M2L1V1: Overview and Liability Recognition Criteria

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Do curso por University of Illinois at Urbana-Champaign

Financial Accounting: Advanced Topics

387 ratings

University of Illinois at Urbana-Champaign

Financial Accounting: Advanced Topics

387 ratings

Curso 2 de 7 em Specialization Financial Management

In this course, you will explore advanced topics in financial accounting. You will start your journey with accounting for assets with more than one-year life. You will learn in detail how firms account for fixed assets. You will then move to financing of assets and discuss accounting for liabilities. The course will continue with an in-depth exploration of shareholders’ equity. Finally, you will critically evaluate preparation, components, and analysis of cash flows statement. Upon successful completion of this course, you will be able to: • Account for fixed assets • Understand accounting for liabilities • Evaluate shareholders’ equity section of a balance sheet • Understand preparation and information provided by cash flows statement This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

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Module 2: Liabilities

One of the major sources of financing for many firms is liabilities. Firms routinely finance their operations through various liabilities including accounts payables, bank loans, and bonds. Accounting for liabilities will help you understand how liabilities are created, how they are valued, how they inform about a firm’s liquidity position.

M2L1V1: Overview and Liability Recognition Criteria2:08

Conheça os instrutores

Oktay Urcan
Associate Professor of Accountancy
Department of Accountancy, College of Business

[SOUND] Hello, welcome to

Financial Accounting Advanced Topics

here at University of Illinois.

As you might remember, a balance sheet has three main components.

These are assets, liabilities, and shareholders equity.

Today, we are going to discuss the liabilities section.

Here is a bit of overview of what we are going to do today.

First we are going to talk about recognition of liabilities.

And then we will discuss valuation of liabilities, and

finally we will go through accounting for liabilities.

So, what's a liability?

Liabilities are sacrifices to transfer economic benefits

because of some past transactions.

Not everything is a liability.

In order for something to be a liability, it has to satisfy two criteria.

First, it needs to be measurable.

It means that you need to be able to attribute a value to this liability.

And second, it needs to be because of an executed contract.

It means that it's liable and should be because of some past transactions.

What are some examples?

We have accounts payable, utility payable, unearned revenue, bank loans and bonds.

These are some examples of liabilities.

So how do we value liabilities?

Valuation of liabilities depend on what type of liabilities we are taking about.

For short term liabilities, life is easy.

Short term liabilities are valued based on their face value.

So, what do I mean? Suppose that their x holds $100 to firm 1.

Then, firm x will show this $100 in its

balance sheet under liabilities section as a liability.

Okay, let me take this one more time we didn't have it good.

So I'm taking from the valuation of liabilities one more time.

So I'm taking it from here.

So, how do you value liabilities?

Valuation of liabilities depends on what type of liabilities we are talking about.

For short term liabilities,

these are liabilities that needs to be paid to between a year, life is easy.

They valued at face value.

Supposed that firm x owes $100 to firm y,

then firm x will show as a liability $100 in it's balance sheet.

So there is no discounting, no reduction or anything.

It's just whatever you all will show up on the liability section of a balance sheet.

On the other hand for long-term liabilities is that liabilities,

these are liabilities which needs to be paid in a time period more than one year,

the situation is a little bit more complicated.

Here we need to calculate present value of future obligations.

And I'm going to discuss present value calculation soon.

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