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Lecture Financial accounting (10th edition): Chapter 10 - Pratt, Peters

Chapter 10 - Introduction to liabilities: Economic consequences, current liabilities, and contingencies. This chapter define liability and describe key economic consequences associated with how liabilities are reported on the financial statement. | 2 Chapter 10: Introduction to Liabilities: Economic Consequences, Current Liabilities and Contingencies 2 3 Learning Objective 1 Define liability and describe key economic consequences associated with how liabilities are reported on the financial statement. 4 Liabilities What is a liability? FASB - “Probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” 5 The Relative Size of Liabilities on the Balance Sheet 6 Reporting Liabilities on the Balance Sheet: Economic Consequences Shareholders and Investors Interest expense is tax deductible, but more debt means more risk to shareholders Leverage is a common strategy Equity ownership is subordinated to creditors Creditors Restrictive covenants regarding debt limits Management When and how to borrow money are important decisions Wants to minimize debt on the balance sheet Less . | 2 Chapter 10: Introduction to Liabilities: Economic Consequences, Current Liabilities and Contingencies 2 3 Learning Objective 1 Define liability and describe key economic consequences associated with how liabilities are reported on the financial statement. 4 Liabilities What is a liability? FASB - “Probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” 5 The Relative Size of Liabilities on the Balance Sheet 6 Reporting Liabilities on the Balance Sheet: Economic Consequences Shareholders and Investors Interest expense is tax deductible, but more debt means more risk to shareholders Leverage is a common strategy Equity ownership is subordinated to creditors Creditors Restrictive covenants regarding debt limits Management When and how to borrow money are important decisions Wants to minimize debt on the balance sheet Less debt now improves ability to borrow in the future 7 Auditors Must attest to the accuracy of all liabilities Particular care is taken because significant unreported liabilities could lead to investor and creditor losses for which auditors could be held liable Enron had billions of unreported liabilities which led to the demise of Arthur Andersen 8 Concept Practice 1 9 Learning Objective 2 Define current liability and list important financial metrics that use current liabilities. 10 The Relative Size of Current Liabilities on the Balance Sheet 11 Current Liabilities Classification Expected to require the use of current assets (or the creation of other current liabilities) to settle the obligation. Valuing current liabilities on the balance sheet Ignore present value (report at face value) Reporting current liabilities Primary problem is ensuring that all existing current liabilities are reported on the balance sheet. 12 Which of the following events does not have any impact on total .