Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 10 Liabilities 471

AnnuityA series of cash flows that are (1) equal in amount
and (2) spaced equally in time.

Annuity paymentThe dollar amount of the equal periodic
cash flows in an annuity.

BondA form of interest-bearing note used by corporations to
borrow on a long-term basis.

Bond indentureThe contract between a corporation issuing
bonds and the bondholders.

Callable bondsBonds that a corporation reserves the right
to redeem before their maturity.

Contingent liabilityAn obligation from a past transaction
that is contingent upon a future event. An example would be
product warranty payable.

Contract rateThe periodic interest to be paid on the bonds
that is identified in the bond indenture; expressed as a per-
centage of the face amount of the bond.

Convertible bondsBonds that may be exchanged for other
securities.

CreditorA lender of money, such as a bank or bondholder.

Current ratioA financial ratio that is computed by divid-
ing current assets by current liabilities.

Debenture bondsBonds issued on the basis of the general
credit of the corporation.

DebtorA borrower of money.

Deferred expense An item that has initially been recorded
as an asset but is expected to become an expense over time or
through the normal operations of the business.

Deferred (unearned) revenue A liability that occurs when
a company receives cash payment from a transaction before
providing goods or services.

DiscountThe interest deducted from the maturity value of
a note or the excess of the face amount of bonds over their
issue price.

Discount rateThe rate used in computing the interest to be
deducted from the maturity value of a note.

DiscountingThe process of converting a future amount into
a present value.

Effective interest rate methodA method of amortizing a

bond discount or premium, using present value techniques.

FICA taxFederal Insurance Contributions Act tax used to

finance federal programs for old-age and disability bene-

fits (Social Security) and health insurance for the aged

(Medicare).

Fringe benefitsBenefits provided to employees in addition

to wages and salaries.

Gross payThe total earnings of an employee for a payroll

period.

InterestThe cost of borrowing or lending money.

LeverageThe ability of a business to meet its fixed financial

obligations (debts).

LiquidityMeasures the ability of a business to pay or other-

wise satisfy its current liabilities.

Market rateThe rate of return that investors demand for

bonds of a specific quality and duration.

Net payGross pay less payroll deductions; the amount the

employer is obligated to pay the employee.

Number of times interest charges are earnedA ratio

that measures the risk that interest payments to debtholders

will continue to be made if earnings decrease.

PayrollThe total amount paid to employees for a certain

period.

PremiumThe excess of the issue price of bonds over their

face amount.

Present valueThe current value of dollars received in

the future, after considering the effects of compound interest.

Present value of $1The present value interest factor for a

single sum. This amount is used to convert a single lump sum

of money at some point in the future to its value in today’s

dollars.

Present value of an annuity of $1The present value in-

terest factor for an annuity. This amount is used to convert an

annuity to its value in terms of a single sum in today’s dollars.

ProceedsThe net amount available from discounting a note

payable.

Illustrate the reporting of liabilities on the balance
sheet.Liabilities are reported on the balance sheet in the
order of liquidity, that is, in the order in which cash is going
to be required to make payment for the liability. In addition
to the amounts reported on the balance sheet, additional
information on liabilities may be included in the financial
statement footnotes.

Analyze and interpret liquidity using the current

ratio, quick ratio, number of times interest charges

earned, and ratio of total liabilities to total assets. The cur-

rent position is analyzed by the current ratio (current assets 

current liabilities) and the quick ratio (quick assets current

liabilities). The number of times interest charges are earned

during the year is a measure of the risk that interest payments

to debtholders will continue to be made if earnings decrease.

It is computed by dividing income before income tax plus in-

terest expense by interest expense. The ratio of total liabilities

to total assets measures the percent of total assets funded by

debt. The larger this ratio, the greater the leverage risk.

5

6

GLOSSARY