Warranty Liability | Expected Cash Flow Approach

This video shows how to calculate a company's warranty expense and warranty liability using the expected cash flow approach.

Traditional approaches to accruing warranty costs don't take into consideration the time value of money.

When the warranty obligation extends beyond one year, you can use the expected cash flow approach and account for the time of money.

With the expected cash flow approach, you first calculate probability-weighted cash outflows and then discount those cash outflows to their present value.  The total present value of the expected cash outflows is the amount that should be accrued for warranty expense and warranty liability.

0:00 Introduction
0:53 Expected cash flow approach
1:13 Example
2:01 Calculating the expected cash flows for each year
4:34 Present value of expected cash flows
6:13 Journal entry

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