(10) ACCTG 311 Chapter 10.ppt

8/20/2019 (10) ACCTG 311 Chapter 10.ppt

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Reporting and AnalyzingLiabilitiesChapter 10


2/87

Liabilities

• Definition• Current obligations arising from past transactions and

requiring future settlement of assets or services

• 2 classifications

▫ Current liability !ill be settled !ithin the year "an# indebtedness$ operating lines of credit$

notes payable$ accounts payable and accruedliabilities$ ta%es payable$ interest payable$current portion of long&term debt

▫ 'on&current !ill be settled beyond one year Long&term debt$ Deferred income ta%es$ bonds

payable


3/87

(%ample )1

• *+, Co- orders some equipment- .he

machine costs /10$000 and monthlyinstallments !ill be paid every month oncethe machine has arrived-

▫ s this a liability

At the time of ordering 'o- nce goods arrive +es-


4/87

(%ample )2

• 3est4et collects money from customers

before the flights ta#e place▫ s this a liability


5/87

(%ample )5

• A parent company guarantees the debt of a

subsidiary company▫ .his means that if the subsidiary company

can6t pay$ then the parent company is onthe hoo# for the loan

▫ s this a liability 7aybe 'ot an obligation to the parent until the

subsidiary defaults


6/87

Accounts payable

• Amounts o!ing to creditors

▫ An informal promise to pay

• 'ormally due in 50 days• nterest may be charged on overdue

accounts


7/87

perating line of credit

• 8rearranged agreement bet!een a companyand a lender 9usually a ban#: to allo! thecompany to borro! up to an agreed&upon

amount• nterest is normally charged on amounts that

have been dra!n on the line of credit

•

'ormally short&term and repayableimmediately

• Reported as ;ban# indebtedness< on thebalance sheet


8/87

=ales ta%

• >ederal ?oods and =ervices .a% 9?=.:

• 8rovincial =ales .a% 98=.:

• @armonized into one combined sales ta%9@=.: in some provinces

• 7ay or may not be included in sale price

• 7ust be remitted periodically to respective

governments


9/87

.he seller$ or collector$ of ?=. is an intermediary for the

government

Required to periodically send to the government allsales ta%es collected

Amount o!ing may be reduced by any ?=. paid tosuppliers !ith business purchases

=ales .a%es


10/87

1- Record sales ta% collected on every sale

?=.

Assume Crazy Canadian Clothing nc- sold /10$B00 ofgoods in the month of 'ovember- =ales are sub4ect to

B ?=.-

Dr- Cash 9or AR: 112$EB

Cr- ?=. payable B$5B

Cr- Revenue or =ales 10$B00


11/87

F Revenue G ?=. H Amount collected

?=. H Revenue I -0B

F Revenue G 9Revenue I 0-0B: H collected

F 1-0B I revenue H collected

F Revenue H Collected 1-0B

?=.

3hat if !e had been told$ instead$ that they hadcollected /112$EB$ !hich included ?=.- @o!do !e determine the sales or ?=.


12/87

2- Record ?=. paid on every purchaseJ

Assume Crazy Canadian had made purchases of

/K$000 during 'ovember$ including ?=.'et purchases H/ K$000 1-0B H /K2$5E1

?=. H /K2$5E1 % B R /K$000 /K2$5E1 H /$M1K

DR Asset or e%pense account K2$5E1DR ?=. receivable $M1K

CR Accounts payable or cash K$000

?=.


13/87

5- Determine amount o!ing and record remittances made-

At the end of 'ovember$ CCC o!esJ

?=. payable H B$5B

?=. receivable H 9$M1K:

'et o!ing H BM

Assume payment is made for this amount

Dr- ?=. payable B$5B

Cr- ?=. receivable $M1K

Cr- Cash BM

?=.


