Kế toán tài chính 2 - Chapter 12: Current liabilities

Current LiabilitiesMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 12Learning ObjectivesIdentify the management issues related to recognition, valuation, classification, and disclosure of current liabilities.Identify, compute, and record definitely determinable and estimated current liabilities.Distinguish contingent liabilities from commitments.2Copyright © Houghton Mifflin Company. All rights reserved.Supplemental ObjectiveCompute and record the liabilities associated with payroll accounting.3Copyright © Houghton Mifflin Company. All rights reserved.Management Issues Related to Accounting for Current LiabilitiesObjective 1Identify the management issues related to recognition, valuation, classification, and disclosure of current liabilities4Copyright © Houghton Mifflin Company. All rights reserved. are incurred to meet cash needs during the operating cycleThe proper identification and management of current liabilities requires an understanding of how they areRecognizedValuedClassifiedDisclosedCurrent liabilities typically equal from 25 to 50 percent of total assetsCurrent Liabilities5Copyright © Houghton Mifflin Company. All rights reserved.Management Issues Related to Accounting for Current LiabilitiesManaging liquidity and cash flowsRecognition of liabilitiesValuation of liabilitiesClassification of liabilitiesDisclosure of liabilities6Copyright © Houghton Mifflin Company. All rights reserved.Managing Liquidity and Cash FlowsThe operating cycle converts cash to purchases, to sales, to accounts receivable, and back to cashMost current liabilities support this cycleFailure to manage related cash flows can have serious consequencesIf suppliers are not paid, they may not shipA continued inability to meet payments when due can lead to bankruptcy7Copyright © Houghton Mifflin Company. All rights reserved.Factors to considerAbility to pay current liabilitiesEvaluate using three measures of liquidityWorking capitalCurrent ratioQuick ratioAmount of time creditors are willing to give a company to pay its accounts payableCommon measures of this timePayables turnoverAverage days’ payableCurrent liabilities are a key component in each of these three measuresManaging Liquidity and Cash Flows (cont’d)8Copyright © Houghton Mifflin Company. All rights reserved.U.S. Airways’ short-term liquidity as measured by working capital was negative in 2000 and 2001Working CapitalLow or negative working capital is common for airline companies because unearned ticket revenue is a current liabilityAssuming only a small percentage of unearned ticket revenues will be repaid to customers, unearned ticket revenues might be excluded for current liabilities for the purpose of analysis9Copyright © Houghton Mifflin Company. All rights reserved.Payables TurnoverThis means that, on average, RadioShack’s accounts payable are paid 9.1 times during the accounting periodRadioShack Corp. had accounts payable of $312.6 million in 2002 and $206.7 million in 2001. Its cost of goods sold in 2002 was $2,338.9 million and its inventory increased by $21.4 million10Copyright © Houghton Mifflin Company. All rights reserved.Payables Turnover for Selected Industries11Copyright © Houghton Mifflin Company. All rights reserved.This means that, on average, RadioShack Corporation takes 40.1 days to pay its accounts payableKnowing that RadioShack Corporation’s payables turnover is 9.1 times, its average days’ payable can be computedAverage Days’ Payable12Copyright © Houghton Mifflin Company. All rights reserved.Recognition of LiabilitiesA liability is recorded when an obligation existsA transaction obligates a company to make future paymentsCurrent liabilities often are not represented by a direct transactionRecord adjusting entries to recognize unrecorded liabilitiesKnown amounts such as salaries payableEstimated amounts such as taxes payableTransactions or commitments where no current obligation exists are not recognized as liabilities13Copyright © Houghton Mifflin Company. All rights reserved.Valuation of LiabilitiesOn the balance sheet, liabilities are generally valued atThe amount of money needed to pay the debt, orThe fair market value of goods or services to be deliveredSometimes the amount must be estimatedEstimates are based on past experience and anticipated changes in the business environmentService warranties on carsAdditional financial statement disclosure may be required14Copyright © Houghton Mifflin Company. All rights reserved.It is important to distinguish between current and long-term liabilities because of the effect on liquidityClassification of Liabilities directly matches the classification of assetsCurrent liabilitiesExpected to be satisfied within one year or within the normal