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Liabilities
- Probable debts pr obligations of the entity that result from past transactions, which will be paid with assets or services.
- Current Lia.- Maturity 1 year or less
- Noncurrent Lia- Maturity more than one year
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Payroll Liabilities
Employers incur several expenses and liabilities from having employees.
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Employee Income Tax
- Federal income tax// State and local income tax
- Amount withheld depend on the employee's earning and the tax rates.
- Employers owe the income tax amounts withheld from employee's gross pay to the appropriate government agency.
- Current Liability.
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Employee FICA taxes
Social security tax paid by employees required by the federal insurance contribution act.
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Employee Voluntary Deductions
- Amount withheld depend on the employee's request.
- Employers owe the voluntary deductions withheld from employees gross pay to the designated agency.
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Face value equals amount borrowed----cash received equals face value
Face value equals amount borrowed plus interest---- cash received is less than face value.
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End of Periods adjustment to notes
An adjusting entry is required to record interest expense incurred to date.
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Borrowing in Foreign currencies
- When a company has operations in a foreign country, it often borrows in the local currency. This reduces exchange rate risk.
- Because interest rates vary from country to country, companies may borrow in the foreign market with the lowest interest rate.
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Working Capital
Current Assets- Current Liabilities
Changes in working capital accounts affect cash flows as indicated in the following table.
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Liquidity
Is the company able to pay its debts as they come due.
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Current Ratio
- Current Assets / Current Liabilities
- Measure of liquidity.
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Compounding within a year
- Dealing with time periods other than one year, when the amount of time is stated in terms of an annual rate:
- n= number of years x compounding periods in one year
- i= annual interest rate / compounding periods in one year
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Future Value of a Lump Sum
- P= amount today
- Fn= amount after n years
- i= interest rate per number of time periods
- n= number of time periods
- Fn= P x (1+i) ^N
- table A.3
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Present Value of a Lump Sum
- P= Fn / (1+i) ^n
- table A.1
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Annuities
- An annuity is made up of equal cash flows at equal intervals. Many rental payments and mortgage payments are annuities.
- Equal dollar amount each interest period.
- Interest periods of equal length.
- Equal interest rate each interest period.
- table A.2
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Present Value of Annuity
- The value now of a series of equal amounts to be received for some specified number of periods in the future.
- Table A.2
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Future Value
Is the sum to which an amount will increase as the result of compound interest.
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Future Value of a Single Amount
- Table A.3
- Asked to calculate how much money you will have in the future as the result of investing a certain amount in the present.
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Future Value of Annuity
- Deposit a fixed amount of money into a saving account each month. This will tell you what you will have in the future.
- Table A.4
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Face Value
The amount the bond promises to pay the holder at maturity.
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Stated Rate, Coupon Rate
Multiplied by the face value, it determines the cash paid by the issuer at regular time intervals, usually semi-annually.
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Market Rate, Price to Yield x%
- The market rate will be the discount rate used in the issuance present value calculation.
- MIR- current rate of interest on a debt when incurred.
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Bond Premium Case
- The difference between the selling price and par when the bond is sold more than par.
- Stated Rate > Market rate
- Price > Face Value
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Bond Discount Case
- The difference between the selling price and par when the bond is sold for less than par.
- Stated Rate< Market Rate
- Price < Face Value
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Bond Trading
Bond market values are expressed as a percent of their par value.
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Bond issued at Par
- Stated Rate = Market Rate
- Price = Face Value
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Advantages of Bonds
- Bonds do not affect owner control.
- Interest on bonds is tax deductible.
- Bonds can increase return on equity.
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Disadvantages of Bonds
- Bonds can decrease return on equity when the company pays more in interest that it earns on the borrowed funds.
- Bonds require payment of both periodic interest and par value at maturity.
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Key Ratio
Debt to Equity= Total Liabilities / Owners Equity
This ration shows the relationship between the amount of capital provided by owners and the amount provided by creditors. In general, a high ration suggest that a company relies heavily on funds provided by creditors.
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Accounts Payable
- Purchase goods from other businesses to make their business run.
- These transactions create accounts payable.
- Interest does not usually accrue on AP
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Accrued Liabilities
- Expenses that have been incurred before the end of an accounting period but have not been paid.
- Ex- Property tax, electricity, and salaries.
- Recorded as adjusting entries at year end,
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Time Value of Money- Interest
- Interest that is associated with the use of money over time.
- To calculate interest you must remember three things 1. principle (cash borrowed) 2. annual interest rate 3. time period for loan.
- Interest = principle x interest rate x time
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Deferred Revenues
Revenues that have been collected but not earned; they are liabilities until the goods or services are provided.
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Contingent Liability
Is a potential liability that has arisen as the result of a past event; not an effective liability until some future events occurs.
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Long Term Liabilities
- Include all obligations that are not classified as current liabilities, such as long term notes payable and bonds payable.
- More than one year in the future.
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Operating Lease
- when a company leases an asset on a short term basis. (delivery trucks)
- Does not meet any of the four criteria established by GAAP and does not require the recording of a asset r liability.
- Most prefer to record it as this type of lease.
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Capital Lease
- Lease an asset for a long term basis rather than purchase it.
- Meets at least one of the four criteria established by GAAP and results in the recording of an asset and liability.
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Four Criteria to be a Capital lease and not a Operating Lease
- Lease term is 75 percent or more of the assets expected economic life.
- Ownership of the asset is transferred to the lessee at the end of the lease term
- The lease contract permits the lessee to purchase the asset at a price that is lower than its fair market value.
- Present value of the lease payments is 90 percent or more of the fair market value of the asset when the lease is signed.
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Present Value
is the current value of an amount to be received in the future; a future amount discounted for compound interest.
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Bond Principle
- is the amount payable at the maturity of the bond and on which the periodic cash interest payments are computed.
- Also called par value or face amount.
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Debenture
Unsecured bond; no assets are specifically pledged to guarantee repayment.
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Callable Bond
may be called for early retirement at the option of the issuer.
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Convertible Bonds
May be converted to other securities of the issuer. (usually common stock)
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Indenture
Is a bond contract that specifies the legal provisions of a bond issue.
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Who determines the price at which the bond sells?
- Market determines.
- Not the issuing company or the underwriter.
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Present Value of a Bond
Present value of the principle and the present value of the interest payments and add them together.
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Straight Line Amortization- Issued at Discount
- Simplified method of amortizing a bond discount or premium that allocates an equal dollar amount to each interest period.
- Divide the difference between the issue bond and the bonds payable by the number of periods.
- Each period the book value will now be increased by this amount.
- More companies use this.
- DIVIDE BY # OF PERIODS!!
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Effective Interest Method- Issued at Discount
- Amortizes a bond discount or premium on the basis of the effective interest rate; it is the theoretically preferred method.
- A. (Bond Amount X % X 1/2)
- B. (Beginning Book Value X Dif. % X 1/2)
- C. (A-B)
- D. Beginning Book Value + C
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If you need money you can sell bonds to other investors and it will not affect the books.
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