14/87

8roperty ta%es

• A payable$ or an ;accrued liability<

• 8roperty ta% assessments relate to acalendar year$ but are not normally receiveduntil 7ay or Nune-

• >rom Nanuary Nune$ companies mustestimate the e%pense amounts

▫ =till required to record e%penses in thosemonths and recognize the liability that isaccumulating


15/87

(vent )1J A"C Company estimates 201 property ta%es!ill be /$200 for the year-

Nanuary 51$ 201

DR 8roperty ta% e%pense 5B0

CR 8roperty ta% payable 5B0

9200 12 H 5B0:

(vent )2J n 7ay 51$ A"C paid /2$000 in property ta%es-

DR 8roperty ta% payable 2$000

CR Cash 2$000

.his entry !ill be repeated in >eb$ 7arch$ April and 7ay


16/87

(vent )5J n Nune 50$ A"C receives the property ta% bill for201- Actual ta%es are /5$M00 for the year-

"efore !e can ma#e the Nune entry$ !e need to see !here!e are for the year so farJ

DR CR

Property tax expense

DR CR

Property tax payable

Nan 5B0>eb 5B07ar 5B0 Apr 5B07ay 5B0

5B0 Nan5B0 >eb5B0 7ar 5B0 Apr 5B0 7ay

1B0

7ay 2000

2B0


17/87

ABC Company

"y the end of Nune$ the property ta% e%pense should beJ5$M00 % 9M12: H 1$E00

t currently is /1$B0$ therefore$ !e only need to OdebitOthe e%pense Oby /B0O

Dr- 8roperty ta% e%pense B0 Cr- 8roperty ta% payable B0

At Nune 50J.otal e%pense H 1$E00.otal paid H 2$0008repaid H 200 9paid P e%pense:


18/87

DR CR

1,750

1,750

Property tax

expense

DR CR

1,750

2,000

250

Property tax

payable

5050

1,800 200


19/87

(%ample$ continued

• Let6s thin# about !hat our entry !ould be in Nulyfor the property ta%es$ assuming no other cashpayment !as madeJ

DR 8roperty ta% e%pense 500

CR 8repaid property ta% 200

CR 8roperty ta% payable 100


20/87

.here are 2 factors that need to be considered !henloo#ing at prepaid or accrued e%pensesJ

1-.he timing of the e%pense& .his needs to be matched to the related

revenue R the period the e%pense relates to

2-.he cash payment made for the e%pense

3hen the timing of these t!o differ$ !e !ill haveeither a prepaid e%pense 9cash payment P e%pense:R an accrued liability accrued e%pense 9!hene%pense P cash payment:


21/87

8ayroll Liabilities

Nust as !ith sales ta%$ governments requireemployers to !ithhold certain amounts fromemployee6s and remit those amounts directlyto them

& ther entities may require or provide anoption for a similar mechanism 9pensionplans$ unions$ etc-

(mployers also have to pay a share of C88and ($ and possibly other benefits-


22/87

8ayroll and (mployee "enefits 8ayable

• (mployee payroll deductions

▫ Canada pension plan 9C88:

▫ (mployment insurance 9(:

▫ >ederal and provincial income ta%es▫ ther deductions at source 9union dues$

support payments$ private health planpremiums$ etc-:

• (mployer payroll contributions▫ C88

▫ (

▫

ther


23/87

8ayroll liabilities

Crazy Canadian pays employees every second>riday for hours !or#ed the t!o !ee#s previous-.he cut off for hours is the .uesday before payday-

@ours !or#ed from 3ed 'ov B to .uesday'ovember 1E !ere paid on >riday 'ovember 21-(mployees !or#ed 150 hours in the pay period

at /1-00 per hour-

Crazy Canadian is required to !ithhold -KB forC88$ 1- for ( and 1B for income ta%es-

.!o employees belong to the private health care

plan and pay /B per pay period for benefits-


24/87


1- Record employee earnings and payJ

>irst$ let6s figure out ho! much they !ere paidJ

?ross !ages 9150 % 1: 2$210

LessJ C88 92$210 I-KB: 910K:

