FA3 Liabilities Equities

1. FA3 Liabilities & Equities Prepared by Budanlu SWUFE

2. Foundation review Financial statement preparation Financial statement concepts and principles

3. contents Lesson 2 liability Chapter 13 current liabilities and contingencies Chapter 14 long-term liabilities Lesson 3 Chapter 15 stockholder�s equity Lesson 4 complex debt and instruments Chapter 16 dilutive securities

4. contents Lesson 5 leases Chapter 21 accounting for leases Lesson 6 Chapter 19 accounting for income taxes Lesson 7 employee benefit costs Chapter 20 accounting for pension and postretirement benefits

5. contents Lesson 8 accounting changes Chapter 22 accounting changes and error analysis Lesson 9 financial statement analysis and cash flow Chapter 23 cash flow reporting Lesson 10 financial statement analysis and EPS Chapter 16 EPS reporting

6. Accounting and Reporting of Current and Contingent Liabilities Chapter 13

7. Describe the nature, type, and valuation of current liabilities. Explain the classification issues of short-term debt expected to be refinanced. Identify types of employee-related liabilities. Identify the criteria used to account for and disclose gain and loss contingencies. Explain the accounting for different types of loss contingencies. Indicate how to present and analyze liabilities and contingencies. Learning Objectives 1. On the topic, �Challenges Facing Financial Accounting,� what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company�s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information) 1. On the topic, �Challenges Facing Financial Accounting,� what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company�s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

8. Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periodsService Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

9. What is a Liability?

10. What is a Current Liability?

11. Why we need to classify liabilities into current and long-term liabilities? And how?

12. Operating cycle Is the period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections.

13. Operating cycle








21. Due on demand If an agreement is violated Grace period Current Maturities of Long-Term Debt



24. E13-3 (Refinancing of Short-Term Debt) On December 31, 2007, Hattie McDaniel Company had $1,200,000 of short-term debt in the form of notes payable due February 2, 2008. On January 21, 2008, the company issued 25,000 shares of its common stock for $38 per share, receiving $950,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2008, the proceeds from the stock sale, supplemented by an additional $250,000 cash, are used to liquidate the $1,200,000 debt. The December 31, 2007, balance sheet is issued on February 23, 2008. Instructions Show how the $1,200,000 of short-term debt should be presented on the December 31, 2007, balance sheet, including note disclosure. What is a Current Liability?

25. Partial Balance Sheet Current liabilities: Notes payable $ 250,000 Long-term debt: Notes payable refinanced 950,000 Total liabilities 1,200,000 What is a Current Liability?













38. Vested rights: exist when an employer has an obligation to make payment to an employee even if his(her)employment is terminated Accumulated rights: can be carried forward to future periods if not used in the period in which earned. Employee-Compensated Absences

39. Sick pay: Employees receive sick pay only if they are absent because of illness Employees are allowed to accumulate unused sick pay even they are not ill. Employee-Compensated Absences

40. The expense and related liabilities for compensated absences should be recognized in the year earned by employees. Employee-Compensated Absences

41. What rate should be used? Current rate or future rate? Current rate(this book) Employee-Compensated Absences

42. Wages expense vacation wage payable vacation wage payable cash Employee-Compensated Absences

43. Ritter Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2003, the company began a program of granting its employees 10 days' paid vacation each year. Vacation days earned in 2003 may first be taken on January 1, 2004. Information relative to these employees is as follows: � Hourly Vacation Days Earned Vacation Days Used Year Wages by Each Employee by Each Employee 2003 $17.20 10 0 2004 18.00 10 8 2005 19.00 10 10 � Ritter has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned.

44. What is the amount of expense relative to compensated absences that should be reported on Ritter�s income statement for 2003? a. $0.b. $45,920.c. $50,400.d.$48,160. � What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2005? A. $63,280.b. $60,480.c. $53,200.d. $63,840.


46. Employees� bonus expense profit-sharing bonus payable profit-sharing bonus payable cash Bonus Agreements

47. Computation of employee�s bonuses(appendix 13A) Wilson Co. has an agreement with the sales manager that she is to receive a bonus of 5% of net income after deduction of the bonus and income taxes. Company income before deduction of the bonus and income taxes is $250,000. Income taxes are 30% and the bonus is deductible for taxes. �

48. Instructions (a) Show your calculation of the amount of the bonus to the nearest dollar. (b) Show your calculation of the amount of the taxes to the nearest dollar.

49. (a) B = .05[$250,000 � B � .30($250,000 � B)] B = .05[$250,000 � B � $75,000 + .3B] B = .05[$175,000 � .7B] B = $8,750 � .035B 1.035B = $8,750 B = $8,454 � (b) T = .30 ($250,000 � $8,454) T = .30 ($241,546) T = $72,464

50. Contingencies

51. Gain Contingencies

52. Loss Contingencies


54. Estimated losses from loss contingencies are accrued as liabilities if: It is probable that a liability has been incurred, and The amount of loss can be reasonably estimated. The interpretation of these terms is often based on lawyers� opinions.

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56. ??? ?????????????????????????????,?�???�????????????????????�??????�?�????�????? 1998?1999???????? 2000???????,????4? 2001?????9.78??,????1.7?,?ST

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64. Garret Music Shop gives its customers coupons redeemable for a poster plus a Dixie Chicks CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $5.00 cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented for redemption. Sales for the first period were $1,050,000, and the coupons redeemed totaled 510,000. Garret Music Shop bought 30,000 posters at $2.00/poster and 30,000 CDs at $6.00/CD.

65. �Instructions Prepare the following entries (a) To record coupons redeemed (b) To record estimated liability

66. Entry Period 1 (a) Estimated Liability for Premiums 9,900 Premium Expense [(510,000 � 100) � ($8.00 � $5)] 15,300 Cash (510,000 � 100) � $5 25,500 Inventory of Premium Posters and CDs 40,800 (b) Premium Expense 9,900* Estimated Liability for Premiums 9,900 *[(1,050,000 � .80) � 510,000] � 100 � $3.00

67. In March 2005, an explosion occurred at Gray Co.�s plant, causing damage to area properties. By May 2005, no claims had yet been asserted against Gray. However, Gray�s management and legal counsel concluded that it was reasonably possible that Gray would be held responsible for negligence, and that $2,000,000 would be a reasonable estimate of the damages. In Gray�s December 31, 2004 financial statements, for which the auditor�s fieldwork was completed in April 2005, how should this casualty be reported? a. As a note disclosing a possible liability of $2,000,000. b. As an accrued liability of $2,000,000. c. As a note disclosing a possible liability of $2,000,000. d. No note disclosure of accrual is required for 2004 because the event occurred in 2005. Environmental liabilities


69. Nuclear Oil and gas Mining facilities Landfills Measured at fair value�present value The cost of ARO is allocated to expense over the period of the related asset�s useful life Asset retirement obligations

70. Presentation and Analysis



FA3 Liabilities Equities

FA3 Liabilities Equities

Presentation Transcript

FA3 Lesson 5: Leases

Assets = Equities

Liabilities

FA3

FA3 Lesson 2. Liabilities

LIABILITIES

Equities Research

Global Equities

Liabilities

LIABILITIES

Liabilities

Resources equities –

LIABILITIES

Liabilities

Liabilities

Liabilities

US Equities

Institutional Equities

LIABILITIES

Liabilities

LIABILITIES

LIABILITIES