Reporting Long-Term Liabilities

Bonds payable and notes payable are reported as liabilities on the balance sheet. Any portion of the bonds or notes that is due within one year is reported as a current liability. Any remaining bonds or notes are reported as a long-term liability. Any unamortized premium is reported as an addition to the face

2 Comments

Financial Analysis and Interpretation: Number of Times Interest Charges Are Earned

As we have discussed, the assets of a company are subject to the (1) claims of credi­tors and (2) the rights of owners. As creditors, bondholders are primarily concerned with the company’s ability to make its periodic interest payments and repay the face amount of the bonds at maturity. Analysts assess the risk that

1 Comments

Present Value Concepts and Pricing Bonds Payable

When a corporation issues bonds, the price that investors are willing to pay for the bonds depends on the following: The face amount of the bonds, which is the amount due at the maturity date. The periodic interest to be paid on the bonds. The market rate of interest. An investor determines how much

1 Comments

Effective Interest Rate Method of Amortization

The effective interest rate method of amortization provides for a constant rate of interest over the life of the bonds. As the discount or premium is amortized, the car­rying amount of the bonds changes. As a result, interest expense also changes each period. This is in contrast to the straight-line method, which provides for

2 Comments

Why Companies Invest

Most companies generate cash from their operations. This cash can be used for the following purposes: Investing in current operations Investing in temporary investments to earn additional revenue Investing in long-term investments in stock of other companies for strategic reasons 1. Investing Cash in Current Operations Cash is often used to support the current

Accounting for Debt Investments

Debt securities include notes and bonds, issued by corporations and governmental organizations. Most companies invest excess cash in bonds as investments to earn interest revenue. The accounting for bond investments1 includes recording the following: Purchase of bonds Interest revenue Sale of bonds 1. Purchase of Bonds The purchase of bonds is recorded by debiting

2 Comments

Accounting for Equity Investments

A company may invest in the preferred or common stock of another company. The company investing in another company’s stock is the investor. The company whose stock is purchased is the investee. The percent of the investee’s outstanding stock purchased by the investor deter­mines the degree of control that the investor has over the

1 Comments

Valuing and Reporting Investments

Debt and equity securities are financial assets that are often traded on public ex­changes such as the New York Stock Exchange. As a result, their market value can be observed and, thus, objectively determined. For this reason, generally accepted accounting principles (GAAP) allows some debt securities, and requires equity securities where there is less

1 Comments

Fair Value Accounting

Fair value is the price that would be received to sell an asset or pay off a liability. Fair value assumes that this transaction occurs under normal business conditions. As illustrated earlier, generally accepted accounting principles require trading and available-for-sale investments to be recorded at fair value. In contrast, many assets and liabilities are

Financial Analysis and Interpretation: Dividend Yield

The dividend yield measures the rate of return to stockholders, based on cash divi­dends. Dividend yield is most often computed for common stock because preferred stock has a stated dividend rate. In contrast, the cash dividends paid on common stock normally vary with the profitability of the corporation. The dividend yield is computed as

2 Comments

Financial Statements for Mornin’ Joe

The financial statements of Mornin’ Joe are provided in the following pages. Mornin’ Joe is a fictitious coffeehouse chain featuring drip and espresso coffee in a cafe setting. The financial statements of Mornin’ Joe are provided to illustrate the com­plete financial statements of a corporation, using the terms, formats, and reporting illustrated throughout this

2 Comments

Mornin’ Joe International

Mornin’ Joe is planning to expand operations to various places around the world. Fi­nancing for this expansion will come from foreign banks. While financial statements prepared under U.S. GAAP may be appropriate for U.S. operations, financial state­ments prepared for foreign bankers should be prepared using international accounting standards. The European Union (EU) has developed

Reporting Cash Flows

The statement of cash flows reports a company’s cash inflows and outflows for a period.1 The statement of cash flows provides useful information about a company’s ability to do the following: Generate cash from operations Maintain and expand its operating capacity Meet its financial obligations Pay dividends The statement of cash flows is used

1 Comments

Statement of Cash Flows – The Indirect Method

The indirect method of reporting cash flows from operating activities uses the logic that a change in any balance sheet account (including cash) can be analyzed in terms of changes in the other balance sheet accounts. Thus, by analyzing changes in noncash balance sheet accounts, any change in the cash account can be indi­rectly

1 Comments

Statement of Cash Flows – The Direct Method

The direct method reports cash flows from operating activities as follows: Cash flows from operating activities: The Cash Flows from Investing and Financing Activities sections of the statement of cash flows are exactly the same under both the direct and indirect methods. The amount of net cash flow from operating activities is also the

1 Comments

Financial Analysis and Interpretation: Free Cash Flow

A valuable tool for evaluating the cash flows of a business is free cash flow. Free cash flow measures the operating cash flow available to a company to use after purchasing the property, plant, and equipment (PP&E) necessary to maintain current productive capacity.[1] It is computed as follows: Analysts often use free cash flow,

2 Comments

Spreadsheet (Work Sheet) for Statement of Cash Flows – The Indirect Method

A spreadsheet (work sheet) may be used in preparing the statement of cash flows. However, whether or not a spreadsheet (work sheet) is used, the concepts presented in this chapter are not affected. The data for Rundell Inc., presented in Exhibit 3 on pages 646-647, are used as a basis for illustrating the spreadsheet

1 Comments

Basic Analytical Methods

Users analyze a company’s financial statements using a variety of analytical methods. Three such methods are as follows: Horizontal analysis Vertical analysis Common-sized statements 1. Horizontal Analysis The percentage analysis of increases and decreases in related items in comparative finan­cial statements is called horizontal analysis. Each item on the most recent statement is compared

1 Comments

Liquidity and Solvency Analysis

All users of financial statements are interested in the ability of a company to do the following: Maintain liquidity and solvency Earn income, called profitability The ability of a company to convert assets into cash is called liquidity, while the ability of a company to pay its debts is called solvency. Liquidity, solvency, and profitability

1 Comments

Profitability Analysis

Profitability analysis focuses on the ability of a company to earn profits. This ability is reflected in the company’s operating results, as reported in its income statement. The ability to earn profits also depends on the assets the company has available for use in its operations, as reported in its balance sheet. Thus, income

3 Comments