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Lecture Financial accounting (10th edition): Chapter 11 - Pratt, Peters

Chapter 11 - Long-term liabilities: Notes, bonds, and leases. This chapter list three major long-term liability categories and identify key financial ratios relied upon to assess the importance of these liabilities as a form of financing; list three basic contractual forms that underlie long-term liabilities, and in each case show how the effective interest rate is computed. | 2 Chapter 11: Long-Term Liabilities: Notes, Bonds and Leases 2 3 Learning Objective 1 List three major long-term liability categories and identify key financial ratios relied upon to assess the importance of these liabilities as a form of financing. 4 Long-Term Liabilities Many companies finance their operations and growth opportunities through the use of long term debt instruments: Notes Payable – Formal borrowing agreement Bonds Payable – Issued to bondholders, smaller dollar amounts and larger amount of notes Leasehold Obligations – Future cash payments for use of an asset 5 The Relative Size of Long-Term Liabilities 6 Economic Consequences of Reporting Long-Term Liabilities Improved credit ratings can lead to lower borrowing costs Leverage and solvency measures have taken on increasing importance Management has strong incentive to manage financial statement numbers by employing reporting strategies like “off-balance-sheet financing” 7 Which of the following will result from . | 2 Chapter 11: Long-Term Liabilities: Notes, Bonds and Leases 2 3 Learning Objective 1 List three major long-term liability categories and identify key financial ratios relied upon to assess the importance of these liabilities as a form of financing. 4 Long-Term Liabilities Many companies finance their operations and growth opportunities through the use of long term debt instruments: Notes Payable – Formal borrowing agreement Bonds Payable – Issued to bondholders, smaller dollar amounts and larger amount of notes Leasehold Obligations – Future cash payments for use of an asset 5 The Relative Size of Long-Term Liabilities 6 Economic Consequences of Reporting Long-Term Liabilities Improved credit ratings can lead to lower borrowing costs Leverage and solvency measures have taken on increasing importance Management has strong incentive to manage financial statement numbers by employing reporting strategies like “off-balance-sheet financing” 7 Which of the following will result from receiving cash upon issuing long-term debt? a. Increase in the company’s indebtedness b. Decrease of the current ratio c. Increase of retained earnings d. Increase of total shareholders’ equity 8 Learning Objective 2 List three basic contractual forms that underlie long-term liabilities, and in each case show how the effective interest rate is computed. 9 Basic Definitions and Different Contractual Forms Some contracts, called interest-bearing obligations, require periodic (annual or semiannual) cash payments (called interest) that are determined as a percentage of the face, principal, or maturity value, which must be paid at the end of the contract period. Non-interest-bearing obligations require no periodic payments, but only a single cash payment at the end of the contract period. Installment obligations require periodic payments covering both interest and principle throughout the life of the contract. 10 These contractual forms may contain additional terms that specify assets pledged as