Term
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Definition
| Compensation rights that employees can carry forward to future periods if not used in the period in which earned. (p. 733). |
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Term
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Definition
| Liquidity ratio that measures the ability of a company to meet its maturing obligations with its available assets and to meet unexpected needs for cash. Computed as cash plus short-term investments plus net receivables divided by current liabilities. A variation of the current ratio, the acid-test ratio eliminates inventories and prepaid expenses from the amount of current assets, to provide better information for short-term creditors. (p. 750). |
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Term
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Definition
| A type of loss contingency, for which a company may accrue a liability depending on the companys ability to determine the degree of probability that an assessment may be asserted, the probability of an unfavorable outcome, and the ability to make a reasonable estimate of the amount of loss. Loss contingencies usually are disclosed in a note to the financial statements; loss contingencies that are probable and can be reasonably estimated are accrued as liabilities in the financial statements. (p. 738). |
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Term
| asset retirement obligation |
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Definition
| An existing legal obligation, whose amount can be reasonably estimated, associated with the retirement of a long-lived asset. Companies should record the ARO at fair value. (p. 743). |
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Term
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Definition
| Compensation in addition to regular salary or wages. Frequently the bonus amount depends on the companys yearly profit. The company shows the bonus expense in the income statement as an operating expense. If the bonus is not paid within the accounting period, the company includes the liability, Bonus Payable, as a current liability in the balance sheet. (p. 734). |
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Term
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Definition
| An amount, payable in cash, that a corporation owes to its stockholders as a result of the board of directors dividend authorization. At the date of declaration, the dividend becomes a liability of the corporation, classified as a current liability. (p. 727). |
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Term
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Definition
| A type of loss contingency, for which a company may accrue a liability depending on the companys ability to determine the degree of probability that a claim may be asserted, the probability of an unfavorable outcome, and the ability to make a reasonable estimate of the amount of loss. Loss contingencies usually are disclosed in a note to the financial statements; loss contingencies that are probable and can be reasonably estimated are accrued as liabilities in the financial statements. (p. 738). |
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Term
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Definition
| Paid absences from employment (e.g., for vacation, illness, and holidays). Companies accrue a liability for the cost of compensation for future absences and recognize the expense and related liability for compensated absences in the year in which the benefits are earned by employees. (p. 732). |
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Term
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Definition
| Material events with an uncertain future. The uncertainty can involve a possible gain (gain contingency) or possible loss (loss contingency) that will ultimately be resolved when one or more future events occur or fail to occur. Typical gain contingencies are tax operating loss carryforwards or company litigation against another party. Typical loss contingencies relate to litigation, environmental issues, possible tax assessments, or government investigations. (p. 735). |
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Term
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Definition
| Liabilities that depend on a contingency, that is, on the occurrence of one or more future events to confirm either the amount payable, the payee, the date payable, or its existence. (p. 736). |
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Term
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Definition
| The obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. This concept includes: payables resulting from the acquisition of goods and services; (2) collections received in advance for the delivery of goods or performance of services; and (3) other liabilities whose liquidation will take place within the operating cycle. (p. 722). |
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Term
| current maturities of long-term debt |
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Definition
| The portion of bonds, mortgage notes, and other long-term indebtedness that will mature within the next fiscal year. However, long-term debts maturing currently as current liabilities are excluded from this category if they are to be: retired by assets accumulated for this purpose that properly have not been shown as current assets; refinanced or retired from the proceeds of a new debt issue; or converted into capital stock. (p. 725). |
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Term
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Definition
| Liquidity ratio that measures the ability of a company to meet its maturing obligations with its available assets and to meet unexpected needs for cash. Computed as total current assets divided by total current liabilities. (p. 749). |
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Term
| expense warranty approach |
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Definition
| Method of accounting for a companys warranty expense, in which a company charges warranty costs to operating expense in the year of a products sale. Also called the accrual method. It is the generally accepted method, and companies should use it whenever the warranty is an integral and inseparable part of the sale and the company can reasonably estimate the costs involved. (p. 739). |
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Term
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Definition
| The Federal Insurance Compensation Act, a payroll tax in which the government taxes both the employer and employee at the same rate, to fund the Old Age, Survivor, and Disability Insurance (OASDI) benefits. (p. 730). |
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Term
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Definition
| The Federal Unemployment Tax Act, a payroll tax levied by the federal government, in cooperation with state governments, to provide a system of unemployment insurance. (p. 731). |
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Term
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Definition
| Claims or rights to receive assets (or have a liability reduced) whose existence is uncertain but which may become valid eventually. Typical gain contingencies include: possible receipts of monies from gifts, donations, bonuses; possible refunds from the government in tax disputes; pending court cases; and tax loss carryforwards. Companies do not record gain contingencies; they disclose them in the financial statement notes only when a high probability of realization exists. (p. 735). |
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Term
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Definition
| Present obligations, as a result of past transactions, that entail settlement by probable future transfer or use of cash, goods, or services. (p. 722). |
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Term
| litigation, claims, and assessments |
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Definition
| Different types of loss contingencies. Litigation may be pending or threatened; claims and assessments may be actual or possible. Whether companies should record litigation, claims, and assessments depends on such factors as the time period in which the underlying cause of action occurred, the probability of an unfavorable outcome, and the ability to make a reasonable estimate of the amount of loss. Loss contingencies usually are disclosed in a note to the financial statements; loss contingencies that are probable and can be reasonably estimated are accrued as liabilities in the financial statements. (p. 738). |
