ACCT207 Chapter Notes - Chapter 10: Accounts Payable, Current Liability, Promissory Note

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violetmuskrat44

7 Aug 2018

School

University of Delaware

Department

Accounting

Course

ACCT207

Professor

Vin Mar

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Lia(cid:271)ilities are ofte(cid:374) defi(cid:374)ed as (cid:862)(cid:272)reditors" (cid:272)lai(cid:373)s o(cid:374) total assets(cid:863) a(cid:374)d as (cid:862)e(cid:454)isti(cid:374)g de(cid:271)ts a(cid:374)d o(cid:271)ligatio(cid:374)s(cid:863) Companies must settle or pay liabilities at some time in the future by transferring assets or services. A current liabilities is a debt that a company reasonably expects to pay: from existing current assets or through the creation of other current liabilities, within one year or the operating cycle, whichever is longer. A company that has more current liabilities than current assets often lacks liquidity, or short term debt paying ability. The different types of current liabilities include: notes payable, accounts payable, unearned revenues, accrued liabilities, taxes, salaries and wages. Companies record obligations in the form of written notes as notes payable. Notes are issued for varying periods of time: those due for payment within one year of the balance sheet are usually classified as current liabilities.

Related Questions

Listed below are several terms and phrases associated with current liabilities. Mach each List A to B

List A

1, Cash, current investments, and A/R all divided by current liabilities.

2, Payment is probable and can be reasonably estimated.

3, Gift cards

4, Long-term debt maturing within one year

5, Social Security and Medicare

6, Interest expense is recorded in the period interest is incurred rather than in the period interest is paid.

7, payment is reasonably possible and can be reasonably estimated.

8, Incurred on a notes payable.

9, Unsecured notes sold in minimum denominations of $25,000 with up to 270 days.

10, Classifying liabilities as either current or long-term helps inverstors and creditors assets this.

List B

a, Recoding a contingentliability

b, disclosure of a contingent liability

c, Interest expense

d, FICA

e, Commercial paper

f, The riskiness of a business's obligations

g, Current portion of Long-term debt

h, Unearned revenue

i, Acid=test ratio

j, Accual Accounting

chocolatewoodchuck193

In the early 1990s, Cranston Dispensers, Inc. was quick torealize that concern for the environment would cause many consumerproduct manufacturers to move away from aerosol dispensers tomechanical alternatives that pose no threat to the ozone layer. Inthe following decades, most countries banned the most popularaerosol propellants, first chlorofluorocarbons and thenhydrocholrofluorocarbons. As the leading manufacturer ofspecialized pump and spray containers for a variety of products incosmetics, household cleaning supplies, and pharmaceuticalindustries, Cranston experienced a rapid increase in sales andprofitability after it made this strategic move. At that time, thefirm focused much of its attention on capturing market share andkeeping up with demand.

For most of 20x4 and 20x5, however, Cranstonâs share price wasfalling while shares of other companies in the industry wererising. At the end of fiscal 20x5, the company hired Susan McNultyas the new treasurer, with the expectation that she would diagnoseCranstonâs problems and improve the companyâs financial performancerelative to that of its competitors. She decided to begin the taskwith a thorough review of the companyâs working capital managementpractices.

While examining the companyâs financial statements, she notedthat Cranston had a higher percentage of current assets on itsbalance sheet than other companies in the packaging industry. Thehigh level of current assets caused the company to carry moreshort-term debt and to have higher interest expense than itscompetitors. It was also causing the company to lag behind itscompetitors on some key financial measures, such as return onassets and return on equity.

In an effort to improve Cranstonâs overall performance, Susanhas decided to conduct a comprehensive review of working capitalmanagement policies, including those related to the cash conversioncycle, credit policy, and inventory management. Cranstonâsfinancial statements for the three most recent yearsfollow.

Cranston Dispensers

Income Statement

($ in thousands)

Account	20x5	20x4	20x3
Sales	3,784	3,202	2,760
Cost of Goods Sold	2,568	2,172	1,856
Gross Profit	1,216	1,030	904
Selling & Administrative	550	478	406
Depreciation	247	230	200
Earnings Before Interest and Taxes	419	322	298
Interest Expense	20	25	14
Taxable Income	399	297	284
Taxes	120	89	85
Net Income	279	208	199

Cranston Dispensers

Balance Sheet

($ in thousands)

Account	20x5	20x4	20x3
Current Assets
Cash	341	276	236
Accounts Receivable	722	642	320
Inventory	595	512	388
Total Current Assets	1,658	1,430	944
Net Fixed Assets	1,822	1,691	1,572
Total Assets	3,480	3,121	2,516
Current Liabilities
Accounts Payable	332	288	204
Accrued Expenses	343	335	192
Short-term Notes	503	491	243
Total Current Liabilities	1,178	1,114	639
Long-term Debt	398	324	289
Other Long-term Liabilities	239	154	147
Total Liabilities	1,815	1,592	1,075
Ownersâ Equity
Common Equity	1,665	1,529	1,441
Total Liabilities & Equity	3,480	3,121	2,516

Question:

Suppose Cranston institutes a policy of granting a 1% discountfor payment within fifteen days with the full amount due in 45days. Half the customers take the discount, the other half take anaverage of sixty days to pay.

