10-1
10-1
10-2
Liabilities
FINANCIAL
ACCOUNTING

Assets financed by

Equity (owners)
Debt (lenders)

Liabilities recorded at current cash equivalent

Fourth Canadian Edition

LIBBY, LIBBY, SHORT, KANAAN, GOWING

Riskier because have to make interest payments
Amount a creditor would accept the liability immediately
Reporting and Interpreting
Current Liabilities
Chapter 10
PowerPoint Author:
Robert G. Ducharme, MAcc, CA
University of Waterloo, School of Accounting and Finance
Copyright © 2011 McGraw-Hill Ryerson Limited
Copyright © 2011 McGraw-Hill Ryerson Limited
10-3
Liabilities Defined and Classified
10-4
Current Liabilities
Account
Name
Defined as probable debts or obligations of the
entity that result from past transactions, which will
be paid with assets or services.
Also
Called
Trade
Payables
Accounts
Payable
Maturity = 1 year or less
Maturity > 1 year
Accrued
Liabilities
Accrued
Expenses
Current
Liabilities
Non-current
Liabilities
Notes
Payable
N/A
Deferred
Revenues
Unearned
Revenues
Copyright © 2011 McGraw-Hill Ryerson Limited
LO 1
Definition
Obligations to pay for goods and
services used in the basic operating
activities of the business.
Obligations related to expenses that
have been incurred but have not been
paid at the end of the accounting
period.
Obligations due supported by a formal
written contract.
Obligations arising when cash is
received prior to the related revenue
being earned.
LO 1
Copyright © 2011 McGraw-Hill Ryerson Limited
10-5
Current Ratio and Working Capital

10-6
Current Ratio
An important indicator of a company’s ability to
meet its current obligations.
An important indicator of a company’s
ability to meet its current obligations.
Current Ratio = Current Assets / Current Liabilities

Two commonly used measures:
Benetton Group has current
assets of €1,334,809 and current
liabilities of €869,864.
Current Ratio = Current Assets ÷ Current Liabilities
Working Capital = Current Assets – Current Liabilities
Copyright © 2011 McGraw-Hill Ryerson Limited
LO 2
Current
=
Ratio
1.53 =
Current
Assets
÷
Current
Liabilities
€1334809
÷
€869864
2009 Current Ratios
Benetton Burberry
Guess
1.53
1.52
3.20
Copyright © 2011 McGraw-Hill Ryerson Limited
LO 2
10-2
10-7
Trade Payables Turnover Ratio
10-8
Payroll Taxes
Gross Pay
Cost of Sales ÷ Average Trade Payables
Measures how quickly management is paying trade accounts.
Net Pay
Less Deductions:
A high trade payables ratio normally suggests that a company
is paying its suppliers in a timely manner.
The ratio can be stated more intuitively by dividing it into the
number of days in a year:
Average Age of Payables = 365 Days ÷ Turnover Ratio
Canada
Pension
Plan
LO 3
Copyright © 2011 McGraw-Hill Ryerson Limited
Health
Taxes and
Premiums
Federal
and
Provincial
Income Tax
Employment
Insurance
Voluntary
Deductions
LO 1
Copyright © 2011 McGraw-Hill Ryerson Limited
10-9
Notes Payable
The time value of money is interest that is
associated with the use of money over time.
Benetton Group
borrows €100,000 for 2
months at an annual
interest rate of 12%.
Compute the interest on
the note for the loan
period.
A note payable specifies the interest
rate associated with the borrowing.
To
To
10-10
Notes Payable
the lender, interest is a revenue.
the borrower, interest is an expense.
Interest = Principal × Interest Rate × Time
Interest
Interest
Interest
When computing interest for one
year, “Time” equals 1. When the
computation period is less than one
year, then “Time” is a fraction.
LO 4
Copyright © 2011 McGraw-Hill Ryerson Limited
= Principal
= €100000
=
€2000
× Interest Rate
×
12%
×
×
Time
2
/12
LO 4
Copyright © 2011 McGraw-Hill Ryerson Limited
10-11
Refinanced Debt: Current or Non-current?
Any portion of a note payable that is due
within one year, or the operating cycle,
whichever is longer.
Instead of repaying a debt from current cash, a company may
refinance it either by negotiating a new loan agreement with a
new maturity date or by borrowing money from a new creditor
and repaying the original creditor.
US GAAP and IFRS differ with respect to the timing of the
refinancing.
Current Notes Payable
Total
Notes
Payable
Copyright © 2011 McGraw-Hill Ryerson Limited
10-12
International Perspective—IFRS
Current Portion of Long-Term Debt
Under US GAAP, the ability
to refinance must be in
place before the financial
statements are issued.
Noncurrent Notes Payable
LO 4
Copyright © 2011 McGraw-Hill Ryerson Limited
In the case of IFRS, the
actual refinancing must
take place by the statement
of financial position date.
LO 4
10-3
10-13
Deferred Revenues
10-14
Provisions Reported as Liabilities

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.