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Term
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Definition
| Possible losses, which may occur as the result of one or more future events. A liability incurred as a result of a loss contingency is by definition a contingent liability. Loss contingencies are judged on likelihood and are rated probable, reasonably possible, or remote. Companies accrue an estimated loss from a loss contingency by a charge to expense and a recorded liability if the loss is probable and its amount can be reasonably estimated. They also disclose and discuss the loss contingency in the financial statement notes. (p. 736). |
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Term
| notes payable (trade notes payable) |
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Definition
| Written promises to pay a certain sum of money on a specified future date, which may arise from purchases, financing, or other transactions. Some notes payable (often referred to as trade notes payable) are part of a sales/purchases transaction; notes payable to banks generally arise from cash loans. Notes payable can be short-term or long-term, and they can be interest-bearing or zero-interest-bearing. (p. 723). |
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Term
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Definition
| Old Age, Survivor, and Disability Insurance; Social Security legislation since 1937 that provides federal benefits for certain individuals and their families, funded by the FICA tax. (p. 730). |
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Term
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Definition
| The period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections. Most retail and service establishments have several operating cycles within a year; some manufacturers and capital-intensive industries have an operating cycle of considerably more than one year. (p. 723). |
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Term
| preferred dividends in arrears |
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Definition
| Accumulated but undeclared dividends on cumulative preferred stock. Such dividends are not a liability until the board of directors authorizes the distribution of earnings, though companies should disclose the amount of cumulative dividends unpaid in a note or show it parenthetically in the capital stock section of the balance sheet. Dividends in arrears must be paid before any common stock dividends are paid. (p. 727). |
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Term
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Definition
| Issued by companies to stimulate sales. In return for boxtops, certificates, coupons, labels, or wrappers, companies may give away silverware, dishes, small appliances, a toy, or free transportation. Companies should charge the costs of premiums to expense in the period of the sale that benefits from the plan. (p. 741). |
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Term
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Definition
| Evaluation of the likelihood of a loss contingency; indicates that a future event or events are likely to occur. (p. 736). |
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Term
| reasonably possible (contingency) |
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Definition
| Evaluation of the likelihood of a loss contingency; indicates that the chance of a future event or events occurring is more than remote but less than likely. (p. 736). |
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Term
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Definition
| A current liability that results from customers making deposits to guarantee performance of a contract or service, or as a guarantee to cover payment of expected future obligations. (p. 727). |
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Term
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Definition
| Method of accounting for an extended warranty sold with a product that has a manufacturers warranty. The seller recognizes separately the sale of the product with the manufacturers warranty and the sale of the extended warranty. The seller defers revenue on the sale of the extended warranty and generally recognizes it on a straight-line basis over the life of the contract. (p. 740). |
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Term
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Definition
| Risk assumption in lieu of insurance. Self-insurance is not insurance. A company that assumes its own risks incurs expenses or losses as they occur. The company should not establish a liability based on a hypothetical charge to insurance expense, because the event giving rise to the obligation has not occurred. (p. 746). |
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Term
| short-term obligations expected to be refinanced |
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Definition
| Obligations that, after refinancing, will be long-term and therefore not require the use of working capital during the next year (or operating cycle). (p. 725). |
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Term
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Definition
| The combination of the OASDI tax (FICA) and the federal Hospital Insurance Tax. The combined rate for these taxes changes intermittently by acts of Congress. Companies report as a current liability the amount of unremitted employee and employer Social Security tax on gross wages paid. (p. 731). |
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Term
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Definition
| Balances owed to others for goods, supplies, or services purchased on open account. Also called simply accounts payable. Accounts payable arise because of the time lag between the receipt of services or acquisition of title to assets and the payment for them. The terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.) usually state this period of extended credit, commonly 30 to 60 days. (p. 723). |
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Term
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Definition
| Written promises to pay a certain sum of money on a specified future date, required in some industries as part of the sales/purchases transaction in lieu of the normal extension of open account credit. (p. 723). |
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Term
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Definition
| Cash received before a company completes the earnings process by delivering goods or rendering services. The company records a current liability for the amount of cash received, and then recognizes the revenue in the period in which it completes the earnings process. (p. 728). |
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Term
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Definition
| Compensation rights that exist when an employer has an obligation to make payment to an employee even after terminating his or her employment. Vested rights are not contingent on an employees future service. (p. 733). |
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Term
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Definition
| A sellers promise to a buyer to make good on a deficiency of quantity, quality, or performance in a product. Also called a product guarantee. Companies use two methods of accounting for warranty costs: Under the cash-basis method, the seller expenses warranty costs in the period in which they are incurred. Under the accrual method (expense-warranty approach), the seller charges warranty costs to operating expense in the year of a products sale. (p. 739). |
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Term
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Definition
| Liquidity ratio that measures the ability of a company to meet its maturing obligations with its available assets and to meet unexpected needs for cash. Also called the current ratio. Computed as total current assets divided by total current liabilities. (p. 749). |
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