operating cycle, whichever is longerPaid out of current assets or with cash generated from operationsLong-term liabilitiesDue beyond one year or beyond the normal operating cycleUsed to finance long-term assets15Copyright © Houghton Mifflin Company. All rights reserved.Disclosure of LiabilitiesSupplemental disclosure may be required in the notes to the financial statementsLarge amount of notes payableSpecial credit arrangementsCommercial paperLines of credit16Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the rule for classifying a liability as current?A liability is current if the obligation will be satisfied within one year or within the normal operating cycle, whichever is longer17Copyright © Houghton Mifflin Company. All rights reserved.Common Categories of Current LiabilitiesObjective 2Identify, compute, and record definitely determinable and estimated current liabilities18Copyright © Houghton Mifflin Company. All rights reserved.Common Categories of Current LiabilitiesTwo major groups of current liabilitiesDefinitely determinable liabilitiesSet by contract or by statute and can be measured exactlyEstimated liabilitiesDefinite debts or obligations of which the exact dollar amount cannot be known until a later date19Copyright © Houghton Mifflin Company. All rights reserved.Types of Definitely Determinable LiabilitiesAccounts payableBank loans and commercial paperNotes payableAccrued liabilitiesDividends payableSales and excise taxes payableCurrent portions of long-term debtPayroll liabilitiesUnearned or deferred revenues20Copyright © Houghton Mifflin Company. All rights reserved.Accounts Payable are short-term obligations to suppliers for goods and servicesAlso called trade accounts payableAmount in Accounts Payable account in the general ledger is generally supported by an Accounts Payable subsidiary ledgerAccounts Payable subsidiary ledger contains an individual account for each person or company to which money is owed21Copyright © Houghton Mifflin Company. All rights reserved.Bank LoansA line of credit may be established with a bankAllows a company to borrow funds when needed to finance current operationsThe bank may require the company to meet certain financial goalsMaintain specific profit marginsMaintain current ratiosMaintain debt to equity ratios22Copyright © Houghton Mifflin Company. All rights reserved.Commercial Paper is a way of borrowing money by using unsecured short-term loans sold directly to the publicThe portion of the line of credit borrowed and the amount of commercial paper issued are usually combined with notes payable in the current liabilities section of the balance sheetDetails are disclosed in a note to the financial statements23Copyright © Houghton Mifflin Company. All rights reserved.Short-Term Notes Payable... are obligations represented by promissory notesCan be used to Secure bank loansPay suppliersObtain other credit Interest may beStated separately on the face of the noteDeducted in advance by discounting it from the face value of the note24Copyright © Houghton Mifflin Company. All rights reserved.Two Promissory Notes: One with Interest Stated Separately; One with Interest in Face Amount25Copyright © Houghton Mifflin Company. All rights reserved.Interest Stated Separately on Face of NoteAug. 31: Issued a 60-day, 12 percent promissory note with interest stated separatelyOct. 30: Note is paid with interestRecording Notes Payable26Copyright © Houghton Mifflin Company. All rights reserved.Recording Notes PayableInterest Deducted in AdvanceAug. 31: Issued a 60-day, 12 percent promissory note with interest deducted in advanceOct. 30: Note is paidThis is called discounting27Copyright © Houghton Mifflin Company. All rights reserved. are existing liabilities that have not yet been recordedIncludeInterest payableWages payableIncome taxes payableAdjusting entries are required to recognize and record accrued liabilities Accrued liabilities can include estimated liabilitiesAccrued Liabilities28Copyright © Houghton Mifflin Company. All rights reserved.Recording Interest PayableInterest Stated Separately on Face of NoteSep. 