Module 8
Reporting and Analyzing
Nonowner Financing
Current Liabilities - Operating


Accounts payable - Obligations to others for
amounts owed on purchases of goods and
services; these are usually non-interestbearing.
Accrued liabilities - Obligations for which
there is no related external transaction in the
current period. These include, for example,
accruals for employee wages and taxes, as well
as accruals for other liabilities such as rent,
utilities, and insurance.
Current Liabilities - Nonoperating



Short-term interest-bearing loans - Short-term
bank borrowings and notes expected to mature in
whole or in part during the upcoming year; this
item can include any accrued interest payable.
Line of Credit – agreement with bank for a loan of
up to a specific amount, typically fee of .05% up to
.35% plus interest on any loan actually taken.
Current maturities of long-term debt - Long-term
liabilities that are scheduled to mature in whole or
in part during the upcoming year.
Accounts Payable Turnover and
Days Payable Outstanding
Uncertain Accruals
A contingent liability is a potential
liability whose occurrence and/or
ultimate amount is dependent upon a
future event.
 If the obligation is probable and the
amount estimable, then a company will
recognize this obligation.
 If only one of the criteria is met, the
contingent liability is disclosed in the
footnotes.

Short-term Interest-Bearing Loans

Companies generally finance seasonal swings in
working capital with a bank line of credit.
Bond Pricing – 2 Important Rates
 Coupon
(contract or stated) rate - the coupon
rate of interest is stated in the bond contract; it
is used to compute the dollar amount of
(semiannual) interest payments that are paid to
bondholders during the life of the bond issue.
 Market (yield or effective) rate - this is the
interest rate that investors expect to earn on the
investment for this debt security; this rate is
used to price the bond.
Cash Flows from Bonds


Assume that investors wish to price a bond
with a face amount of $10 million, an annual
coupon rate of 6% payable semiannually (3%
semiannual rate), and a maturity of 10 years.
Investors purchasing this issue will receive the
following cash flows:
Bond Pricing:
Coupon Rate < Market Rate (Discount)


Assume that investors expect an 8% annual yield
(4% semi-annual yield).
Given this discount rate, the bond will sell for
$8,640,999 as below. The entry to record this:
Cash
Bond Discount
Bonds Payable
8,640,999
1,360,001
10,000,000
Bond Pricing:
Coupon Rate > Market Rate (Premium)


Assume that investors expect only a 4% annual
yield (2% semiannual yield).
Given this new discount rate, the bond will sell for
$11,635,129 as below. The entry to record this:
Cash
11,635,129
Bonds Payable
Bond Premium
10,000,000
1,635,129
Coupon Rate vs. Market Rate
Effective Cost of Debt



Sale at par - the effective cost to the company is
the cash interest paid.
Sale at a discount - the effective cost to the
company includes both the cash interest paid
and the discount.
Sale at a premium - the effective cost to the
company, then, is the cash interest paid less the
premium amortization.
Accounting for Bonds:
Income Statement
Interest expense in the income statement is the sum of two components:
Amortization of the discount or premium:
1. Straight-line method: Divide the original amount by the number of
periods.
2. Effective interest rate method: Interest expense is calculated as the
beginning book value times the effective rate. The amortization will
be the difference between interest expense and the cash payment.
Gain (Loss) on Repurchase of Bonds
Verizon’s L-T Debt Footnote
Companies are required to present a schedule of debt
maturities for each of the next 5 years:
Debt Ratings
Bond Interest Rates
Factors Affecting Bond Ratings
Moody’s Ratings Distributions
Bond Terms





Indenture: legal agreement between bond holders and
company.
Perpetuity: no due date.
Zero coupon bond: risky bond that promises to pay
the principal on the due date.
Callable bond: bond may be called at the option of
the issuer, normally for a premium.
Convertible bond: bond is convertible into common
stock at a fixed rate over the life of the bond.
Global Accounting



Under IFRS, companies can limit disclosure of
contingent liabilities if doing so would severely
prejudice the entity’s competitive or legal position.
IFRS offers more disclosure of liabilities and accruals.
Under IFRS, convertible debt is split into two parts:
debt and equity (reflecting the option to convert).
Results in a bond discount that is amortized.