Understanding Current Liabilities and Contingencies

School: University of Nevada, Las Vegas - Course: ACC 401 - Subject: Accounting

LECTURE NOTES:Current Liabilities and Contingencies (Ch. 13) CURRENT LIABILITIES AND CONTINGENCIES (Ch. 13) According to the conceptual framework, a liability has three essential characteristics: 1.Arises from a _present obligation______________to others. 2.Results from apast transaction or event____________. 3.Represents aprobablefuture sacrifice of economic benefits (assets or services). Note:To be reported as a liability, an obligation does not need to be payable in cash. Nor does the amount and timing of settlement need to be known with certainty. In Ch. 13, we will focus onCurrentLiabilities. Classifying liabilities as either current or long-term helps investors and creditors assess the risk that the liability will require the use of cash/other assets in the near-term. Current liabilitiesare "obligations that are expected to be satisfied with_current assets or by the creation of other_current liabilities_." General Rule:Current liabilities will be satisfied within 1 year Examples of current liabilities Accounts payable and other accrued liabilities Short-term notes payable Dividends payable Unearned revenues Taxes payable Current maturities of long-term debt * You should be familiar with some of these current liabilities already. We will discuss some of the new/more complex ones. LECTURE NOTES:Current Liabilities and Contingencies (Ch. 13) NEW items / items that may need to be revisited: 1.Short-term Notes Payable-Just the flipside of a short-term note receivable (from ACC 400). A short-term note payable is a very common type of temporary financing arrangement.A company signs a promissory note, whereby the company promises to pay a sum of money (the principal) at a specified due date.The promissory note also will specify any interest to be paid on the loan/note. A note payable may arise when a company borrows cash from a lending institution OR as a result of a purchase /financing arrangement with a vendor. For short-term notes payable, you will NOT use time value of money calculations because the time to maturity is one year or less. However, there mustbe a consideration of stated or implied interest (even for zero interest bearing notes).Interest is like paying "rent" to use someone's money. Just like you can't live somewhere rent-free (except with mom and dad), you can't borrow money "rent-free" (except maybe from mom and dad).