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