Kế toán, kiểm toán - Chapter 6: Accounting for presentation of liabilities and owners’ equity

CHAPTER 6Accounting for Presentation of Liabilities and Owners’ Equity1Learning ObjectivesExplain what are current liabilities?Explain the difference between interest calculated on a straight basis and interest calculated on a discount basis.Explain the concept of unearned income.Explain the employer’s liability for payroll taxes, GST and superannuation contributions.Explain the importance of making estimates for certain accrued liabilities. Explain what leverage is and how it is affected by long-term borrowings.2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOverviewLiabilities are present obligations of the entity that have not yet been paid but that will involve an economic sacrifice in a financial period after the current period.Distinguish from Contingent liabilities, which are not present obligations (only possible obligations).Financial Statement presentation of liabilities in order of settlement priority.3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynTermsLiabilities are present obligations of the entity that have not yet been paid but that will involve an economic sacrifice in a financial period after the current period.Distinguish from Contingent liabilities, which are not present obligations (only possible obligations).Financial Statement presentation of liabilities in order of settlement priority.4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLiabilities and Owners’ EquityA = L + OEAccounting EquationFinancial resources available to an entity for financing its assetsClaim of the entities owners to the assetsObligations of the entity5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLiabilitiesCurrentAccounts payableShort-term borrowingsCurrent maturities of long-term borrowingsUnearned revenueOther accrued liabilitiesProvisionsNon-currentDeferred tax liabilitiesFinance lease obligationsBondsDebenturesOther non-current liabilities6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesAccounts payableAmounts owed to suppliers for goods and services that have been provided on credit.2/10, n/30 . . . in this number of days.. . . for this number of days.Otherwise, net (or All) is due . . . Percentage discount . . .Discounts offered for prompt payment7Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesSpecified repayment schedule, orrepayment by a specified date.Interest will be charged on the amount of the facility.Short-term borrowings:working capital loan.revolving line of credit or bank overdraft facility.8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesEffect of short term-borrowings on the balance sheet9Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesInterest calculation methodsStraight line – Simple interestInterest = Principal x Rate x Time (years) = 1000 x 12% x 1 year = $120For example, a loan of $1,000 borrowed for one year at an interest rate of 12%.At the maturity date, the borrower will repay the principal and interest of $1,120.10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesDiscount basisSubtract interest from loan at beginning of loan period. Borrower receives $880 ($1,000-$120).At the maturity date, the borrower will repay just the principal, as interest has already been paid.Interest calculation methodsEffective interest rateInterest paid / Money received x Time=$120 / $880 x 1 year13.6%==11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesUnearned RevenuePayment in advance for goods that have not been delivered or services not performed.Must be allocated to the period when revenue is earned.MATCHING CONCEPT12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesUnearned RevenueExampleA magazine publisher or club or society receives payment in advance for subscription.13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesOther accrued liabilities Payroll taxes and other withholdings GST obligations Accrued property taxes Accrued expenses Income tax payable14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesPAYG tax withholdings, payroll taxes and other withholdings Employers are responsible for remitting payment to the appropriate entities on behalf of their employees for amounts withheldPAYG tax payable Wages payable Superannuation Health fund insurance premium payable15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesGST obligationsNet amount of GST owing to Australian Tax Office (difference between GST collected from customers and GST paid to suppliers).Goods and Services TaxEntity charges GST on sales value of items sold.Entity claims deduction for GST paid to suppliers on inputs to sales.difference16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesIncome tax payableBased on calculation of taxable incomeBased on accounting income before taxIncome tax EXPENSEDifferent to:17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCurrent LiabilitiesProvisionsAmount or timing of future sacrifice of economic benefits is uncertain – liability estimated based on past experience and statistical analysis.Provision for warranty Provision for annual leave Provision for other employee entitlements 18Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynProvisions e.g. Employee entitlementsAll accounts will comprise four factors:Beginning balance (beginning year Balance Sheet)Current year estimated Income Statement expense)This year’s payment (discharge of liability)Current year end balance Examples: long service leave; sick leave; pensionOther provisions: Warranty payments; Guarantees signed; Law Suites contended19Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynNon-current LiabilitiesLong-term borrowings – for many non-financial firms, this accounts for up to half of the firm’s capital structure.Capital structure or leverage– mix of borrowings and owners’ equity that is used to finance the acquisition of the firm’s assets.20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynNon-current LiabilitiesAdvantage of borrowings – interest expense is deductible for tax purposes whereas dividends (distributions of profits to shareholders) are not.Financial leverage – relates to the use of borrowed money to enhance returns to owners. Difference between