( 92$210 % 1-: 95E:

.a% 92$210 % 1B: 9552:

"enefit payments 91B0:

'et pay to employees 1$BE1


25/87


1- Record employee earnings and payJ

Dr- 3age e%pense 2$210

Cr- C88 payable 10K Cr- ( payable 5E

Cr- .a% !ithheld payable 552

Cr- Due to benefit plan 1B0

Cr- Cash 1$BE1


26/87


2- Record employer costs

.he government requires that companies also pay

C88 equal to the amount that employees pay$ andto pay ( of 1- times the employee amount-

Crazy Canadian also pays /100 per employee perpay period to the benefit plan-

C88 o!ing H 10K 9same as employees:

( o!ing H B5 95E % 1-:

"enefit plan H 200


27/87


2- Record employer costs

Dr- "enefit e%penses 5M2

Cr- C88 payable 10KCr- ( payable B5

Cr- Due to benefit plan 200


28/87


5- Record amounts remitted-

Crazy Canadian o!es the governmentJ

C88 H 10K G 10K H 21E ( H 5E G B5 & K1

ncome ta%es !ithheld H 552

.otal o!ing to the federal gov6t H M1

And o!es the benefit plan providerJ

1B0 G 200 H 5B0


29/87


5- Record amounts remitted-

C88 payable 21E

( payable K1 .a% !ithheld payable 552

Cash M1

Due to benefit plan 5B0

Cash 5B0


30/87

8ayroll liabilities

•

n our e%ample$ everything happened in'ovember-

• 3hat if the pay period spans 2 different months

• >or e%ample$ say employees !or# from

'ovember 1K December 2and are paid for thattime on December B- 3hat needs to happen in'ovember

3e need to record accrued !ages

• Do !e need to record liabilities for !ithholdingsin 'ovember▫ 'o-


31/87

'otes payable

• ften used instead of accounts payable

• 8rovide !ritten documentation$ if needed$ for

legal remedies• 'ormally has interest attached

• Qsed for short&term and long&term financingneeds

• .he other side of ;'ote receivable<

• =ee e%amples in the te%tboo#


32/87

Current portion of Long&term debt

• .he portion of the long&term debt that is due!ithin the current year or operating cycleshould be classified as a current liability

(%ampleJ Distiller nc- borro!ed /B0$000 onNanuary 1$ 201- .he loan is to be repaidequally over B years-

.he current portion of L. Debt H 10$000


33/87

8rovisions and Contingent Liabilities

• 3e have seen many areas !here !e useestimates in accrual accounting

• .hese are the terms used for liabilities that have ahigher degree of uncertainty than ;payables<


34/87

8rovisions

F .his is the term used for liabilities that !e arecertain !ill occur$ but !e are not certain aboutthe timing andor the amount- (%amplesJ

F 3arrantiesF Asset retirement costsF 8ension liabilities


35/87

Contingencies

• Contingencies are things that may becomea liability do!n the road-

• 3e are unsure about the future settlementJ▫

8ast transaction▫ 8resent obligation▫ >uture settlement

• La!suits are a good e%ample f !e lose

this la!suit !e6ll have to pay /*-▫ 'ot a present obligation until !e actually lose

the la!suit


36/87

Contingencies

Accounting rules specify !hen it needs to berecorded as a liability only discussed in thenotes or nothing

.here are t!o factors to considerJ1)Likelioo! of event occurring

2)Amo"nt needed if event occurs


37/87

Contingent Liabilities

Likely# $ot Likely

%eas"rable

$ot %eas"rable

Record

Dr- (%pense Cr- Liability

7Q=.discuss in

the notes

7ay discuss in

the notes9disclose:

7ay discuss inthe notes

9disclose:

>R= uses ;probable< H more li#ely than not 9PB0 chanceof happening:

