1. Gary A. Porter and Curtis L. Norton
Using Financial Accounting Information: The Alternative to Debits and Credits Fifth Edition
Gary A. Porter and Curtis L. Norton
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

2. Jacuzzi Brands Partial Balance Sheet – 2004
(in millions)
Liabilities and shareholders' equity
Current liabilities:
Notes payable $ 21.1
Current maturities of long-term debt
Trade accounts payable 123.7
Income taxes payable 18.3
Accrued expenses and other
current liabilities
Total current liabilities $301.4
Requires
payment within
one year

3. Selected 2004 Liquidity Ratios
Current Quick
Ratio Ratio
Jacuzzi Brands
Sara Lee
Tommy Hilfiger
Boeing
Nike
LO1

4. Accounts Payable
Amounts owed for the purchase of inventory, goods, or services on credit
Discount payment terms offered to encourage early payment
Example:
2/10,
n30

5. Promissory Note I promise to pay $1,000 plus 12% annual
interest on December 31, 2007.
Date: January 1, 2007
Signed:_________
Lamanski Co.
S.J.Devona
Total repayment = $1,120
$1,000 + ($1,000 × 12%) 5

6. Discounted Promissory Note
In exchange for $880 received today, I promise to pay $1,000 on December 31, 2007.
Date: January 1, 2007
Signed:_________
Lamanski Co.
Effective interest rate on note = 13.6% ($120 interest/$880 proceeds)

7. Balance Sheet Presentation of Discounted Notes
Discount transferred to interest expense over life of note
1/1/ /31/07
Notes Payable $1,000 $1,000
Less: Discount on Notes Payable
Net Liability $ $1,000 7

8. Current Maturities of Long-Term Debt
Principal repayment on borrowings due within one year of balance sheet date
“Due in upcoming year”

9. Taxes Payable Record expense when incurred, not when paid 12/31/07
3/15/08
Record
2007 tax
expense
Taxes
Paid
LO2

10. Current Liabilities on the Statement of Cash Flows
Operating Activities
Net income xxx
Increase in current liability +
Decrease in current liability –
Investing Activities
Financing Activities
Increase in notes payable +
Decrease in notes payable –
LO3

11. Contingent Liabilities
Obligation involving
existing condition
Outcome not known with certainty
Dependent upon some future event
Actual amount is estimated
LO4 11

12. Contingent Liabilities
Accrue estimated amount if:
Liability is probable
Amount can be reasonably estimated
In Year criteria are met:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
increase increase 12

13. Typical Contingent Liabilities
Warranties
Premium or coupon offers
Lawsuits 13

14. Recording Contingent Liabilities
Example:
Quickkey Computer sells a computer product for $5,000 with a one-year warranty. In 2007, 100 computers were sold for a total sales revenue of $500,000.
Analyzing past records, Quickkey estimates that repairs will average 2% of total sales.

15. Recording Contingent Liabilities
Probable liability has been incurred?
Amount reasonably estimable?
YES
YES
Record in 2007:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Warranty Warranty Expense
Liability 10, (10,000)

16. Disclosing Contingent Liabilities
Disclose in financial statement notes IF
not probable but reasonably possible OR
amount not estimable 16

17. Contingent Assets
Contingent gains and assets are not recorded but may be disclosed in financial statement notes
Conservatism principle applies

18. Time Value of Money
Prefer payment at the present time rather than in the future due to the interest factor
Applicable to both personal and business decisions

19. I = P × R × T Simple Interest Dollar amount of Time in years Principal
interest per year
Principal
Time in years
Interest rate as a percentage
LO5 19

20. Example of Simple Interest
Given following data:
principal amount = $ 3,000
annual interest rate = %
term of note = 2 years
Calculate interest on the note. 20

21. Example of Simple Interest
Given following data:
principal amount = $ 3,000
annual interest rate = %
term of note = 2 years
Calculate interest on the note.
P × R × T
$3,000 × × = $ 600 21

22. Compound Interest
Interest is calculated on principal plus previously accumulated interest
Interest on interest
Compound interest amount always higher than simple interest due to interest on interest 22

23. Example of Interest Compounding
Given following data:
principal amount = $ 3,000
annual interest rate = %
term of note = 2 years
annual compounding of interest
Calculate interest on note.
LO6 23

24. Compound Interest Periods
Year 1 Year 2
10%
annually
2 10% annual interest 24

25. Example of Interest Compounding
Principal Amount
at Beginning Interest at Accumulated
Year of Year 10% per Year at End of Year
1 $3,000 $ $3,300
, ,630 25

26. Comparing Interest Methods
Simple annual interest:
$3,000 × × 2 = $600
Annual compounding:
1 $300
Total $630 26

27. Compound Interest Computations
Present value of a single amount
Future value of a single amount
Present value of an annuity
Future value of an annuity 27

28. Future Value of Single Amount
Known amount of single payment or investment
Future Value
+ Interest = 28

29. Future Value of a Single Amount Example
If you invest $2,000 10% compound interest,
what will it be worth 2 years from now?
invest
$2,000
Future
Value = ?
Year 1
Year 2
+ 10% per year 29

30. Future Value of a Single Amount Example – Using Formulas
FV = p(1 + i)n
= $2,000(1.10)2
= $2,420

31. Future Value of a Single Amount Example – Using Tables
Year 1
Year 2
FV = ??
PV = $2,000
FV = Present value × table factor
= $2,000 × (2 10%) 31

32. Future Value of $1 (n) 2% 4% 6% 8% 10% 12% 15% 32

33. Future Value of a Single Amount Example – Using Tables
Yr. 1
Yr. 2
PV = $2,000
FV = $2,420
FV = Present value × table factor
= $2,000 × (2 10%)
= $2,000 × 1.210
= $2,420 33