What is the length of Cranstonâs collection cycle under this newpolicy?

In dollars, how much would the policy have cost Cranston in20x5?

If this policy had been in effect during 20x5, by how many dayswould Cranston have shortened the cash conversion cycle?

rosealligator18

Hands-On Project 10-12

IMPROVING DECISION MAKING: USING SPREADSHEET SOFTWARE TO ANALYZEA DOT- COM BUSINESS

Software skills: Spreadsheet downloading, formatting, andformulas

Business skills: Financial statement analysis 10- 12

Pick one e- commerce company on the Internetâ for example,Ashford, Buy. com, Yahoo, or Priceline. Study the Web pages thatdescribe the company and explain its purpose and structure. Use theWeb to find articles that comment on the company. Then visit theSecurities and Exchange Commissionâs Web site at www. sec.gov to access the companyâs 10- K ( annual report) formshowing income statements and balance sheets. Select only thesections of the 10- K form containing the desired portions offinancial statements that you need to examine, and download theminto your spreadsheet. Instructions below provide more detailedinstructions on how to download this 10- K data into a spreadsheetand information on financial statements. Create simplifiedspreadsheets of the companyâs balance sheets and income statementsfor the past three years.

â¢ Is the company a dot- com success, borderline business, orfailure? What information provides the basis of your decision? Why?When answering these questions, pay special attention to thecompanyâs three- year trends in revenues, costs of sales, grossmargins, operating expenses, and net margins.

â¢ Prepare a PowerPoint overhead presentation (with a minimum offive slides), including appropriate spreadsheets or charts, andpresent your work to your professor and classmates. An examplePowerPoint slide presentation is attached for your review in thislearning module folder in Blackboard.

As needed: Students can find material on understanding financialstatements on financial Web sites such as Ameritrade(www.ameritrade.com) or the Small Business Knowledge Basehttp://www.bizmove.com/finance/m3b2.htm.

Downloading the Data into a Spreadsheet

Use the Convert Text to Columns Wizard in your spreadsheetsoftware to arrange the 10-K data you downloaded into spreadsheetcolumns and rows. From the Excel menu, select Data and then selectthe Text to Columns option. The software brings up a Wizard toconvert the imported text into spreadsheet columns. Although youcan decide to create line breaks, it may be easiest to accept thedefault settings (Fixed Width, General format) and then adjustcolumn widths after the Wizard has arranged the data in spreadsheetcolumns.

Financial Statements

Financial statements are used to evaluate the performance of abusiness and diagnose its strengths and weaknesses. The two primaryfinancial statements are income statements and balance sheets. Theincome statement, also called an operating statement or profit andloss statement, shows the income and expenses of a firm over aperiod of time, such as a year, a quarter, or a month. Gross profitis calculated by subtracting the cost of goods sold from revenues,or sales. The gross margin is calculated by dividing gross profitby revenues (or sales). Net profit (or loss) is calculated bysubtracting all other expenses, including operating expenses andincome taxes from gross profit. Operating expenses are all businesscosts (such as expenditures for sales and marketing, general andadministrative expenditures, and depreciation) other than thoseincluded in the cost of goods sold. Net margins arecalculated by dividing net profit (or loss) by revenues (orsales).

A balance sheet provides a snapshot of a companyâs financialassets and liabilities on a given date, usually the close of anaccounting period. It lists what material andintangible assets the business owns and what money the businessowes either to its creditors (liabilities) or to its owners(shareholdersâ equity, also known as net worth). At any given timea businessâs assets equals the sum of its liabilities plus its networth. Current assets include cash, securities, accountsreceivable, or other investments that are likely to be convertedinto cash within one year. Liabilities are outstanding obligationsof the firm. Current liabilities are debts that are due within oneyear. Long-term debt consists of liabilities that are not due untilafter a year or more. If too much debt has been used to finance thefirmâs operations, problems may arise in meeting future interestpayments and repaying outstanding loans. By examining a series ofbalance sheets, one can identify and analyze trends in thefinancial strength of a business.

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ACCT207 Chapter Notes - Chapter 10: Accounts Payable, Current Liability, Promissory Note

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