A=8( uses ;li#ely< H higher requirement than ;probable<


38/87

Long&term liabilities

• bligations to be paid after one year

•

ncludes long&term notes$ bonds$ and leaseobligations


39/87

Long&term notes payable

• 'ormally repayable in a series of periodicpayments called installments

• 7ay be secured by specific assets !hich arecommonly referred to as mortgages

• 7ay be unsecured• nstallment payments usually ta#e one of t!o

formsJ▫

>i%ed principal payments plus interest 9fi%edor floating interest:▫ "lended principal and interest payments


40/87

(%ample

Assume nco Ltd- receives a note payable for/120$000 to be repaid over B years and !ithinterest at -

Date loan is receivedJ

Dr- Cash 120$000 Cr- 'ote payable 9or long&term debt: 120$000

nstalment 8ayment =chedule


41/87

(A) (B) (C) (D)

Cash Interest Reduction Principal

Interest Payment Expense of Principal BalancePeriod (B + C) (D x 7 x !"!#) (!#$%$$$"&$) ( D ' C )

Issue date !#$%$$$

! #%7$$ 7$$ #%$$$ !!%$$$

# #%& & #%$$$ !!&%$$$

* #%&77 &77 #%$$$ !!%$$$

nstalment 8ayment =chedule S>i%ed 8rincipal 8ayment

Assume that the loan terms provide for monthlyinstallment payments of /2$000 9/120$000M0: plusinterest- .he installment payment schedule for the firstfe! months is sho!n belo!J

nstalment 8ayment =chedule "lended


42/87

Assume that instead of fi%ed principal payments$ nco Ltdrepays its /120$000$ percent, B&year note payable inblended monthly installments of /2$5M- .he installmentpayment schedule for the first fe! months is sho!n belo!J

(B) (C) (D)

(A) Interest Reduction Principal

Interest Cash Expense of Principal Balance

Period Payment (D x 7 x !"!#) (A ' B) ( D ' C )

Issue date !#$%$$$

! #%*7& 7$$ !%&7& !!%*#

# #%*7& &,$ !%&& !!&%&*

* #%*7& &$ !%&,& !!%,#

3ith both types of installment notes payable$ the reduction inprincipal for the ne%t year must be reported as a currentliability !hile the remaining unpaid principal is classified as a

long&term liability-

nstalment 8ayment =chedule S "lended8ayment


43/87

Nournal entries

1st caseJ

Dr- 'ote payable 2000

Dr- nterest e%pense 00

Cr- Cash 200

2nd caseJ

Dr- 'ote payable 1MM

Dr- nterest e%pense 00

Cr- Cash 25M


44/87

"onds

• "onds are a financing tool for companies a !ay for them to get cash into thecompany

• .hey are a form of debt$ as there is noo!nership that goes !ith them▫ .here is a promise to pay the principle

amount at a fi%ed date in the future▫ Also a promise to pay some interest at

predetermined dates 9can be at a 0 rateof interest:


45/87

"onds & e%ample

• n Nanuary 1$ 2010$ Cash =trapped nc- issuesB00 B year$ M$ /1$000 bonds

▫ /1000 is the face value

▫ M is the stated interest rate

▫ 7aturity date is December 51$ 201

• =old in small denominations$ !hich ma#es themattractive to investors

• Convertible vs- redeemableretractable


46/87

"onds & 8ricing

• Let6s assume you have /1$000 saved up thatyou !on6t need for B years- +ou are loo#ing toinvest that money-

• C= is issuing B year$ /1$000 bonds !ith 0interest-▫ .his entitles the bondholder the right to receive

/1$000 in B years$ but no interest 9interest H 0:▫ 3ould you be !illing to purchase this bond for

/1$000


47/87

"onds & 8ricing

• Assume >3C Ltd- is also issuing B year$ /1$000bonds but these bear interest at M▫ .his entitles you to annual interest payments of