30: Record interest expense for 30 days on 60-day, 12 percent promissory note issued August 31Interest Included in Face AmountDiscount on Notes Payable will have a debit balance of $50 which will become interest expense during the next 30 days29Copyright © Houghton Mifflin Company. All rights reserved.Dividends Payable are dividends that have been declared but not yet paidCash dividends are a distribution of earnings by a corporation During the time between the date of declaration and the date of payment, dividends are a current liability There is no liability until the board declares a dividendThe decision to pay dividends is solely up to the board of directors30Copyright © Houghton Mifflin Company. All rights reserved.Sales and Excise Taxes Payable are taxes collected by businesses that must be forwarded to the appropriate government agenciesMost states and many cities levy a sales tax on retail transactionsThe amount of tax collected is a current liability until remitted to the government31Copyright © Houghton Mifflin Company. All rights reserved.June 1: Sold merchandise for $100; subject to 5 percent sales tax and 10 percent excise taxThe taxes are collected and recorded as liabilities to be remitted at the proper times to the appropriate government agenciesRecording Sales and Excise Taxes Payable32Copyright © Houghton Mifflin Company. All rights reserved.Current Portions of Long-Term Debt include the portions of long-term debt that are due within the next year and are to be paid from current assetsAre classified as current liabilitiesNo journal entry is requiredDebt is reclassified when financial statements are prepared33Copyright © Houghton Mifflin Company. All rights reserved.Payroll Liabilities include the cost of labor and related taxes for a companyThe employer is liable to employees for wages and salaries WagesPayment for the services of employees at an hourly rateSalariesCompensation of employees who are paid at a monthly or yearly rate34Copyright © Houghton Mifflin Company. All rights reserved.Payroll Liabilities (cont’d)Payroll accounting is important because complex laws and significant liabilities are involved The employer is responsible to various government and other agencies for amounts withheld and related taxesIt is important to distinguish between employees and independent contractorsThe journal entry to record payroll is lengthy35Copyright © Houghton Mifflin Company. All rights reserved.Illustration of Payroll LiabilitiesFeb 15: Record payroll, total employee wages, $32,500Feb 15: Record payroll taxesNote that employees earned $32,500 but take home pay was $21,214Payroll taxes and benefits increase the total cost of payroll to $41,901 ($32,500 + $9,401)Recording Payroll37Copyright © Houghton Mifflin Company. All rights reserved.Unearned Revenues are obligations for goods or services that the company must provide or deliver in a future accounting period in return for an advance payment from a customerDeposits received in advance are also considered current liabilities38Copyright © Houghton Mifflin Company. All rights reserved.Received annual subscriptions totaling $240Monthly issue of magazines mailedThe publisher now has a liability that will be reduced gradually as monthly issues of magazines are mailedRecording Unearned Revenues39Copyright © Houghton Mifflin Company. All rights reserved.Estimated Liabilities are definite debts or obligations of which the exact dollar amount cannot be known until a later dateThere is no doubt about the existence of the legal obligationThe primary accounting problem is to estimate and record the amount of the liability40Copyright © Houghton Mifflin Company. All rights reserved.Types of Estimated LiabilitiesIncome taxesProperty taxesProduct warrantiesVacation pay41Copyright © Houghton Mifflin Company. All rights reserved.Income TaxesThe amount of income taxes liability depends on the results of operationsThe amount may not be known until after the end of the yearSole proprietorships and partnerships do not pay income taxesTheir owners pay on their individual returnsAn adjusting entry records the estimated tax liability42Copyright © Houghton Mifflin Company. All rights reserved.Property Tax PayableProperty taxes are levied on real and personal propertyThey are assessed annually, but the government unit’s fiscal year and the company’s may not correspondThe company must estimate the amount of property tax that applies to each month of the year43Copyright © Houghton Mifflin Company. All rights reserved.Product Warranty LiabilityA liability exists for the length of time specified in the terms of the warrantyA company can estimate the future cost of the liabilityBased on past experience with claims for the product or servicesAn average cost is usually usedThe estimated cost of the warranty is debited to an expense account in the period of sale44Copyright © Houghton Mifflin Company. All rights reserved.During July, 350 mufflers were sold for $50 each. In the past, 6 percent of mufflers were returned for replacement under warrantyComputation of Product Warranty Liability45Copyright © Houghton Mifflin Company. All rights reserved.Computation of Product Warranty Liability (cont’d)Dec 5: A customer returns, under warranty, a defective muffler that cost $40 and pays a $20 service fee for the replacement46Copyright © Houghton Mifflin Company. All rights reserved.Vacation Pay LiabilityEmployees accrue vacation pay as they work during the yearThe cost should be allocated over the entire year so that month-to-month costs will not be distortedThe treatment of vacation pay also applies to other payroll costsBonus plansContributions to pension plans47Copyright © Houghton Mifflin Company. All rights reserved.Vacation Pay Liability (cont’d)April 20: Record estimated vacation pay liability. Employees earn two weeks paid vacation for every 50 weeks worked, and it is assumed only 75 percent of employees will ultimately collect vacation pay. The weekly payroll was $21,000, of which $1,000 was paid to employees on vacation.The computation of vacation pay expense is based on the payroll of employees not on vacation48Copyright © Houghton Mifflin Company. All rights reserved. Dividends payable Income taxes payable Current portion of long-term debt Vacation pay liability a b a bDiscussionIndicate whether each of the following is (a) A definitely determinable liability (b) An estimated liability49Copyright © Houghton Mifflin Company. All rights reserved.Contingent Liabilities and CommitmentsObjective 3Distinguish contingent liabilities from commitments50Copyright © Houghton Mifflin Company. All rights reserved.Past transaction – building of a bridgeFuture event – outcome of a lawsuitContingent Liabilities are potential liabilities that depend on future events arising out of past transactionsTwo conditions for determining when a contingency should be entered in the accounting records The liability must be probableIt can be reasonably estimatedVacation pay, income taxes, and warranty liability51Copyright © Houghton Mifflin Company. All rights reserved.Commitments are legal obligations that do not meet the technical requirements for recognition as a liabilityCommon examplesPurchase agreementsLeases52Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is a contingent liability, and how does it differ from an estimated liability?A contingent liability is a potential liability that depends on a future event arising out of a past transaction It differs from an estimated liability in that an estimated liability is not a potential liability but a current liability for which the amount is uncertain and must be estimated53Copyright © Houghton Mifflin Company. All rights reserved.Payroll Accounting IllustratedSupplemental Objective 4Compute and record the liabilities associated with payroll accounting54Copyright © Houghton Mifflin Company. All rights reserved.Computation of an Employee’s Take-Home Pay55Copyright © Houghton Mifflin Company. All rights reserved.Regular TimeHours worked up to 40 hours per week or 8 hours per dayFor employers taking part in interstate commerce, employees who work beyond regular time must be paid overtimeThe Fair Labor Standards Act requires employers to pay a minimum wage56Copyright © Houghton Mifflin Company. All rights reserved.OvertimeRegulated by the federal Fair Standards ActOvertime pay must be at least one and one-half times the regular rateWork on Saturdays, Sundays, and holidays may also call for overtime pay or some sort of premium payOvertime pay under union or other employment contracts may exceed these minimums57Copyright © Houghton Mifflin Company. All rights reserved.Calculating Total WagesRobert Jones earns a regular wage of $8 an hour, one and one-half times the regular rate for work over eight hours in any weekday, and twice the regular rate for work on Saturdays, Sundays, and holidaysJones works the following days and hours during the week of January 18, 20xx58Copyright © Houghton Mifflin Company. All rights reserved. Calculating Total Wages (cont’d)Jones’s wages would be calculated as follows 59Copyright © Houghton Mifflin Company. All rights reserved.Calculating Net (Take-Home) PayOnce total wages have been calculated, total deductions must be determinedDeductions includeFederal income taxes withheldSocial security taxMedicare taxMedical insuranceLife insuranceOther deductions 60Copyright © Houghton Mifflin Company. All rights reserved.Social Security and Medicare TaxesSocial security tax6.2% (if total wages earned ≤ $87,000)Medicare tax1.45%61Copyright © Houghton Mifflin Company. All rights reserved.Based on earnings and number of exemptions claimedW-4Employee’s Withholding Exemption CertificateOne exemption each may be claimed for the employee and his or her dependentsAmount of withholding is determined by referring to a withholding table provided by the IRSBased on the information on the W-4Federal Income Taxes62Copyright © Houghton Mifflin Company. All rights reserved.Sample Withholding TableJones is a married employee who has a total of four exemptions and is paid weeklyThe withholding on total wages of $412 is $31Actual withholding tables change periodically to reflect changes in tax laws and regulations63Copyright © Houghton Mifflin Company. All rights reserved.Net (Take-Home) PayJones’s union dues are $2.00, his medical insurance premiums are $7.60, his life insurance premium is $6.00, he places $15.00 per week in savings bonds, and he contributes $1.00 per week to United Charities 64Copyright © Houghton Mifflin Company. All rights reserved.Payroll RegisterA detailed listing of a company’s total payrollIs prepared each pay periodColumns in the register help employers record payroll in the accounting records and meet legal reporting requirements65Copyright © Houghton Mifflin Company. All rights reserved.Payroll Register (cont’d)The last two columns are needed to divide the expenses in the accounting records into selling and administrative categoriesNote that the name, hours, earnings, deductions, and net pay are listed for each employeeCopyright © Houghton Mifflin Company. All rights reserved.Payroll Register (cont’d)The journal entry for recording the payroll is based on the column totals from the payroll registerCopyright © Houghton Mifflin Company. All rights reserved.Payroll Register (cont’d)Employee Earnings RecordEach employer must keep a record of earnings and withholdings for each employeeMost companies use computers for this purpose, but a manual record, such as the one above, may still be used69Copyright © Houghton Mifflin Company. All rights reserved.Employee Earnings Record (cont’d)This form is designed to help employers meet legal reporting requirementsEach deduction must be shown to have been paid to the proper agencyThe employee must receive a report of the deductions each year70Copyright © Houghton Mifflin Company. All rights reserved.Employee Earnings Record (cont’d)Most of the columns are self-explanatoryCumulative Gross Earnings columnTotal earnings to dateHelps employer comply with rules of applying social security and unemployment taxes up to the minimum wage levels71Copyright © Houghton Mifflin Company. All rights reserved.Employee Earnings Record (cont’d)Cumulative Gross Earnings column (cont’d)At year end, the employer reports total earnings and deductions on Form W-2 to the employeeUsed by employee to complete the individual tax returnA copy is sent to the IRSUsed to check whether employee has reported correct amounts on his or her individual tax return72Copyright © Houghton Mifflin Company. All rights reserved.Recording Payroll TaxesCopyright © Houghton Mifflin Company. All rights reserved.Payment of PayrollThe company has a liability for wages payable of $1,334.40 after recording payroll for the week ended January 18If a special payroll account is usedA check for regular net earnings must be drawn on the regular account and deposited in the special payroll accountChecks are issued to employees from the special payroll accountCopyright © Houghton Mifflin Company. All rights reserved.Payment of Payroll (cont’d)If a voucher system is combined with a payroll account A voucher for the total wages payable is prepared and recorded in the voucher registerCopyright © Houghton Mifflin Company. All rights reserved.Payment of Payroll (cont’d)Social security and Medicare taxes must be paid at least quarterlyThis includes both the employees’ and employer’s sharesFederal income taxes must also be paid at least quarterlyMore frequent payments are required when the total liability exceeds $500Copyright © Houghton Mifflin Company. All rights reserved.Payment of Payroll (cont’d)Federal unemployment insurance tax is paid yearly if the amount due is less than $100If the amount due is more than $100 at the end of any quarter, a payment is necessaryPayment dates vary among statesCopyright © Houghton Mifflin Company. All rights reserved.Payment of Payroll (cont’d)Other payroll deductions must be paid in accordance with the particular contracts or agreements involvedCopyright © Houghton Mifflin Company. All rights reserved.DiscussionAre the amounts recorded for wages expense and wages payable for a pay period always the same?No. The amount recorded for wages expense is equal to the gross earnings of employees for the pay period. The amount recorded for wages payable is equal to the employees net earnings, which is gross earnings less any deductions for taxes, union dues, insurance premiums, etc.Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewIdentify the management issues related to recognition, valuation, classification, and disclosure of current liabilitiesIdentify, compute, and record definitely determinable and estimated current liabilitiesDistinguish contingent liabilities from commitments80Copyright © Houghton Mifflin Company. All rights reserved.And FinallyCompute and record the liabilities associated with payroll accounting81Copyright © Houghton Mifflin Company. All rights reserved.