34. Present Value of Single Amount
Known amount of single payment in future
Present Value
Discount 34

35. Present Value of a Single Amount Example
If you will receive $2,000 in two years, what is it worth today (assuming you could invest at 10% compound interest)?
Present
Value = ?
$2,000
Year 1
Year 2
10% 29

36. Present Value of a Single Amount Example – Using Formulas
PV = Future value × (1 + i)–n
= $2,000 × (1.10)–2
= $1,652

37. Present Value of a Single Amount Example – Using Tables
Year 1
Year 2
PV = ??
FV = $2,000
PV = Future value × table factor
= $2,000 × (2 10%) 31

38. Present Value of $1 (n) 2% 4% 6% 8% 10% 12% 15% 32

39. Present Value of a Single Amount Example – Using Tables
Year 1
Year 2
PV = $1,652
FV = $2,000
PV = Future value × table factor
= $2,000 × (2 10%)
= $10,000 × 0.826
= $1,652 33

40. Future Value of an Annuity
Periods
$ $3, $3,000 $3, $3,000
+ Interest
Future
Value = ? 40

41. Future Value of an Annuity Example
If we invest $3,000 each year for four years at 10% compound interest, what will it be worth 4 years from now?
$0 $3, $3, $3, $3,000
Year 1 Year Year Year 4
FV = ?? 41

42. Future Value of an Annuity Example
$0 $3, $3, $3, $3,000
Year 1 Year Year Year 4
FV = ??
FV = Payment × table factor
= $3,000 × (4 10%)

43. Future Value of Annuity of $1 32

44. Future Value of an Annuity Example
Year 1 Year Year Year 4
$0 $3, $3, $3, $3,000
FV = $13,923
PV = Payment × table factor
= $3,000 × (4 10%)
= $3,000 × 4.641
= $13,923

45. Present Value of an Annuity
Periods
$ $ $ $ $500
Discount
Present
Value = ?

46. Present Value of an Annuity Example
What is the value today of receiving $4,000 at the end of the next 4 years, assuming you can invest at 10% compound annual interest?
Year 1 Year Year Year 4
$0 $4, $4, $4, $4,000
PV = ?? 41

47. Present Value of an Annuity Example
Year 1 Year Year Year 4
$0 $4, $4, $4, $4,000
PV = ??
PV = Payment × table factor
= $4,000 × (4 10%)

48. Present Value of Annuity of $1 32

49. Present Value of an Annuity Example
Year 1 Year Year Year 4
$0 $4, $4, $4, $4,000
PV = $12,680
PV = Payment × table factor
= $4,000 × (4 10%)
= $4,000 × 3.170
= $12,680

50. Solving for Unknowns Example
Assume that you have just purchased a new car for $14,420. Your bank has offered you a 5-year loan, with annual payments of $4,000 due at the end of each year. What is the interest rate being charged on the loan?
Year Year Year Year Year 5
$0 $4, $4, $4, $4, $4,000
Discount
PV = $14,420
LO7

51. Solving for Unknowns Example
Year Year Year Year Year 5
$0 $4, $4, $4, $4, $4,000
PV = $14,420
PV = Payment × table factor
Table factor = PV/payment
Rearrange equation to solve for unknown

52. Solving for Unknowns Example
Year Year Year Year Year 5
$0 $4, $4, $4, $4, $4,000
PV = $14,420
Table factor = PV/payment
= $14,420/$4,000
= 3.605

53. Present Value of Annuity of $1
The factor of equates to an interest rate of 12% 32

54. Accounting Tools: Payroll Accounting
Appendix A
Accounting Tools: Payroll Accounting

55. Calculation of Gross Wages
Hourly
Multiply the number of hours worked times employee’s hourly rate
Salaried
Paid at a flat rate per week, month, or year, regardless of hours
LO8

56. Calculation of Net Pay Gross wages
Less: Income tax (federal, state, local)
FICA—Employee’s share
Voluntary deductions
(includes health insurance, retirement
contributions, savings plans, charitable
contributions, union dues, etc.)
= Net pay

57. Employer Payroll Taxes
Not deducted from paycheck – employer pays taxes for each employee, in addition to salary
FICA—Employer’s share
Unemployment tax

58. Payroll Accounting Example:
Gross wages for Kori Company for July are $100,000. The following amounts have been withheld from employees’ paychecks:
Kori Company’s unemployment tax rate is 3%.
Make the appropriate payroll entries.
Income Tax $20,000
FICA ,650
United Way Contributions 5,000
Union Dues ,000

59. Payroll Accounting To record July salary and deductions:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Salaries Payable , Salaries Expense (100,000)
Income Taxes Payable 20,000
FICA Taxes Payable ,650
United Way Payable ,000
Union Dues Payable ,000

60. Payroll Accounting To record payment of employee salaries
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash = Salaries Payable
(64,350) (64,350)
To record employer’s payroll taxes
FICA Taxes Payable Payroll Tax Expense
7, (10,650)
Unemployment Taxes
Payable 3,000

61. Compensated Absences
Employee absences for which the employee will be paid
Vacation, illness, holidays
Accrued as a liability if
The services have been rendered
The rights (days) accumulate
Payment is probable and can be reasonably estimated
LO9

62. Appendix B
Accounting Tools: Using Excel for Problems Involving Interest Calculations

63. Using Excel Functions
Many functions built into Excel, including PV and FV calculations
Click on the PASTE function (fx) of the Excel toolbar or the Insert command

64. FV Function in Excel Example:
Find the FV of a 10% note payable for $2,000, due in 2 years and compounded annually
Answer:
$2,420

65. PV Function in Excel Example:
How much should you invest now at 10% (compounded annually) in order to have $2,000 in 2 years?
Answer:
$1,653
(rounded)

66. End of Chapter 9