Feature Story. How did Macro deal with its liabilities?

Transcription

1 Unit 5 Liabilities

2 Study Objective Define liabilities, current liabilities and long-term liabilities. Identify the major types of current liabilities and log-term liabilities. Explain current ratio and its implication. Describe the features of different types of bonds. Determine on what conditions bonds are sold at discount or at premium. Explain debt to total asset ratio, times interest earned ratio and their implication. 2

3 Feature Story How did Macro deal with its liabilities? 3

4 5.1 Current Liabilities What is current liabilities? How is current liabilities classified? 4

5 What is current liabilities? Current liabilities refer to the obligations that are reasonably expected to be paid on demand from existing current assets or through the creation of other current liabilities. The time period for payment is one year or the operating cycle. 5

6 Classification of Current Liabilities Notes and accounts payable that are due in one year. Accrued expenses. Unearned revenues. Current maturities of long-term debt. Contingent liabilities. Whether the amount is definite? Current liabilities of definite value Estimated liabilities Contingent liabilities 6

7 Current Ratio Users of financial statements focusing on the relationship between current assets and current liabilities is because it is important in evaluating a company s liquidity. 7

8 Current Ratio Current assets exceeded current liabilities: Paying the liabilities is favorable. Current liabilities exceeded current assets: Short-term obligations may not be able to be paid. Current ratio=current asset/current liabilities Higher Healthier internal operating Surroundings and better external Credit ranking of the company. 8

9 5.2 Long-Term Liabilities Long-term liabilities are company obligations that extend beyond the current year or alternatively, beyond the current operating cycle. Long-term loans payable Long-term accounts payable Bonds payable Deferred income taxes Endowment insurance for the employees Liability for severance pay Liability for vacation pay 9

10 Long-term loans payable Long-term loans payable include the loans borrowed from financial institutions and other units. It shall be accounted independently according to the different characters of the loan and at the amount actually incurred. 10

11 Long-term Accounts Payable Long-term accounts payable include accounts payable for importing equipments, accounts payable for fixed assets financed by leasing. Longterm accounts payable shall be accounted at actual amounts. 11

12 Bonds Payable Bonds are issued to obtain large amount of long-term capital. Bonds have many different kinds, and each has its particular feature. Bonds are a form of Interest-bearing notes Payable. Convertible bonds Callable bonds Secured bonds ---- unsecured bonds Term bonds ---- serial bonds Registered bonds bearer bonds 12

13 Lease Operating lease The lesser continues to own the property and the lessee just use the property temporarily. So the rental payments are recorded as an expense in the income statement. Capital lease the lease contract transfers all the benefits and risks of ownership to the lessee. Such a lease is actually a purchase of the property. 13

14 Capital lease A lease is recognized as a capital lease if any one of the following conditions exists: If during the lease term, the lessee can purchase the asset at a lower price than its market value at his option, and the ownership of the asset is transferred to the lessee; If the lease term is equal to 75% or more of the useful life of the asset; If the amount of rental payments during the lease term is equal to or more than 90% of the market value of the asset. 14

15 Contractual interest rate & market interest rate Contractual interest rate < market interest rate Sold at discount Does not mean the issuer s bad financial situation Contractual interest rate > market interest rate Sold at premium Does not mean the issuer s outstanding financial strength 15

16 Two ratios for investors: Debt to total asset ration = Total liabilities / total assets If ratio is higher: Company fails to pay the bond interest at due time Times interest earned ratio = Income before income taxes And interest expense / Interest expense If ratio is lower: Less earnings are Available to meet Interest payments 16

17 Brief Summary 1. Current liabilities refer to the obligations that are reasonably expected to be paid on demand from existing current assets or through the creation of other current liabilities. The time period for payment is one year or the operating cycle, whichever is longer. 2. Long-term liabilities are company obligations that extend beyond the current year or alternatively, beyond the current operating cycle. 17

18 End Of Unit 5