Financial Reporting and Analysis
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
ACCT1110
Financial Reporting and Analysis
Lecture 8
CRICOS code 00025B
Chapter 9: - Liabilities
1. explain the differences between current and non-current liabilities.
2. identify common types of current liabilities and explain how to account for them.
3. identify common types of non-current liabilities, such as debentures and unsecured notes,
and explain how to account for them.
4. prepare journal entries for loans payable by instalment and distinguish between current and
non-current components of long-term debt.
5. identify the advantages of leasing and explain the difference between an operating lease
and a finance lease.
6. complete basic journal entries for accounting for leases and explain how to report leases
7. explain the differences between provisions, contingencies and other types of liabilities and
explain how to report contingent liabilities.
8. prepare entries to record provisions for warranties.
9. evaluate an entity’s liquidity and solvency.
Learning Objectives
2
CRICOS code 00025B
Learning objectives (continued)
3
Chapter 10: – Reporting and analyzing equity
1. explain the business context and the importance of decision making relating to equity.
2. identify and discuss the main characteristics of a corporation (company).
3. record the issue of ordinary shares.
4. describe the effects of share splits.
5. prepare the entries for cash dividends and share dividends and describe the impact on
equity and assets.
6. understand the concept of earning power and indicate how irregular items are presented.
7. identify components of comprehensive income and changes in equity.
8. identify the items that affect retained earnings.
9. evaluate a company’s dividend and earnings performance from a shareholder’s
perspective.
10. evaluate debt and equity as alternative sources of finance.
CRICOS code 00025B
Overview of Liabilities
4
Liability
1. Overview
2. Distinguish normal liability,
provision, and contingent
liability
Current liability
1. Notes payable
2. Payroll and payroll
deductions payable
3. Revenues received in
advance
Non-current liability
1. Unsecured notes and
debentures
2. Loans payable by
instalment (Current and
non-current components of
long-term debt)
3. Leasing
CRICOS code 00025B
✓A present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
Liabilities are recognised when:
✓It is probable that an outflow of economic benefits will result from
the settlement of a present obligation;
✓The amount of liability can be reliably measured.
Liabilities are displayed in statement of financial position in order of
liquidity.
What is a liability?
5
CRICOS code 00025B
1. Notes payable
2. Payroll and payroll deductions payable
3. Revenues received in advance
4. Accounts payable
Current Liabilities
6
CRICOS code 00025B
Current Liabilities – Dominos
7
CRICOS code 00025B
Wellington University sold 5000 season football tickets at $50 each
for its 5-game home schedule. What entries should be made:
a) when the tickets are sold and
b) after each game?
Your Weekly Task
8
CRICOS code 00025B
1. Unsecured notes and debentures
2. Loans payable by instalment (Current and non-current
components of long-term debt)
3. Leasing
Non-current liabilities
9
CRICOS code 00025B
Why issue unsecured notes or debentures?
10
CRICOS code 00025B
Lecture Exercise 1
11
Admiralty Pty Ltd borrows $1m on 30 June from the bank by signing a $1m,
10% 1-year note payable. Prepare the journal entries to record:
a) The proceeds of the note and
b) Accrued interest at 31 December (assuming adjusting entries are made only
at the end of the year)
CRICOS code 00025B
• Entities may borrow money from a single lender in the form of loan.
• It is common for such loans to be repayable by instalment e.g. mortgages.
• A mortgage is a loan secured by a charge over property.
• If the borrower is unable to repay the loan, the lender may sell the property
and use the proceeds to repay the loan.
Mortgage payments consist of:
- interest expense
- reduction of loan liability.
Loans payable by instalment
12
CRICOS code 00025B
What is the journal entry to record the following monthly mortgage
payment:
- Loan balance $100 000
- Interest rate 12%p.a
- Instalment amount $10 000
Lecture Exercise 2
13
CRICOS code 00025B
Leases are liabilities payable by instalment.
