LIABILITIES AND OWNERS

EQUITY

STATEMENT OF FINANCIAL POSITION

LIABILITIES
Current Liabilities

Are those liabilities that are

expected to be settled in the entitys
normal operating cycle,
held primarily for trading,

or due to be settled within 12 months after

the balance sheet date.
 Trade/Accounts Payable
Trade payables
amounts that a company
owes its vendors for
purchase of goods and
services
almost always interest-free
ANALYST CONCERNS

Accounts Payable Turnover

Significant change in accounts payable relative to
purchases could signal potential changes in the
companys credit relationships with suppliers
 Accounts Payable Turnover Ratio

Accounts Payable
Turnover
A short-term
liquidity measure
used to quantify the
rate at which a
company pays off its
suppliers.
Other Current Liabilities

Notes Payable - are financial liabilities owed by a

company to creditors, including trade creditors and
banks, through a formal loan agreement.
Accrued Expenses expenses that have been
recognized on an entitys income statement but which
have not yet been paid.
Deferred Income arises when a company receives
payment in advance of delivery of goods and services
associated with the payment. The company has an
obligation either to provide the goods or services or to
return the cash received.
AN ALYSIS O F D EFERRED
REVEN U E
In the notes to its 2009 Financial
Statements, SAP Group describes its
deferred income as follows:
Deferred income consists mainly of
prepayments made by our customers for
support services, fees for multiple
element arrangements allocated to
undelivered elements, and amounts.
for obligations to perform under acquired
support contracts in connection with
acquisitions.
Apples deferred revenue arises from sales
involving components, some delivered at
AN ALYSIS O F D EFERRED
REVEN U E

the first deliverable is the hardware and

software delivered at the time of sale, and
the second deliverable is the right included
with the purchase of iPhone and Apple TV to
receive on a when-and-if-available basis
future unspecified software upgrades and
features relating to the products software
the Company is required to estimate a
standalone selling price for the unspecified
software upgrade right included with the sale
of iPhone and Apple TV and recognized that
amount ratably over the 24-month estimated
life of the related hardware device.
PRO BLEM 1

1. In general, in the period a transaction

occurs, how would a companys balance
sheet reflect $100 of deferred revenue
resulting from a sale?
(Assume, for simplicity, that the
company received cash for all sales, the
companys income tax payable is 30%
based on cash receipts, and the
company pays cash for all relevant
income tax obligations as they arise.
Ignore any associated deferred costs.)
SO LU TIO N TO 1

1. In the period that deferred revenue

arises, the company would record a
$100 increase in the asset Cash and a
$100 increase in the liability Deferred
Revenues. In addition, because the
companys income tax payable is based
on cash receipts and in paid in the
current period, the company would
record a $30 decrease in the asset Cash
and a $30 increase in the asset
Deferred Tax Assets. DTA increase
because the company has paid taxes on
revenue it has not yet recognized for
PRO BLEM 2

2. In general, how does deferred revenue

impact a companys financial statements
in the periods following its initial
recognition?
SO LU TIO N TO 2

2. In subsequent periods, the company will

recognize the deferred revenue as it is
earned. When the revenue is recognized,
the liability Deferred Revenue will
decrease. In addition, the tax expense is
recognized on the income statement as
the revenue is recognized and thus the
associated amounts of Deferred Tax
Assets will decrease.
PRO BLEM 3

3. Interpret the amounts shown by SAP

Group as deferred income and by Apple,
Inc. as deferred revenue.
SO LU TIO N TO 3

3. The deferred income on SAP Groups

balance sheet and deferred revenue on
Apple, Inc.s balance sheet at the end of
their respective 2009 fiscal years will be
recognized as revenue, sales, or a similar
item in income statements subsequent to
the 2009 fiscal year, as the goods or
services are provided or the obligation is
reduced. The costs of delivering the
goods or services will also be recognized.
PRO BLEM 4

4. Both accounts payable and deferred

revenue are classified as current
liabilities. Discuss the following
statements:
A. When assessing a companys liquidity, the
implication of amounts in accounts payable
differs from the implication of amounts in
deferred revenue.
B. Some investors monitor amounts in deferred
revenue as in indicator of future revenue
growth.
SO LU TIO N TO 4

4A. The amount of accounts payable

represents a future obligation to pay cash
to suppliers. In contrast, the amount of
deferred revenue represents payments
that the company has already received
from its customers, and the future
obligation is to deliver the related
services. With respect to liquidity,
settling accounts payable will require
cash outflows whereas settling deferred
revenue obligations will not.
SO LU TIO N TO 4

4B. Some investors monitor amounts in

deferred revenue as in indicator of future
growth because the amounts in deferred
revenue will be recognized as revenue in
the future. Thus, growth in the amount of
deferred revenue implies future growth of
that component of a companys revenue.
LONG-TERM FINANCIAL LIABILITIES

Loans, notes or bonds payable, etc. typically reported

at amortized cost.
In certain cases, liabilities such as bonds issued by a
company are reported at fair value if held for
training, or are derivatives that are a liability to a
company.
EQUITY
the owners residual
claim on a companys
assets after subtracting
its liabilities.
includes funds directly
invested in the company
by the owners, as well
as earnings that have
been reinvested over
time.
can also include items
of gain or loss that are
not yet recognized in
the companys income
statement.
Components of Equity

1. Capital contributed by Owners

2. Preferred Shares
3. Treasury Shares
4. Retained Earnings
5. Accumulated Other Comprehensive Income
6. Non-controlling interest (or minority interest(
Components of Equity

Preferred Shares a company may repurchase its

shares when management considers the shares
undervalued, needs shares to fulfil employees stock
options, or wants to limit the effects of dilution from
various employee stock compensation plans.
Non-controlling interest represents the interest of
minority shareholders in the subsidiary companies
that have been consolidated by the parent company
but that are not wholly owned by the parent
company.
READING ASSIGNMENT

Events After the date of the Statement of Financial

Position
Summary Of Measurement & Presentation of Some
Accounting Elements
Significance of Financial Accounting to the Analysis
of Financial Statements