Chapter 8 and 9 study guide PDF

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Summary

CHAPTER 8 AND 9 STUDY GUIDE NOTES...

Description

For Chapter 8 and 9, only partial of the chapters will be covered. Specifically, for Chapter 8, only Part A (that is, before "Part B: Contingencies") will be covered. For Chapter 9, only Part A will be covered as well (before "Part B: Pricing a bond"). As such, the VP assignment (and also EX assignment) for Ch8 and 9 are combined. The following are the important topics for these two chapters: Chapter 8 Current vs. long-term liabilities: -Current liabilities are payable within one year from the balance sheet date, and long term liabilities are payable in more than one year. -Its important in helping investors and creditors assess risk. Most companies would prefer to report a liability as a long term rather than current, because doing so may cause the firm to appear less risky. Less risky firms may enjoy lower interest rates on borrowing.

Notes payable; • Note signed by a firm promising to repay the amount borrowed plus interest. liability that creates interest expense. •

interest calculation: Interest = Face Value × Annual interest rate × Fraction of the year When a company borrows money, it pays the lender interest in return for using the lender’s money during the term of the loan. Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan. Because the stated interest rate is an annual rate, when calculating interest for a current note payable

we must adjust for the fraction of the year the loan spans. We calculate interest on notes as above

Employee and Employer payroll cost: Employer: •

Federal and state unemployment taxes

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Employer matching portion of Social Security and Medicare

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Employer contributions for health, dental, disability, and life insurance

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Employer contributions to retirement or savings plans

Employee: •

Federal and state income taxes

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Employee portion of Social Security and Medicare (FICA taxes)

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Employee contributions for health, dental, disability, and life insurance

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Employee investments in retirement or savings plans

Deferred revenue Liability account used to record cash received in advance of the sale or service Sales tax payable Sales taxes collected from customers by the seller Chapter 9 Financing alternatives:

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Capital structure: mixture of liabilities and stockholders’ equity a business uses q Debt financing: borrowing money q Equity financing: obtaining investment from stockholders

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Cost of financing q Debt: interest expense (tax-deductible) q Equity: dividends (not tax-deductible)

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Examples of debt

Notes, leases, and bonds

Installment notes (important!): Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. The periodic reduction of the balance is enough that at maturity the note is completely paid.

Characteristics of leases: •

Contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time

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Leases are recorded by the lessee as a debit to lease asset and a credit to lease payable q for the present value of the lease payments q at the beginning of the lease term

Characteristics of different types of bonds Secured: Bonds are backed by collateral. Unsecured: Bonds are not backed by collateral Term: Bond issue matures on a single date. Serial: Bond issue matures in installments. Callable: Issuing company can pay off bonds early.

Convertible: Investor can convert bonds to common stock...