【正文】 onsidered immaterial. 12 Liability Classification ? Liabilities are separated into current and noncurrent based on the length of time that will elapse before the obligation must be fulfilled. ? Current liabilities are obligations that must be fulfilled within the current operating cycle which is almost always one year. ? Noncurrent liabilities are obligations that need not be fulfilled within the current operating cycle. ? Obligations calling for periodic payments such as a mortgage may be noncurrent but have a current portion。 that is, the payments due within the operating cycle are current but the remaining payments are noncurrent. 13 Current Liabilities a. Accounts payable b. Shortterm notes and interest payable c. Wages, salaries and other payroll items d. Ine taxes payable e. Deferred performance liabilities: advances from customers f. Deferred performance liabilities: product warranties 14 Accounts Payable to Creditors ? Business firms often buy and sell to each other on credit. ? Amounts owed to other businesses for services or goods are called trade accounts payable. ? Typically these are shortterm liabilities. ? Typically, a payment grace period is allowed before these obligations must be fulfilled (or paid). ? A grace period may be 30 days or more. ? Because such a grace period represents interestfree borrowing, the prudent firm takes advantage by paying exactly on time but not before. ? Rarely, a firm is more aggressive and always pays late, but a late charge may be assessed and such a firm will develop a reputation which may affect the terms they can negotiate. 15 ShortTerm Notes and Interest Payable ? A note payable is a form of short term borrowing. ? The note accrues interest expense and interest payable at a stated rate over time. ? The total amount of the note and the interest are mostly due as one payment upon maturity of the note. 16 Wages, Salaries and Other Payroll Items ? Employers pay workers directly in cash and in the form of benefits this gives rise to payroll expense ? For example, vacation time may be earned over time. The firm pays taxes on this benefit as it is earned and a liability to the worker is recorded. When vacation is taken, the liability is reduced. ? Employers also pay some taxes that relate to the workers these are tax expenses. 17 Ine Taxes Payable ? . and most countries tax business ine. ? Corporations are taxed directly. ? Partnerships and sole proprietorships are not taxed but the ine is assigned to the partners or proprietor who must then pay the tax. ? Ine taxes are assumed to accrue。 payment in many cases is required earlier. ? In addition, GAAP allows for differences between ine tax expense (an accrual concept) and ine tax liability (the amount owed to IRS). This is covered in a later chapter under deferred tax accounting. 18 Deferred Performance Liabilities: Advances from Customers ? A mutual promise (the customer promises to pay and the firm promises to deliver) is not recorded. ? However, if the customer pays in advance, then there is an obligation that arises and the firm records this as an increase in an asset (cash) and an increase in a liability (advances from customers, unearned revenues). ? The obligation is for the firm to either fulfill its promise to deliver goods or services within the specifications of the contract or return the cash. ? An example is a magazine subscription which is typically paid in advance. The subscription is an obligation to produce and deliver the magazine. When a magazine is delivered, the obligation can be reduced (debited) and revenue can be recognized (credited) because it is then earned. 19 Deferred Performance Liabilities: Product Warranties ? A warranty is a promise to repair or replace the good but is limited by time. ? When goods with a warranty are sold: revenue, the warranty expense, and the warranty liability are recognized. The amount of the liability must be estimated. ? When a claim is made, the warranty liability is reduced (debited) and what is given to fulfill the claim (cash or new goods or parts and labor) are credited. ? Any unused portion of the warranty expires at the end of the warranty period reducing the liability and creating a gain. 20 LongTerm Liabilities a. Bonds b. Mortgages 21 Procedures for Recording LongTerm Liabilities ? Whereas short term liabilities may be paid at maturity, longterm liabilities are more monly paid in installments. ? Also, the general rule is that longterm liabilities are recorded at the present value of the payments. ? The accountant distinguishes between payment of the liability (the principle) and payment of interest (an expense of financing). ? Commonly, the principle, the periodic payments and the interest rates are explicitly stated in the debt contract. ? If not, then discounted cash flow methods may be used to separate out the interest payment. ? The rate of interest that equated the present value of a given set of periodic payments with the principle is called the internal rate of return or discount rate). If you are confused with this slide, please skip and