/M0 and principle of /1$000 at the end of the Byears-

▫ 3ould you be !illing to purchase this bond for/1$000


48/87

"onds

3hat you should be !illing to pay is going todepend on the price of the bond

.he bond price !ill be determined based on ho!the stated rate of interest compares to mar#etrates of interest on similar bonds

.he price of a bond is equal to the present valueof the future cash flo!s generated by the bond-

" d


49/87

"onds

• 'eed to understand the concept of present value or

time value of money • "ecause !e can invest our money$ the ;present

value< of a dollar in the future is something lessthan a dollar

• f can earn 10 on my money$ and invest /0-K1today$ !ill have /1-00 in a year

• =o the ;present value< of /1-00 one year from no!$

if interest rates are 10 is /0-K1• .here are established !ays to calculate present

values▫ >ormulas and tables


50/87

"ond pricing

• Assume C= issues a 2 year$ /1$000 bond thatoffers interest at 10$ paid annually- Currentmar#et interest rates for investments !ith similarris# are offering E-

• ?iven that C= bonds !ill pay 10$ !hileeverything else in the mar#et is paying E$ !hat!ould investors be !illing to pay for these

bonds• .he ans!er is ;the present value of the future

cash flo!s$ discounted at mar#et interest rates<


51/87

"ond pricing

=tep 1J Determine cash flo!s

• .here are 2 cash flo!s presentJ▫ nterest

8aid annually "ased on face value and stated rate of interest /1$000 % 10 H /100 per year

▫ >ace value 8aid at maturity /1$000


52/87

"ond pricing

=tep 2J Discount each of the types of cash flo!

•nterest is a different ;type< of cash flo!▫ nterest

Annuity regular$ recurring cash flo!s▫ >ace value

Lump sum one time cash payment

▫ .he present value of an annuity is calculateddifferently from the present value of a lump sum orone&time payment


53/87

"ond pricing

=tep 2J Discount each of the types of cash flo!

nterestAnnuityJ !e need to #no!J▫ Cash payments H /100

▫ Discount rate H E &market rate)▫ 'umber of paymentsperiods H 2

3e !ill use the tables presented at the end of thechapter material to determine the factor H 1-E52M % 100 H 1E-55


54/87

"ond pricing

• Discount the lump sumJ▫ Cash payments H /1$000

▫ nterest rate H E

▫ 'umber of paymentsperiods H 2

• Qsing the tables presented at the end of theChapter material to determine the factor H 0-EB55K % 1000 H EB-5

=tep 5J Add the t!o amounts togetherJ

H EB-5 G 1E-55 H 1$05B-M

nvestors should be !illing to pay /1$05B-M


55/87

"ond premiums

•

.his is an e%ample of a bond premiumJ▫ "ecause C= is offering an interest rate above

anything else offered in the mar#et$ investors !illpay more than the face value for the bond

• =imilarly$ !e can have bond discounts▫ Arise !hen the stated rate T mar#et rates

▫ Assume instead that mar#et rates are 12

▫ Recalculating the bond price$ !e getJ/100 % 1-MK00B H 1MK-01

G /1$000 % 0-K1K H K-1K

KMM-20


56/87

3hy do rates differ

• Assume C= identifies on Nanuary 1$ 201B that itrequires cash and that it !ill raise the money byissuing bonds-▫ Advice from under!riters as to pricing based on

the mar#et6s perception of C=6s ris#▫ Consider their situation ho! much interest can

they afford @o! much can they raise !ith theissue based on e%pected pricing (tc-

▫ 3ill determine the rate$ but then must get thecertificates printed and issued ta#es time


57/87

8resent value and rates

• As the interest rate used to discount cash flo!sgoes up$ !hat happens to the present value▫ t goes do!n

▫ nverse relationship

• 3hy is this the case▫ Less money is needed today to receive the same

cash in the future more earnings


58/87

Accounting for bonds

Dis'o"nts and premi"ms result fromdifferences bet!een bonds6 stated interestrates and mar#et rates at the date of issue of

the bonds-.he discount or premium is a contra accountand is included !ith the legal debt on the

corporation6s balance sheet$ probably notmentioned separately but disclosed in notesif material-

i " d t 8 9f l :