When either the amount or the timing of the liability is uncertain, it
is referred to as provision.
A provision must be recognized when the following conditions are
met:




Examples of provisions include:




LO 4
Copyright © 2011 McGraw-Hill Ryerson Limited
(1) an entity has a present obligation as a result of a past event,
(2) it is probable that cash or other assets will be required to settle
the obligation, and
(3) a reliable estimate can be made of the amount of the obligation.
estimated liabilities for warranties,
legal and tax disputes that arise in the ordinary course of business,
closing of stores or specific operations, and
restructuring of the production, sales, or administrative structures.
LO 4
Copyright © 2011 McGraw-Hill Ryerson Limited
10-15
It’s a Matter of Degree
A contingent liability is a possible liability that is created
as a result of a past event; it is not an effective liability
until some future event occurs.
Level of certainty of the present or
possible obligation
There is a present obligation that
probably requires an outflow
of resources.
There is a present obligation or a
possible obligation that may,
but probably will not, require an
outflow of resources.
There is a present obligation or a
possible obligation where
the likelihood of an outflow of
resources is remote.
10-16
International Perspective—IFRS
Contingent Liabilities
The assessment of future probabilities is inherently subjective
but both US GAAP and IFRS provide some guidance.
Should a liability be
recognized?
Disclosure requirements
A provision must be
recognized.
Disclosure of the
provision is required.
Under US GAAP, “probable”
has been defined as likely
which is interpreted as
having a greater than 70%
chance of occurring.
There is no need to
Disclosure is required
recognize a provision. for the contingency.
This difference means that companies reporting under IFRS
would record a liability when other companies reporting under
US GAAP would report the same event as a contingency.
There is no need to
Disclosure is not
recognize a provision. required.
Copyright © 2011 McGraw-Hill Ryerson Limited
Under IFRS, probable is
defined as more likely than
not which would imply
more than a 50% chance
of occurring.
LO 5
LO 5
Copyright © 2011 McGraw-Hill Ryerson Limited
10-17
Working Capital Management
10-18
Appendix 10A: Deferred Income Taxes
Permanent
Differences
Permanent differences arise from specific
differences between rules that govern the
preparation of financial statements (IFRS)
and tax returns (Income Tax Act).
Specifically, some types of revenue are
exempt from tax while other types of
expenses are not deductible in computing
taxable income.
Temporary
Differences
Timing differences that cause
deferred income taxes and will
reverse, or turn around, in the
future.
Working Capital = Current Assets – Current Liabilities
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.
Copyright © 2011 McGraw-Hill Ryerson Limited
LO 6
Copyright © 2011 McGraw-Hill Ryerson Limited
Appendix 10A
10-4
10-19
Appendix 10A: Deferred Income Taxes
IFRS is the set of
rules for preparing
financial statements.
Results in . . .
Assume the following financial information for
BMX Corp.
The Income Tax Act is the
set of rules for preparing
tax returns.
Usually. . .
Financial statement
income tax expense.
10-20
Appendix 10A: Deferred Income Taxes
Results in . . .
ITA income taxes
payable.
The difference between tax expense and tax
payable is recorded in an account called a
Deferred Income Tax Liability or Asset.
The company uses straight-line depreciation for
financial reporting and CCA for income tax reporting.
The company has a 30% tax rate.
Appendix 10A
Copyright © 2011 McGraw-Hill Ryerson Limited
Revenues
$ 1,000,000
Depreciation Expense:
Straight-line
200,000
CCA
320,000
Other Expenses
650,000
Appendix 10A
Copyright © 2011 McGraw-Hill Ryerson Limited
10-21
Appendix 10A: Deferred Income Taxes
Compute BMX’s income tax expense and
income tax payable.
Income
Statement
Revenues
Less:
Depreciation
Other expenses
Profit before taxes
× Tax rate
Income taxes
Tax
Return
$ 1,000,000
$
$
Compute BMX’s income tax expense and
income tax payable.
Income
Statement
Difference
Revenues
$ 1,000,000
Less:
Depreciation/CCA
200,000
Other expenses
650,000
Profit before taxes
$ 150,000
The income tax
amount computed
based on financial
statement income
is income tax
expense for the
period.
200,000
650,000
150,000
30%
45,000
× Tax rate
Income taxes
Appendix 10A
Copyright © 2011 McGraw-Hill Ryerson Limited
10-23
Appendix 10A: Deferred Income Taxes
Compute
Benetton
Group’s
incomefortax
The Deferred
Tax Liability
of $36,000
the period
the difference
between
expense
andisincome
tax payable.
income tax expense of $45,000 and
income tax
payable of
$9,000.
Income
Tax
Statement
Revenues
$ 1,000,000
Less:
Depreciation/CCA
200,000
Other expenses
650,000
Profit before taxes
$
150,000
× Tax rate
Income taxes
Copyright © 2011 McGraw-Hill Ryerson Limited
$
Return
$ 1,000,000
$
30%
45,000 $
320,000
650,000
30,000
10-22
Appendix 10A: Deferred Income Taxes
Difference
$
-
$
(120,000)
120,000
30%
9,000 $
30%
36,000
Appendix 10A
Copyright © 2011 McGraw-Hill Ryerson Limited
$
Tax
Return
$ 1,000,000
$
30%
45,000 $
320,000
650,000
30,000
30%
9,000
Difference
Income taxes
based on tax
return income
are the
income taxes
payable for
the period.
Appendix 10A