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Probable debts or obligations of the entity that result from past transactions which will be paid with assets or service.
Short-Term obligations that will be paid within the current operating cycle of the business or with in one year of the balance sheet date.
- A business has this if it has the ability to meet it's current obligations
- Current Ratio measures this
- Current assets / Current Liabilites
Accounts Payable (Current)
- Aka; Trade accounts Payable
- Obligations to pay for goods and service used int he basic operation activities of the business.
Accured Liabilites (current)
- Aka: Accured expenses.
- Obligations related to expenses that have been incurred, but will not be paid until the subsequent period
- Ex: property tax, electricity, salary
- Recorded as adjusting entries at the year-end
Employee Income Taxes
Amount withheld recored as current liability between date of deduction and date remitted to government.
Employee FICA taxes
required by Federal Insurance contribuing act. Imposed on both employee and employer. P.466
Written contract specifies amount borrowed, date by which it must be repaid, and interest rate associated.
Time Value of Money
Interest associated with use of money over time to borrower, interest is expense
Principle * Rate * Time
Unearned Revenue: Obligations arising when cash is received prior to the related revenue being earned
- Potential liabilities that are create as a result of a past event.
- Probable future sacrifice.
- May or may not become a recorded Liability
Working Capital Management
- Dollar difference between current assets and current Liabilities.
- has significant impact on health and profitability of a company.
- Too little: risk of not meeting obligations creditors
- Too much: tie up resources in additional cost
Long Term Liabilites
Include all obligations that are not classified as current liabilities, such as long-term notes payable and bonds payable
Notes payable and bonds
- Private Placement: raising debt from financial organizations like banks, insurance companies, pension plans.
- Bonds: company's needs for debt capital exceeds financial ability of any single creditor. So public trade dept.
Operating Lease: when a company leases an asset on a short term basis. No liability recored. Just rent expense
Lease on a long term basis. Meets 1 of 4 GAAP. Record an asset and Liability
Present Value Concepts
Present Value: The current value of an amount to be received in the future; money received today is worth more than money recieved one year from today because it can be used to receive interest.
Prestent value of a single amount is the worth to you today of receiving that amount some time in the future.
- A series of consecutive payments characterized by
- 1) An equal dollar amount each interest period
- 2) Interest periods of equal length
- 3) Equal interest rate each interest period
Present Value of Annuity
The value now of a series of equal amounts to be received (or paid out) for some specified number of periods in the future.
Mixture of debt and equity used to finance a companies operations
- Adavantages: Stockholders maintain control because bonds are debt, not equity
- Interst expense is tax deductible
- The impact on earnings is positive because money can often be borrowed at low interest rate, invest higher.
Bonds Paybable (cont)
- Disadvantages: Risk of bankruptcy because interest and debt mut be paid back as scheduled or creditor force legal action.
- Negative impact on cash flows because interest and principals must be repaid in future.
- Amount 1) payable at maturity date, 2) on which the periodic cash interest payments are computed
- Aka: par value, face amount
Rate of cash interest per period stated in contract
Not secured with pledge of a specific assets
May be called for early retirement at the option of issuer
May be converted to other security (usually common stock)
A bond contract that specifies the legal provisions
- Legal document bond issuer prepares that is given to potential investors.
- Describes the company, the bonds, and how the process of bond will be used.
- An independent party appointed to represent bondholders.
- They make sure the issuing company fulfills all provisions.
Are long term debt for issuing company
- Stated Rate of interest on bonds
- When interest payments are made more frequently than once a year, you mush adjust both interest rate and number of periods.
Market Interest Rate
- Current rate of interst on a debt when incurred.
- Aka: Yield or Effective interest Rate
Difference between the selling price and par when the bond is sold for more than par.
Difference between the selling price and par when the bond is sold for less than par
Bonds Issued at Par
- Sell at their par value when buyers are willing to invest in them at the interest rate stated in the bong contract.
- Stated Rate: Market rate
- Bond Price: par value of the bond
Straight line Amortization
- Simplifed method of amortizing a bond discount or premium that allocates an equal dollar amount ot each interst paid.
- Have to allocate equal dollar amount to each interest period.
- Add to the cash payment of interest to compute interst expense
- Discount will be reduced to zero by maturity date
Effective Interest Method
- Amortizes a bond discount or premium on the basis of the effective interest rate
- Prefered method
- Compute interest expense by multiplying the current unpaid balance times the market rate of interest
Zero Coupon bonds
- Do not pay periodic cash interest.
- It is a deep discount bond that will sell for less than mature value
Authorized number of shares
The maximum number of shares of a corparations capital stock that can be issued as specified in the charter.
Represents the total number of shares of stock that have been sold
Stock that has been bought back within it's own company.
Refer to the total number of shares of stock that are owned by stockholders on any particular date.
Held by individuals who are often thought of as the "owners" of the corporations because they have the right to vote and share in the profitability of the businesss through dividens.
Nominal value per share of capital stock specified in the charter; serves as the basis for legal capital.
The permanent amount of capital defined by state law that must remain invested in the business; serves as a cushion for creditors
No-par Value Stock
Capital stock that has no par value specified in the corporate charter
Distribution of additonal shares of a corporations stock to it's stockholders on a pro rata basis at no cost to the stockholder
Is an increase in the total number of authorized shares by a specified ratio; does not decrease retained earnings.
Stock that has specified rights over common stock
Current dividend preference
Feature of preferred stock that grants priority on preferred dividends over common dividends
Cumulative dividend preference
The preferred stock feature that requires specifed current dividens not paid in full to accumulate for every year in which they are not paid.
Dividens in arrears
Dividends on cumulative preferred stock that have not been declared in prior years
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