Week 7 Lecture paper

School: Colorado State University, Fort Collins - Course: BUS 614 - Subject: Accounting

Video 1 This video covers current liabilities and how they affect the financial statements.Liquidity is how liquid a company is.It is a measure of risk.Working capital is current assets minus current liabilities (how much you have to work with in the current period).Current ratio is current assets divided by current liabilities. This is popular to compare against other companies.If you get a bond, your current assets go up, but current liabilities stay the same thus giving a higher ratio when having long term assets. Current liabilities are probable future economic sacrifice of assets, that arises from a present obligation, from past events or transactions.It something we owe in the future because of something that happened in the past.Current liabilities are only for one year or operating cycle and due that same year or cycle.Long term liabilities are due more than a year or operating cycle. Current liabilities are riskier because of the year or operating cycle deadline whereas long term liabilities appear to be less risky.Liabilities consist of accounts payable, notes payable, unearned revenue, sales tax payable, current portion of long-term debt, and contingent liabilities.Sales tax is something that always needs to be accounted for.Every time you make a sale, the revenue is multiplied by the interest rate.That is an operating activity in statement of cash flows. For contingent liabilities, you usually have to book it with an estimate.If it is probable to happen, and the amount can be reasonably estimated, you would need to recognize this liability in the financial statements.If it is a reasonable possibility but not likely or if it is likely but cannot be reasonably estimated, you would disclose the potential liability in the notes on financial statements.If is not probable, there is no need to make an entry on financial statements or disclose as a note.Warranties hit the income statement, balance sheet, and statement of cash flows. Current assets include marketable securities, interest receivable, cash, supplies, inventory, accounts receivable, prepaid items, and short-term notes receivable.Current liabilities (short- term liabilities) include taxes payable, wages payable, short-term notes payable, interest payable, and accounts payable. Video 2 This video covers long-term liabilities and how they affect the financial statements.Most businesses have them, this is how they finance their projects.One lump sum at the maturity date or installments is how the principal repayment is generally required.For example, for you mortgage, you are paying interest on it on installments.These are recorded on the balance sheet right under current liabilities and before equity accounts.Liabilities that usually have terms from two to five years are long-term installment notes.These long-term installment notes have to have payments applied to the principal and interest.First, identify the unpaid principal balance.The amount applied to interest is equal to unpaid principal balance multiplied by the interest rate.Cash payment less the amount applied to interest is equal to amount applied to principal.The new unpaid principal balance is equal to the unpaid principal balance less the amount applied to the principal.Any loan that requires payments of principal and interest at regular intervals (monthly car payment), are amortizing loans, these go down to zero on the amortization table.The principal amount is recorded in notes payable, and interest is recorded in retained earnings, expense and net income.Interest is an operating activity on statement of cash flows and principal payment is a financing activity on the statement of cash flows.