1. Current Liabilities and the Time Value of Money – Chapter 8 Financial & Managerial Accounting, 8th Edition by Needles, Powers, Crosson

2. Key Concepts / Terms The primary reason a company incurs current liabilities is to meet its needs for cash during the operating cycle. Failure to manage these cash flows can have devastating consequences. To evaluate a company’s ability to pay it current liabilities, two ratios are used (defined in an earlier chapter). They include working capital and the current ratio.

3. Key Concepts / Terms Two measures are also used to assess a company’s ability to pay within a certain time frame. 1.Payables turnover = Cost of goods sold +/- Change in merchandise inventory ÷ Average accounts payable. Shows the number of times, on average, a company pays its accounts payable in an accounting period. 2.Days’ payable = 365 days ÷ Payables turnover. Shows how long, on average, a company takes to pay its accounts payable.

4. Key Concepts / Terms Be sure you understand the recognition, valuation, classification and disclosure requirements related to liabilities. –Current liabilities: debts and obligations that a company expects to satisfy within one year or within its normal operating cycle, whichever is longer. –Long-term liabilities: liabilities due beyond one year or beyond the normal operating cycle.

5. Key Concepts / Terms Current Liabilities 1.Definitely determinable liabilities Accounts payable Bank loans and commercial paper (unsecured loans) Notes payable. See journal entries page 429. Accrued liabilities. Dividends payable

6. Key Concepts / Terms 1.Definitely determinable liabilities (con’t) Sales and excise taxes payable. See journal entries page 430. Current portion of long-term debt Payroll liabilities. See full descriptions of components on page 432. Include federal income taxes, state and local income taxes, FICA taxes, medical insurance premiums, pension contributions, FUTA taxes and SUTA taxes. See journal entries on page 434. Unearned revenues.

7. Key Concepts / Terms 2.Estimates liabilities: exact dollar amount cannot be known until a later date Income taxes payable Property taxes payable Promotional costs Product warranty liability. See journal entries on page 436. Vacation pay liability. See journal entries on page 438.

8. Key Concepts / Terms 3.Contingent liability: a potential liability because it depends on a future event arising out of a past transaction. Include: lawsuits, income tax disputes, discounted notes receivable, guarantees of debt, and failure to follow government regulations. 4.Commitment: a legal obligation that does not meet the technical requirements for recognition as a liability (probable and can be reasonably estimated) and so is not recorded.

9. Key Concepts / Terms Time Value of Money: the costs or benefits derived from holding or not holding money over time. Interest: the cost of using money for a specific period. Simple interest: interest cost for one or more periods when the principal sum stays the same from period to period. See example page 440. Compound interest: interest cost for two or more periods when after each period, the interest earned in that period is added to the amount on which interest is computed in future periods. See example pages 440 and 441.

10. Key Concepts / Terms Future value: amount an investment will be worth at a future date if invested at compound interest. –Table 1. Future value of $1… (single sum) –Table 2. Future value of an ordinary annuity of $1… Present value: amount that must be invested today at a given rate of interest to produce a given future value. –Table 3. Present value of $1… (single sum) –Table 4. Present value of an ordinary annuity of $1

11. Key Concepts / Terms Using the tables, the factors used are the point where the interest rate and number of period intersect. These are called future/present value factors, depending. You MUST make sure your interest rate compounding period and number of periods are in the same terms (i.e., annual, monthy, semi-annual, or quarterly) to acquire the correct factor!

12. Key Concepts / Terms –i = annual interest rate ÷ number of compounding periods in a year (12% ÷ 12 = 1% per month) –n = number of compounding periods in a year x number of years (12 x 5 years = 60 months) Applications for the time value of money –Valuing an asset (cost vs. present value of future benefits) –Deferred payment –Investment on idle cash –Others (see pages 448 and 449)