59/87

ssuing "onds at 8ar 9face value:

Assume that Artisan nc- issued / 1 million$ five&year$ B$ bonds dated Nanuary 1 at 100 9face value:- 9mar#et interest H B:

Nournal entryJ

Dr- Cash 1$000$000 Cr- "onds payable 1$000$000

.o record bonds payable issued at par


60/87

ssuing "onds at Discount

Assume that on Nanuary 1$ Artisan$ nc- sells /1million$ five&year$ B bonds at KE 9mar#et rates arePB:-

Nournal entryJ

Dr- Cash KE0$000

Dr- "ond discount 20$000Cr- "onds payable 1$000$000

.o record bonds issued at a discount


61/87

Carrying 9"oo#: Ualue of "onds

"onds payable /1$000$000

LessJ Discount on bonds payable 20$000 /KE0$000

Long-termliabilities


62/87

ssuing "onds at 8remium

Assume that on Nanuary 1$ Artisan$ nc- sells/1 million$ five&year$ B bonds at 102- 9mar#etrates are T B:

Nournal entryJ

Dr- Cash 1$020$000

Cr- "ond premium 20$000Cr- "onds payable 1$000$000

.o record bonds issued at a premium


63/87

Carrying 9"oo#: Ualue of "onds

"onds payable /1$000$000 AddJ 8remium on bonds payable 20$000 /1$020$000

Long-termliabilities


64/87

Amortization of "ond 8remium Discount

• .here are t!o methods to amortize bonddiscount or premiumJ

F =traight&line method S premium ordiscount is amortized to interest e%penseover the life of the bond in equal amounts

F (ffective interest method S the interest

e%pense reflects the same percentage ofthe bond6s carrying value this is thepreferred method


65/87

Amortizing "ond Discounts or8remiums

• Amortization spreads the cost of borro!ing overthe life of the bond

• Discount amortization increases intereste%pense

• 8remium amortization reduces interest e%pense

( l


66/87

(%ample

• n Nanuary 1$ +ear 1$ 3indemere Ltd- issued year$ /100$000 bonds at !hen mar#et rates!ere K▫ 8rice of bonds H K5$B21

▫

Discount H /M$K


67/87

(%ample effective interest method

Nanuary 1$ +ear 1 9issue:Dr- Cash K5$B21

Dr- "ond discount M$K

Cr- "onds payable 100$000


December 51$ +ear 1 9pay interest:

Dr- nterest e%pense 000 Cr- Cash 000

.o record interest payment


68/87


December 51$ +ear 1 9amortize bond discount:

(ffective interest methodJ

& Amortizes the discount using the effectiveinterest H mar#et interest rate

& Loo# to the bond amortization table at the start

& Qse the amount that is the difference bet!een

actual interest paid and ;effective interest<

( l ff ti i t t th d


69/87


DR nterest e%pense 11

CR "ond discount 11

.o amortize bond discount



70/87

(%ample


Dr- nterest e%pense 1B

Cr- "ond discount 1B.o amortize bond discount


71/87


December 51$ +ear 9record redemption of bond:

DR "onds 8ayable 100$000

CR Cash 100$000

( l


72/87

(%ample

• Let6s re&do the e%ample using the straight linemethod

• n Nanuary 1$ +ear 1$ 3indemere Ltd- issued year$ /100$000 bonds at !hen mar#et rates

!ere K▫ 8rice of bonds H K5$B21

▫ Discount H /M$K

• 3ith straight line$ !e simply spread the bonddiscount across the yearsJ▫ MK H /1M1K-B

( l t i ht li


73/87

(%ample straight line

Nanuary 1$ +ear 1 9issue:Dr- Cash K5$B21

Dr- "ond discount M$K

Cr- "onds payable 100$000


December 51$ +ear 1 9pay interest:

Dr- nterest e%pense $000 Cr- Cash $000

.o record interest payment

( l t i ht li th d


74/87

(%ample straight line method

December 51$ year 1 9amortize bond discount:

Dr- nterest e%pense 1$M1K-B

Cr- "ond discount 1$M1K-B

.o amortize bond discount



75/87


Dr- nterest e%pense 1M1K-B

Cr- "ond discount 1M1K-B

December 51$ +ear 9redeem bond:

Dr- "onds payable 100$000 Cr- Cash100$000


Amortizing "ond Discounts or 8remiums


76/87

Amortizing "ond Discounts or 8remiums

F =traight&line method Constant periodic e%pense$ varying percent

=impler and !idely used as a result

F (ffective interest method Uarying periodic e%pense$ constant percent

Conceptually superior$ better matches e%pense

Required under >R=

"oth methods result in the same total amount

of interest e%pense over the life of bonds-


77/87

Discount8remium =ummary

DiscountJ

F"oo# value T face value

Fnterest e%pense P stated rate

8remiumJ

F"oo# value P face value

Fnterest e%pense T stated rate

R d i " d " f 7 t it


78/87

Redeeming "onds "efore 7aturity

• A company may decide to retire bondsbefore maturity in order toJ

▫ Reduce interest cost

▫ Remove debt from its balance sheet

• A company should retire debt early only if

it has sufficient cash resources


79/87

Retiring bonds early

• 3hen bonds are retired before maturityJ

▫ (liminate carrying value of the bonds atthe redemption date

▫ Record the cash paid

▫ Recognize the gain or loss on redemption9gain if cost T carrying value loss if cost P

carrying value:

( l


80/87

(%ample

•

Assume 3indemere redeemed the bonds onNanuary 1$ +ear $ at KK and had used theeffective interest method to amortize the bonddiscount- 8repare the 4ournal entry

• DR "onds payable100$000

•

DR Loss on bond redemption E5B▫ CR "ond discount 9100$000&KE$1MB: 1$E5B

▫ CR Cash KK$000

=t t t 8 t ti


81/87

=tatement 8resentation

• "alance sheet▫ Current liabilities are first in order of

settlement dates

▫

'on&current liabilities follo!• 'otes

▫ nclude information about repaymentschedules$ interest rates$ securitypledged$ value of the security$ etc-


82/87

=tatement 8resentation

• Cash flo!

▫ 7ost current liabilities relate to operations

▫ Receiving cash by issuing debt is a

financing activity▫ 8aying cash to repay debt is also a

financing activity

•

ncome =tatement▫ nterest e%pense is reported as an

operating e%pense


83/87

3hat6s the issue !ith liabilities

• Companies sometimes have obligations thatdon6t quite meet the definition of a liability$

and so are not recorded on the balance sheet▫ 7ay be an area sub4ect to manipulation

▫ Can be substantial$ so it6s important to

#no! !here to loo# for these

.i i t t d


84/87

.imes interest earned

&Qsed to determine if the company is able to meetinterest payments !hen they are due

& this ratio !ould be used if !e !ere concernedthat a company6s debt load is too high

& relates earnings to annual interest costs

& ban#s and other lenders !ould be particularlyinterested in this ratio-

.i i t t d


85/87

.imes interest earned How is it calculated?

( B*+ &earnins be-ore interest an! tax)

*nterest expense

Calculation Results201. ( 75.8/112 ( 5

2012 ( 512/12 ( .1

*nterpretation3


86/87

.i i t t d


87/87

.imes interest earned How is it calculated?

( B*+ &earnins be-ore interest an! tax)

*nterest expense

Calculation Results201. ( 7,5.8 / 1,12 ( 5

2012 ( 5,12 / 12 ( .1

*nterpretation

(10) ACCTG 311 Chapter 10.ppt

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