee  benefits Employee Deductions o Government laws require the employer to deduct an appropriate amount of  income tax each period from the gross earnings of each employee o Deductions may include employment insurance (EI), Canada Pension Plan  (CPP). These balances reflect both the employee and the employer Note Payable • Creditors are willing to lend cash because they will earn interest • Time Value of Money: is interest that is associated with the use of money over  time • To calculate interes
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