rate of return on assets (ROA) and rate of return earned on owners’ equity (ROE).21Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBondsDebenture bonds/mortgage bondsDebenture bonds are bonds that are secured only by the general credit of the issuer.Mortgage bonds are secured against real estate owned by the issuer (borrower).The term bond is a debt financing arrangement that like all loans has to be repaid.22Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynContingent Liabilities Potential claims on a company’s resources, arising from such things as pending litigation for environmental hazards or product warranties.Financial statement disclosure: In notes to accounts23Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynContingent liabilitiesWhen should a contingency be taken up in the balance sheet as a liability?When recognition criteria are satisfied.When it is probable that the loss will be confirmed by a future transaction or event.When the amount of the loss is reasonably estimable.24Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynWorking Capital ( CA –CL) and Measures of Liquidity Current Assets Current RatioLiquidity refers to a firm’s ability to meet its current obligations. Working capital is the excess of a firm’s current assets over its current liabilities.Working CapitalCurrent Assets-Inventory Current Liabilities=Quick RatioCurrent Liabilities= Current Assets - Current Liabilities25Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLiquidity MeasuresAs a general rule a current ratio of 2.0 times (or 2:1) and a quick ratio of 1.0 times are considered indicative of adequate liquidity.In terms of debt-paying ability, the higher the current ratio the better. If the current ratio is too high it can mean the company has not made the most productive use of its assets.If less money is held in inventory or accounts receivable, the money freed up can be used to purchase new production equipment or expand marketing efforts.26Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynProfitability MeasuresEvaluations more valid when based on the trend of one company’s ROA and ROE relative to: Trends in industry Trends of competitors (local and oversees) Trends in budgets In undertaking any financial analysis, it is the trend of these calculations over time that is important.27Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynTrend AnalysisResults of any ratio analysis from a single balance sheet are not as meaningful as trend results over several periods. For example if a short-term loan were repaid just before balance date - working capital would not change but current ratio would.28Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynTrend Analysis*Incorporate exhibit 10-2 (table of results over five years for Medical and Health Care Ltd).Commentary: The data shown above has been compiled from the financial statements for five years for Medical Health care Ltd (MHC).29Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynTrend Analysis*Incorporate exhibit 10-3 (trend analysis graph of results over five years for Medical and Health Care Ltd).Commentary: The graph reveals that both ROA and ROE declined from 2004. The performance continued to decline but at a less dramatic rate until 2007, when the first improvement was recorded. Important to look also at the returns of the industry.30Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynExample incorporating leverageInvestor is considering 2 investments: $500 will return 5% and $750 will return 9%. Small problem investor only has $500. Which is the better investment?What is the maximum rate at which money can be borrowed to make the second investment pay?31Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynProfitability MeasuresEvaluations more valid when based on the trend of one company’s ROA and ROE relative to: Trends in industry Trends of competitors (local and oversees) Trends in budgets 32Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynTrend AnalysisResults of any ratio analysis from a single balance sheet are not as meaningful as trend results over several periods. For example if a short-term loan were repaid just before balance date - working capital would not change but current ratio would.33Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynTrend Analysis*Incorporate exhibit 10-2 (table of results over five years for Medical and Health Care Ltd).Commentary: The data shown above has been compiled from the financial statements for five years for Medical Health care Ltd (MHC).34Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynTrend Analysis*Incorporate exhibit 10-3 (trend analysis graph of results over five years for Medical and Health Care Ltd).Commentary: The graph reveals that both ROA and ROE declined from 2004. The performance continued to decline but at a less dramatic rate until 2007, when the first improvement was recorded. Important to look also at the returns of the industry.35Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynReturn on Equity (ROE) Profit for the period after taxAverage Owners’ EquityReturn on Equity=Using Exhibit 10-1= 14.1%= $34 910 ($230 320 + $265 230) ÷ 2ROE relates the earnings to the owners’ investment36Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynWorking Capital and Measures of Liquidity Current Assets Current RatioLiquidity refers to a firm’s ability to meet its current obligations. Working capital is the excess of a firm’s current assets over its current liabilities.Working CapitalCurrent Assets-Inventory Current Liabilities=Quick RatioCurrent Liabilities= Current Assets-Current Liabilities37Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLiquidity MeasuresAs a general rule a current ratio of 2.0 times (or 2:1) and a quick ratio of 1.0 times are considered indicative of adequate liquidity.In terms of debt-paying ability, the higher the current ratio the better. If the current ratio is too high it can mean the company has not made the most productive use of its assets.If less money is held in inventory or accounts receivable, the money freed up can be used to purchase new production equipment or expand marketing efforts.38Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn