Transcript 9-1 Chapter F9 Financing Activities Electronic Presentation by Douglas Cloud Pepperdine University 9-2 Objectives 1. Identify information that companies report Oncetoyou have and explain the about obligations lenders completed thislong-term chapter, debt. transactions affecting should be able to: procedures 2.

9-1
Chapter F9
Financing
Activities
Electronic Presentation
by Douglas Cloud
Pepperdine University
9-2
Objectives
1. Identify information that companies report
Oncetoyou
have and explain the
about obligations
lenders
completed
thislong-term
chapter, debt.
transactions
affecting
should be
able to: procedures
2. Describe you
appropriate
accounting
for contingencies and commitments,
including capital leases.
3. Identify information reported in the
stockholders’ equity section of a corporate
balance sheet and distinguish contributed
capital from retained
earnings.
Continued
9-3
Objectives
4. Explain transactions affecting stockholders’
equity and describe how these transactions
are reported in a company’s financial
statements.
5. Distinguish between preferred stock and
common stock, and discuss why
corporations may issue more than one type
of stock.
9-4
Liabilities are an
organization’s obligations to
deliver payments, goods, or
services in the future.
Notes Payable
Accounts Payable
Interest Payable
Wages Payable
Unearned Revenue
9-5
Three attributes
define a liability for
an organization.
9-6
Attributes of a
Liability
(1) A present responsibility
exists to transfer
resources to another
entity at some future time.
9-7
Attributes of a
Liability
(1) A present responsibility
exists to transfer
resources to another
entity at some future time.
(2) The organization cannot
choose to avoid the
transfer.
9-8
Attributes of a
Liability
(1) A present responsibility
exists to transfer
resources to another
entity at some future time.
(2) The organization cannot
choose to avoid the
transfer.
(3) The event creating the
responsibility has already
occurred.
9-9
Objective
1
Identify information that
companies report about
obligations to lenders and
explain the transactions
affecting long-term debt.
9-10
Debt Obligations
A firm’s short-term and
long-term borrowings are
obligations to creditors.
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Debt Obligations
As you can see in the next two
slides, Mom’s Cookie Company,
debt is separated into current- and
long-term amounts.
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Debt Obligations
December 31,
2005
2004
Liabilities:
Current liabilities:
Accounts payable
$ 16,260 $ 9,610
Wages payable
3,590
-0Unearned revenue
2,770
4,250
Interest payable
810
650
Notes payable, current
6,000
5,000
Total current liabilities
29,430 19,510
Notes payable, long-term
80,200 73,200
Current debt for Mom’s
Total liabilities
$109,630 $92,710
Cookie Company
9-13
Debt Obligations
December 31,
2005
2004
Liabilities:
Current liabilities:
Accounts payable
$ 16,260 $ 9,610
Wages payable
3,590
-0Unearned revenue
2,770
4,250
Long-Term
Debt for Mom’s 810
Interest
payable
650
Notes Cookie
payable,Company
current
6,000
5,000
Total current liabilities
29,430 19,510
Notes payable, long-term
80,200 73,200
Total liabilities
$109,630 $92,710
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Debt Obligations
Long-term debt
includes notes and
bonds payable.
9-15
Debt Obligations
Notes and bonds
payable are contracts
between borrowers
and creditors.
9-16
Debt Obligations
Company debts
secured by specific
company assets are
referred to as secured
debts. Major
companies often issue
debentures, or
unsecured debts.
9-17
Debt Obligations
What about bonds
Thosethat
are commonly
require a portion
of the
bond
issued
by
governments
Most
corporate
bondsand
to be repaid each
year? at to
are repaid
referred
serial
are
theasend
of
bonds.
a fixed
period.
9-18
Debt Obligations
bonds
holders
Yes,Callable
these bonds
notrequire
only include
Don’t theseofbonds
haveoftodebt
be to resell the
this
type
specific dates for repurchasing, but
outstanding for
a specified
periodcompany if
bonds
to
the
issuing
specific prices that the issuer must
before they can
be repurchased?
thepay
issuer
chooses tothem.
repurchase
to reacquire
the bonds.
9-19
Debt Transactions
Mom’s Cookie Company issued
$20,000 of five-year bonds on
January 1, 2005. The bonds pay 8%
annually at the end of each year.
maturity value or
face value
Stated rate
of interest
9-20
Debt Transactions
If Mom’s Cookie Company’s bonds are
issued at a price to provide the investor
with a 9% return, then this return is known
as the effective rate of interest.
How is the issue price of Mom’s
8% bonds determined if the
effective rate of interest is 9%?
9-21
Debt Transactions
PV of bonds = PV of annuity + PV of single amount
PV of bonds = $1,600 x 3.88965 +
$20,000 x 0.64993
9%
$20,000 5x periods,
.08
Face value of
5 periods, 9%
bond
9-22
Debt Transactions
PV of bonds = PV of annuity + PV of single amount
PV of bonds = $1,600 x 3.88965 +
$20,000 x 0.64993
PV of bonds = $6,223 + $12,999 (rounded)
PV of bonds = $19,222
9-23
Exhibit 3
Example of the Relationship of
Bond Cash Flows to Present Value
9-24
Debt Transactions
To determine transactions
recorded for the bonds, we need
to develop an amortization table
for Mom’s Cookie Company.
9-25
Exhibit 4
Bond Amortization Table
Mom’s Cookie Company
9-26
Debt Transactions
ASSETS
Date
Accounts
1/1 Cash
Bonds Payable
Cash
= LIABILITIES
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
Other
Assets
19,222
19,222
Mom’s Cookie Company would record
the bond sale on January 1, 2005.
9-27
Exhibit 4
Bond Amortization Table
Mom’s Cookie Company
9-28
Debt Transactions
ASSETS
Date
Accounts
Cash
12/31 Interest Expense
Bonds Payable
Cash
–1,600
= LIABILITIES
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
Other
Assets
–1,730
130
At the end of 2005, Mom’s Cookie
Company would record the amount
paid and the interest expense.
9-29
Debt Transactions
ASSETS
Date
Accounts
Cash
12/31 Bonds Payable
Cash
–20,000
= LIABILITIES
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
Other
Assets
–20,000
When the bond matures on December 31,
2009, the liability is removed when the
face value of the bond is paid.
9-30
Financial Reporting of Debt
Balance Sheet
Liabilities:
Long-term debt
Income Statement
Nonoperating expenses:
Interest expense
Statement of Cash Flows
Cash flow from operating activities:
Interest paid
Cash flow from financing activities:
Long-term debt issued
Dec. 31, 2005
$19,352
1,730
(1,600)
19,222
9-31
Financial Reporting of Debt
Balance Sheet
Liabilities:
Long-term debt
Income Statement
Nonoperating expenses:
Interest expense
Statement of Cash Flows
Cash flow from operating activities:
Interest paid
Dec. 31, 2006
$19,494
1,742
(1,600)
9-32
Financial Reporting of Debt
After recording the fifth interest payment and
related interest expense, Mom’s Cookie
Company records paying the creditors the
maturity value of the bonds:
Dec. 31, 2009
9-33
Financial Reporting of Debt
Balance Sheet
Liabilities:
Long-term debt
Income Statement
Nonoperating expenses:
Interest expense
Statement of Cash Flows
Cash flow from operating activities:
Interest paid
Cash flow from financing activities:
Debt repaid
----
$ 1,783
(1,600)
(20,000)
9-34
Objective
2
Describe appropriate
accounting procedures
for contingencies and
commitments, including
capital leases.
9-35
Contingencies
A contingency is an existing
condition that may result in
an economic effect if a
future event occurs.
9-36
Contingencies
If a contingency probably will result in a loss,
and the amount of the loss can be reasonable
estimated, it should be included as a liability
on a company’s balance sheet.
9-37
Commitments
A commitment is a promise to
engage in some future activity that
will have an economic effect.
9-38
Commitments
Operating leases are
expensed in the period in
which the leased assets
are used.
9-39
Capital Leases
Capital leases are recorded
as liabilities, and the related
leased resources are
recorded as assets.
9-40
Capital Leases
Mom’s Cookie Company
signs a lease on January
1, 2005 to acquire
computer equipment.
The lease is for three
years, the assumed life of
the equipment. The
company agrees to pay
$10,000 a year, including
8% interest.
9-41
Capital Leases
Using a table:
PVA
= A x IF (Table 4)
PVA
= $10,000 x 2.57710
$25,771 = $10,000 x 2.57710
Using Excel:
Enter: =PV(0.08,3,-10000)
9-42
Capital Leases
ASSETS
Date
Accounts
1/1 Leased Assets
Capital Lease
Obligation
Cash
= LIABILITIES
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
Other
Assets
25,771
25,771
Mom’s Cookie Company records the
present value of lease payments.
9-43
Capital Leases
ASSETS
Date
Accounts
Cash
12/31 Capital Lease
Obligation
Interest Expense
Cash
–10,000
= LIABILITIES
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
Other
Assets
–7,938
$25,771 x .08
–2,062
Mom’s Cookie Company records the $10,000
payment, which includes interest expense.
9-44
Objective
3
Identify information reported
in the stockholders’ equity
section of a corporate balance
sheet and distinguish
contributed capital from
retained earnings.
9-45
Exhibit 8
Stockholders’ Equity for
Mom’s Cookie Company
December 31,
Common stock, $1 par value,
50,000 shares authorized,
20,000 and 10,000 issued
Paid-in capital in excess of par
Retained earnings
Treasury stock, 1,000 shares
at cost
Total stockholders’ equity
2006
2005
$ 20,000 $ 10,000
190,000
90,000
130,417
42,990
(12,000)
0
$328,417 $142,990
9-46
Stockholders’ Equity
Contributed Capital is
Retained
earnings
the the direct investment
Treasury
stock isisstock
accumulationbyofa profits
repurchased
companymade by stockholders
reinvested
a corporation. in a corporation.
from itsinstockholders.
9-47
Contributed Capital
Corporations primarily issue shares of stock in
exchange for cash. Common stock or capital
stock represents the ownership rights of
investors in a corporation.
9-48
Contributed Capital
A charter is the legal right
granted by a state that permits a
corporation to exist.
9-49
Contributed Capital
The par value of stock is the value
What is assigned
meant byto each share by a
par
value? in its corporate charter.
corporation
9-50
Contributed Capital
Paid-in capital in excess
Outstanding shares
of par value is the
shares currently
amount in excess
of shares
the areare
Issued
held by investors.
stock’s parshares
value that have
received by a corporation
been sold by a
from the sale ofcorporation
its stock. to
investors.
9-51
Retained Earnings
Mom’s Cookie Company for 2005 and 2006.
Year
Net
Income
Dividends
2004
2005 $ 52,990 $10,000
2006 107,427 20,000
Increase in Balance of
Retained
Retained
Earnings
Earnings
$
$42,990
87,427
0
42,990
130,417
9-52
Objective
4
Explain transactions
affecting stockholders’
equity and describe how
these transactions are
reported in a company’s
financial statements.
9-53
Exhibit 10
Examples of Transactions
That Affect Common
Stockholders’ Equity
*An increase in treasury stock decreases stockholders’ equity.
Continued
9-54
Exhibit 10
Examples of Transactions
That Affect Common
Stockholders’ Equity
Transfers net
Deducts
amount
incomethe
earned
ofduring
dividends
2005paid
to
during 2005
from
Retained
Earnings.
Retained Earnings.
9-55
Examples of Transactions
That Affect Common
Stockholders’ Equity
Records the
Exhibit 10
Records the
amount received
purchase of
from the sale of
treasury stock.
common stock.
9-56
Equity Transactions
A company cannot earn profit
from equity transactions.
9-57
Cash Dividends
Three dates are important for dividend
transactions:
1) The date of declaration is the date on
which a corporation’s board of directors
announces that dividends will be paid.
2) The date of record is the date used to
determine who will receive the dividend.
3) The date of payment is the date on which
the dividends are mailed.
9-58
Issuing New Stock
The right to maintain the same
percentage of ownership when new
shares are issued is the stockholder’s
preemptive right.
9-59
Issuing New Stock
When a new stock issue is prepared,
stock rights are issued to existing
owners. These rights authorize the
recipient to purchase new shares.
9-60
Stock Dividends
Stock dividends are shares of stock
distributedSo,
by we
the had
company
the
1,000to
shares
stockholders before
withoutthe
any
charge.
Druid
stock dividend.
Company distributed
a
5%
stock
dividend.
Now we have 1,050.
9-61
Stock Dividends
An important point about
issuing stock dividends is that
the firm’s total stockholders’
equity does not change.
9-62
Stock Split
When a corporation issues a
stock split, it issues a multiple of
the number of shares of stock
outstanding before the split.
9-63
Objective
5
Distinguish between
preferred stock and
common stock, and
discuss why corporations
may issue more than one
type of stock.
9-64
Preferred Stock
Preferred
Cash dividends
stock must
is stock
be paid
with
a to
higher
preferred
claimstockholders
on dividends
before
and assets
they than
can be
common
paid to
commonstock.
stockholders.
9-65
Preferred Stock
Preferred
stockholders
normally do not have
voting rights in a
corporation.
9-66
Preferred Stock
Some companies
Preferred stock that
issue redeemable
can be converted
Redeemable preferred
preferred stock.
into shares of
stock is not included
This is stock the as part ofcommon stock are
issuing company
referred to as
stockholders’ equity.
plans to repurchase
It is reported as convertible
a
at a particular
time item between
preferred stock.
separate
in the future. liabilities and
stockholders’ equity.
9-67
CHAPTER F9
THE END
9-68