A lease is an agreement between a lessee and lessor where the
lessor (owner of the asset) grants the lessee the right to use the
asset for an agreed period of time.
Operating lease — treated as rental payment when instalment
payments are made.
Finance lease — both asset and liability recorded on the statement
of financial position.
Covered in more detail in ACCT3102
Leasing
14
CRICOS code 00025B
Accruals are liabilities to pay for goods or services that have been
provided but not yet invoiced:
• e.g. next telephone or electricity account
• involve a low level of uncertainty.
Provisions are liabilities for which the amount of the future sacrifice
is still uncertain:
• e.g. long service leave
• involve significant level of uncertainty.
Provisions
15
CRICOS code 00025B
A warranty is an obligation of the supplier of goods or services to
the purchaser that the product will be functional.
There is significant uncertainty in measuring the future sacrifice
because:
• it is conditional upon the customer making a claim
• the costs of satisfying the claim depend on the nature of the fault.
Provisions
16
CRICOS code 00025B
How does a company determine the amount to report for a
provision?
Management must use judgement, based on past or similar
transactions, discussions with experts, and any other pertinent
information.
Provisions
17
Toyota warranties. Toyota might determine that 80 percent of its cars will not
have any warranty cost, 12 percent will have substantial costs, and 8 percent
will have a much smaller cost. In this case, by weighting all the possible
outcomes by their associated probabilities, Toyota arrives at an expected value
for its warranty liability.
CRICOS code 00025B
On 30 June Marshall Ltd estimates that in the future it will cost them $200,000
to repair or replace goods which are defective.
On 5 July they have to replace some defective goods at a cost of $1,000
On 30 June of the following year they decide that the warranty provision should
be $404,000 as they have had some major issues with their products.
Record the following three entries to reflect the above items:
a) Entry to record liability for outstanding warranties
b) Entry to record goods replaced under warranty
c) Entry to increase estimated cost of servicing unexpired warranty contracts
Lecture Exercise 3
CRICOS code 00025B
Trish’s Toasters Pty Ltd sells toasters with a 1-year warranty. At 30 June,
it is estimated that the liability for unexpired warranties is $18,000. The
warranty provision account has a debit balance of $4,000. What should be
the adjusting entry to record the warranty provision at 30 June?
1. Debit $18,000
2. Credit $18,000
3. Debit $22,000
4. Credit $22,000
Lecture Exercise 4
19
Semester 1, 2019
CRICOS code 00025B
Contingent liabilities are liabilities for which the amount of future
sacrifice is so uncertain that it cannot be measured reliably:
• e.g. an unresolved legal action.
Contingent liabilities are not recognised in the accounts because
they are neither probable nor able to be measured reliably.
However, they must be disclosed in the notes to the financial
statements.
Contingent liabilities
20
CRICOS code 00025B
Classification of liabilities
21
CRICOS code 00025B
1. Liquidity Ratios:
Measure the short-term ability of an entity to pay its maturing
obligations and to meet unexpected needs for cash.
Three useful measures:
i. working capital
ii. current ratio
iii. quick ratio.
Financial statement analysis
22
CRICOS code 00025B
i. Working capital:
= Current assets – Current liabilities
ii. Current ratio:
= Current assets
Current liabilities
iii. Quick ratio:
= Cash + Marketable securities + Net receivables
Current liabilities
• Provides a measure of immediate short-term liquidity.
Financial statement analysis
CRICOS code 00025B
2. Solvency Ratios:
These measure the ability of an entity to survive over a long period
of time.
Two useful measures:
i. debt to total assets ratio
ii. times interest earned.
Financial statement analysis
24
CRICOS code 00025B
i. Debt to total assets ratio:
= Total liabilities
Total assets
ii. Times interest earned:
= Profit before income tax + Interest expense
Interest expense
• Provides an indication of an entity’s ability to meet interest
payments as they become due.
Financial statement analysis
CRICOS code 00025B
Lecture Exercise 5