Chapter 10

Reporting and Analying Liabilties

• Current Liabilities

• Sales taxes

• Payroll

• Provisions and contingent liabilities

• Statement presentation and analysis

• Presentation and analysis

 

Liabilities

• Present obligations to transfer economic resources as a result of from past transactions

• Classified as current and non-current

• One type of liability is financial liability these types have a contractual obligations to pay cash in future.

 

Currents Liabilities

• Expected to be paid or settled

• Within one year of the date on statement of financial posion or within the operating cycle

• Thorugh payment by cash, through transfer of goods or srevices or through creation of other liabilities

• Types of currents liabilities include

• Bank indebtedness from operating lines of credit

• Accoutns payable and accured liabilities

• Refund liabilties

• Deferred revenue

• Sales and property taxse

• Payroll

• Notes payable

• Current portion of bank loans and mortgages

 

Sales taxes

• Federal good and service tax (GST)

• Povincial (PST, QST)

• Combined in to one sometimes (HST)

 

 

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Sales tax payable

• May or may not be included in sale price

• To calculate the sales portion

• Divide the cash received by 100 percent plus the sales tax percentag

 

 

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• Must be remitted periodically to repective governments

• When paid, debit sales tax payable accoutn and credit cash

 

Payroll

• Salary

• Payroll deductions required to be withheld from employees' gross pay

• Emploee's froos pay less payroll deductions is known as net pay

 

Employee payroll deductions

• Mandatory payroll deductions

• Federal and provincal income taxes

• Canada pension plan

• Employment insurance

• Voluntary payroll deductions

• Benefits

• Unions dues

• Chartiable donations

 

 

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Employee payroll liabilities

• Employer's share of CPP and EI

• Workers compensation

• Employee benefits

• Compensated adsences

• Employer-sponsored health plans and pensions

 

 

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Operating line of credit (credit facility)

• Pre-arranged agreement between a company and a lender to allow the company to borrow up to pre-authorized limit whenever required

• To help manage remp cash short falls

• Company repays whatever portion of the borrowed funds it chooses whenever it is able to

• Interest is shared using a floating or variable interest rate

• Security (collateral) may be required by bank

• When used, results in bank indebtedness; reported in current liabilites section of statement of financial position

 

Liabilities with principal due at maturity

• A promise to pay a specified amoutn usually on a fixed future date

• Often used instead of accounts payable

• Formal written promise, provides stong legal claim

• Bears interst at a fixed interest rate, which is constant for the entire term of the note

• Issued for varying periods of time

• If due within one year of financial statement date, classified as current liabilities

 

Liabilities with Instalment payments

• Normally non-current liabilities

• Obligations to be paid after one year or more

• Bank loand payble, moergagse payable

• Series of periodic payment, called instalments, consisting of

• Interest on the unpaid balance of the loan at the beginning of the period

• A repayment of the portion of the loan principal

• A specified repayment schdule must be followed

 

 

Currents and non-current portions

• For a loan reuiqring instalment payments, the principal portion of the loand that will be repaid durign the enxt is a current liability

• Portion that will be repaid after the next year is non current liability

• Other non-current liabilites include

• Banks loans, notes and mortgages payable

• Bonds payable

• Lease liabilites

• Deferred income taxes and pension liabilites

 

Statement Presentation

• Current Liabilities

• Reported as the first category of liabilities

• Can be listed separtely on statement of financial position or detailed in the notes

• Normally listed in order in which they are du

• Non-current liabilities

• Typically presented immediately following current liabilities and detail in notes

• Generally measured and reported at amount expectd to be paid when due

 

Analysis of debt obligation

• Liquidity- ratios measure short term ability to pay maturing obligation and meet unexpected cash needs within the next year

• Current ratio

• Inventory turnover

• Receivables turnover

• Solvency- ratios measure ability ro meet LT obligions

• Debt to total assets

• Times interst earned

 

Debt to total assets

• Indicates the extent to which a company's assets are financed by debt

• Debt to total assets= total liabilites/total assets

• Lower is better

 

Times interest earned

• Provides an indication of a company's ability to meet interest payments as they come due

• Times interest earned = net income + interest expense+( income tax expense/interest expense)