Reporting and Interpreting Liabilities
My favorite chapter in this course was reporting and interpreting liabilities. For many people, liabilities are something they always want to avoid. However, this chapter has taught that liabilities are paramount in business, and can be an unimpeachable source of capital, which can be turned into returns. What matters is proper management and knowing how to interpret them. Surprisingly, having liabilities is the same as using resources that one does not own for the purposes of making profits with cost of the liability being the interest paid. Additionally, learning how to account for the liabilities was another reason that made this chapter tremendously important. Although many people and businesses are happy receiving money, none is happy losing or giving out. Learning how to account for the liabilities helps in maintaining them at a manageable level depending on the ability of the assets.
The concept that I found most difficult in this chapter is accounting for contingent liabilities. Contingent liabilities are potential payments that arise from past events. However, their payment or resolution will be dependent upon other events in the future. Accounting for contingent liabilities required anticipating the likelihood of their occurrence in the future. Their dependence on future events creates a lot of uncertainties. This requires one to evaluate the possibility of this contingency ever resulting to a liability. This is quite hard because it also requires estimating the amount of the liability. If the liability cannot be estimated, one has to describe it in the financial reports, which makes accounting for it even harder.
One of the easiest concepts in this chapter was the calculation and evaluation of the company using Quick Ratio and the Times Interest Earned Ratio. What made this concept of analyzing the company using ratios was the ease of the calculations. In addition, the information needed for calculation such as current assets is always available in the financial reports. For instance, calculating the quick ratio is just a matter of dividing the current assets with the current liabilities. This simply indicates the number of times the most liquid assets of the company can pay up the current liabilities in case there is a need to do so at once. This ratio is quite simple to calculate and interpret as well. Another reason that makes the concept of evaluating a company using ratios is because it is not time consuming. To find out the health of a company using ratios takes only a few minutes considering it is a matter of comparing figures, and determining how they relate with each other. For instance, to find out whether a company can pay its interests one only requires find out if it has generated enough income to do so. This is where the Times Interest Earned Ratio comes in.
One suggestion that I have for improving this course is use of more real examples from companies. Contrary to many people’s thinking, accounting is quite different from mathematics because it is not absolute. It does not follow on just formulas like mathematics does. In accounting, there is not single answer. Perfecting depends on practice and understanding the concepts. In addition, the answers are used for making decisions. Learning why certain companies make decisions using accounting would be pivotal in understanding this course deeper. In addition, use of real company examples would offer more experience in accounting.
I feel that I will use this accounting information in the future because I plan to pursue a career in accounting. In addition, it will help me in managing my assets and getting the best returns out of them. This course is quite crucial for people who invest, which I believe I will do in the future. Overall, the information provided in this course will be exceptionally crucial in making financial decisions everywhere I go.