1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA CHAPTER 9 REPORTING AND INTERPRETING LIABILITIES McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 9-2 LIABILITIES DEFINED AND CLASSIFIED Defined as probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services. Maturity = 1 year or lessMaturity > 1 year Current Liabilities Noncurrent Liabilities

3. 9-3 LIQUIDITY Liquidity is the ability to pay current obligations. Working Capital Current Assets – Current Liabilities Working capital is a margin of safety that ensures a company can meet its short-term obligations.

4. 9-4 CURRENT LIABILITIES

5. 9-5 Gross Pay PAYROLL TAXES Net Pay Medicare Tax State and Local Income Taxes Social Security Tax Federal Income Tax Voluntary Deductions Less Deductions:

6. 9-6 NOTES PAYABLE A note payable specifies an annual interest rate associated with the borrowing.  To the lender, interest is a revenue..  To the borrower, interest is an expense. A note payable specifies an annual interest rate associated with the borrowing.  To the lender, interest is a revenue..  To the borrower, interest is an expense. Interest = Principal × Interest Rate × Time When computing interest for one year, “Time” equals 1. When the computation period is less than one year, then “Time” is a fraction.

7. 9-7 DEFERRED REVENUES Revenues that have been collected but not earned. Deferred revenues are reported as a liability because cash has been collected but the related revenue has not been earned by the end of the accounting period.

8. 9-8 ESTIMATED LIABILITIES Contingent liabilities are potential liabilities that are created as a result of a past event. The probabilities of occurrence are defined in the following manner: 1.Probable—the chance that the future event or events will occur is high. 2.Reasonably possible—the chance that the future event or events will occur is more than remote but less than likely. 3.Remote—the chance that the future event or events will occur is slight.

9. 9-9 Working Capital = Current Assets – Current Liabilities WORKING CAPITAL MANAGEMENT Changes in working capital accounts are important to managers and analysts because they have a direct impact on cash flows from operating activities reported on the statement of cash flows.

10. 9-10 LONG-TERM NOTES PAYABLE AND BONDS Relatively small debt needs can be filled from single sources. Banks Insurance Companies Pension Plans

11. 9-11 LEASE LIABILITIES Operating Lease Short-term lease; No liability or asset recorded Capital Lease Long-term lease; Meets one of 4 criteria; Results in recording an asset and a liability Capital Lease Criteria 1.Lease term is 75% or more of the asset’s expected economic life. 2.Ownership of the asset is transferred to the lessee at the end of the lease. 3.Lease permits lessee to purchase the asset at a price that is lower than its fair market value. 4.The present value of the lease payments is 90% or more of the fair market value of the asset when the lease is signed.

12. 9-12 PRESENT VALUE CONCEPTS Money can grow over time because it can earn interest. $1,000 invested today at 10%. In 1 year it will be worth $1,100. In 5 years it will be worth $1,610!

13. 9-13 PRESENT VALUE CONCEPTS The growth is a mathematical function of four variables: 1.The value today (present value). 2.The value in the future (future value). 3.The interest rate. 4.The time period. The growth is a mathematical function of four variables: 1.The value today (present value). 2.The value in the future (future value). 3.The interest rate. 4.The time period.

14. 9-14 PRESENT VALUE OF A SINGLE AMOUNT The present value of a single amount is the worth to you today of receiving that amount some time in the future. Today Present Value Future Future Value Interest compounding periods

15. 9-15 PRESENT VALUES OF AN ANNUITY An annuity is a series of consecutive equal periodic payments. Today

16. 9-16 PRESENT VALUES OF AN ANNUITY What is the value today of a series of payments to be received or paid out in the future? Today Present Value Interest compounding periods Payment 1Payment 2Payment 3

17. 9-17 SUPPLEMENT A: PRESENT VALUE COMPUTATIONS USING EXCEL

18. 9-18 SUPPLEMENT B: DEFERRED TAXES Deferred Taxes Exist because of timing differences caused by reporting revenues and expenses according to GAAP on a company’s income statement and according to the Internal Revenue Code on the tax return. Temporary Differences Timing differences that cause deferred income taxes and will reverse, or turn around, in the future.

19. 9-19 SUPPLEMENT C: FUTURE VALUE CONCEPTS How much will an amount today be worth in the future? Today Present Value Future Value Interest compounding periods Future value is the sum to which an amount will increase as the result of compound interest.

20. 9-20 FUTURE VALUE OF AN ANNUITY Equal payments are made each period. The payments and interest accumulate over time. Today Interest compounding periods Payment 1Payment 2Payment 3

21. 9-21 END OF CHAPTER 9