Chapter 13 Current Liabilities and Contingencies
Part A: Current Liabilities
* Liabilities and owners’ equity on the right-hand side of the equation represent the two basic sources of the assets on the left-hand side. * Characteristics of Liabilities
1. Are probable, future sacrifices of economic benefits.
2. Arise from present obligation (to transfer goods or provide services) to other entities. 3. Result from past transactions or events.
* Current Liability
* Obligations payable within one year or within the firm’s operating cycle, whichever is longer. * Be satisfied with current assets or by the creation of other current liabilities. * Most common: accounts payable, notes payable, commercial paper, income tax liability, dividends payable, and accrued liabilities. * Accounts Payable and Trade Notes Payable
1. Accounts payable are obligations to suppliers of merchandise or of services purchased on open account. * Most trade credit is offered on open account.
* Only formal credit instrument is the invoice.
* Short term, noninterest bearing, reported at face amounts. 2. Trade notes payable
* Formally recognized by a written promissory note.
* Longer term than open accounts, bear interest.
* Short-Term Notes Payable
* Most common way for a corporation to obtain temporary financing is to arrange a short-term bank loan. * Borrow cash from a bank and signs a promissory note. * Credit lines: a line of credit allows a company to borrow cash without having to follow formal loan procedures and paperwork. a. Noncommitted line of credit: an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. (Sometimes require the company to maintain a compensating balance on deposit with the bank) b. Committed line of credit: a more formal agreement that usually requires the firm to pay a commitment fee to the...
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