CONCEPTUAL
Liabilities are probable future payments of
assets or services that past transactions or events obligate an entity
to make. Current liabilities are due within one year or the operating
cycle, whichever is longer. All other liabilities are long
term.
Known (determinable)
current liabilities are set by agreements or laws and are
measurable with little uncertainty. They include accounts
payable, sales taxes payable, unearned revenues, notes payable,
payroll liabilities, and the current portion of long-term debt.
If an uncertain future
payment depends on a probable future event and the amount can be reasonably
estimated, the payment is recorded as a liability. The uncertain future
payment is reported as a contingent liability (in the notes) if (a)
the future event is reasonably possible but not probable or (b)
the event is probable but the payment amount cannot be reasonably estimated.
ANALYTICAL
Times interest earned is computed by dividing
a company’s net income before interest expense and income taxes by
the amount of interest expense. The times interest earned ratio reflects
a company’s ability to pay interest obligations.
PROCEDURAL
Short-term notes payable are current
liabilities; most bear interest. When a short-term note’s face value equals the
amount borrowed, it identifies a rate of interest to be paid at maturity.
Employee payroll deductions
include FICA taxes, income taxes, and voluntary deductions such as for pensions
and charities. They make up the difference between gross and net pay.
An employer’s payroll
expenses include employees’ gross earnings, any employee benefits, and
the payroll taxes levied on the employer. Payroll liabilities include
employees’ net pay amounts, withholdings from employee wages, any employer-promised
benefits, and the employer’s payroll taxes.
Liabilities for health and
pension benefits, warranties, and bonuses are recorded with estimated amounts. These
items are recognized as expenses when incurred and matched with revenues
generated.
Employers report FICA taxes and
federal income tax withholdings using Form 941. FUTA taxes are reported on
Form 940. Earnings and deductions are reported to each employee and the
federal government on Form W-2. An employer’s payroll records often include a payroll register
for each pay period, payroll checks and statements of earnings, and
individual employee earnings reports.
Guidance Answers to Decision
Maker and Decision Ethics
Web Designer
You need to be concerned about being an accomplice to
unlawful payroll activities. Not paying federal and state taxes on wages earned is
illegal and unethical. Such payments also will not provide the employee with Social
Security and some
Medicare credits. The best course of action is to request payment by check. If
this fails to change the owner’s payment
practices, you
must consider quitting this job.
Entrepreneur
Risk is partly reflected by the times interest earned ratio. This ratio for the
first franchise is 1.5 [($100,000
+ $200,000)/$200,000], whereas the ratio for
the second franchise is
3.5 [($100,000 + $40,000)/$40,000]. This analysis shows
that the first
franchise is more at risk of incurring
a loss if its sales decline.
The second question asks about variability of income. If income greatly varies, this
increases the risk an owner will not earn sufficient income to cover interest. Since the first
franchise has the
greater variability, it is a riskier investment.
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