Spontaneous liability

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  • #227000
    Haneen Salih
    Participant

    Hi there,

    In textbook, Part 1 Vol.1 page 276, Three ways to fund increase in assets due to increase in sales are explained.  I didn’t understand the first way of financing for increase in assets which is “spontaneous liability”. I mean how is it going to fund for increase in assets. Could you please explain that point?

    Haneen

    • This topic was modified 7 months, 1 week ago by Haneen Salih.
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  • #227002
    Lynn Roden
    HOCK international

    Hello Haneen Salih,

    “Spontaneous” means something happens as a result of something else. In other words, it is something that just happens, almost automatically. A “spontaneous liability” is a liability that is created without the obligor having to, for example, go to a bank and apply for a loan. Accounts payable are spontaneous liabilities because they arise in the process of doing business. They happen each time a company buys something on account and incurs the liability to pay for it.

    Usually increased revenue will cause accounts payable to increase because increased sales create the need to buy more inventory, or, in a service business, to hire more employees to provide the service. Buying inventory or hiring more employees incurs the “spontaneous liability” to pay for the increased inventory or the increased salaries and wages.

    However, someone who wants to borrow money from a bank must apply for a loan, wait to see if the loan is approved, and then go to the bank and sign documents promising to repay the loan before he can receive the loan proceeds. When he receives the loan proceeds, he incurs a liability that is recorded on the balance sheet.

    Spontaneous liabilities are legal liabilities just as a note payable to a bank is a legal liability. And both types of liabilities are included on the balance sheet in the liabilities section. But accounts payable and accrued salaries on the balance sheet can increase without the need to go to the bank and apply for a loan beforehand. So accounts payable and other accrued liabilities are considered spontaneous liabilities, whereas notes payable are not considered spontaneous liabilities.

    Does that help?

    Lynn

    #227007
    Haneen Salih
    Participant

    Hi Lynn, 

    Yes, that really helped. Thank you.

    Haneen

    #227227
    Prem Suthar
    Participant

    hello

    i think projected increase in assent and spontaneous liability and retained earnings and external funding is calculation and formulas are not tested in the exam as it is removed from material only a brief information is available in material.

    thanks

    #227230
    Lynn Roden
    HOCK international

    Hello Prem Suthar,

    Are you saying that you think this material is no longer being tested on the exam? If so, I do not think that assumption is correct.

    This information is in the topic of “Forecasting Future Financing Needs” in “Top-Level Planning” in Section B of your HOCK CMA Part 1 study materials. The Learning Outcome Statements for the Top-Level Planning and Analysis topic said this when the topic was first tested in 2010:

    The candidate should be able to:

    1. define the purpose of a pro forma income statement, a pro forma statement of financial position, and a pro forma cash flow statement and demonstrate an understanding of the relationship among these statements and all other budgets
    2. prepare pro forma income statements based on several revenue and cost assumptions
    3. evaluate whether a company has achieved strategic objectives based on pro forma income statements
    4. use financial projections to prepare a pro forma balance sheet and a statement of cash flows
    5. identify the factors required to prepare medium- and long-term cash forecasts 
    6. use financial projections to determine required outside financing and dividend policy
    7. determine the effect of financial forecasts on debt covenants, including debt ratio and coverage ratios
    8. forecast earnings per share based on pro forma financial statements and other relevant information

    The current Learning Outcome Statements for Top-Level Planning and Analysis say this:

    The candidate should be able to:

    1. define the purpose of a pro forma income statement, a pro forma balance sheet, and a pro forma statement of cash flows, and demonstrate an understanding of the relationship among these statements and all other budgets
    2. prepare pro forma income statements based on several revenue and cost assumptions
    3. evaluate whether a company has achieved strategic objectives based on pro forma income statements
    4. use financial projections to prepare a pro forma balance sheet and a pro forma statement of cash flows
    5. identify the factors required to prepare medium- and long-term cash forecasts
    6. use financial projections to determine required outside financing and dividend policy

    The last two Learning Outcome Statements that were there in 2010 have been deleted. However, their deletion does not remove the need to know how to forecast future financing needs. And the remainder of the current Learning Outcome Statements on the topic are identical to the 2010 Statements.

    If you have taken the exam and have not seen any questions on forecasting future financing needs, or if you know people who have taken the exam and have not seen any questions on forecasting future financing needs, that does not mean that topic is no longer being tested. It is still in the Learning Outcome Statements, so it is still subject to testing on the CMA exams.

    In your CMA Part 1 textbook, Top-Level Planning is covered on pages 280 through 293 of the current edition.

    Lynn

     

     

    • This reply was modified 6 months, 4 weeks ago by Lynn Roden.
    • This reply was modified 6 months, 4 weeks ago by Lynn Roden.
    • This reply was modified 6 months, 4 weeks ago by Lynn Roden.
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