9-1 financing activities electronic presentation by douglas cloud pepperdine university chapter f9

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Financing Financing ActivitiesActivitiesFinancing Financing ActivitiesActivities

Electronic Presentation by Douglas Cloud

Pepperdine University

Electronic Presentation by Douglas Cloud

Pepperdine University

Chapter Chapter F9F9

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1. Identify information that companies report about obligations to lenders and explain the transactions affecting long-term debt.

2. Describe appropriate accounting procedures for contingencies and commitments, including capital leases.

3. Identify information reported in the stockholders’ equity section of a corporate balance sheet and distinguish contributed capital from retained earnings.

ObjectivesObjectivesObjectivesObjectives

Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:

Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:

ContinuedContinuedContinuedContinued

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4. Explain transactions affecting stockholders’ equity and describe how these transactions are reported in a company’s financial statements.

5. Distinguish between preferred stock and common stock, and discuss why corporations may issue more than one type of stock.

ObjectivesObjectivesObjectivesObjectives

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Liabilities are an organization’s obligations to deliver payments, goods,

or services in the future.

Liabilities are an organization’s obligations to deliver payments, goods,

or services in the future.

Notes PayableAccounts PayableInterest PayableWages PayableUnearned Revenue

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Three attributes define a liability for

an organization.

Three attributes define a liability for

an organization.

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(1) A present responsibility exists to transfer resources to another entity at some future time.

Attributes of a Attributes of a LiabilityLiability


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(2) The organization cannot choose to avoid the transfer.



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(2) The organization cannot choose to avoid the transfer.

(3) The event creating the responsibility has already occurred.



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11ObjectiveObjectiveObjectiveObjective

Identify information that companies report about obligations to lenders and explain the transactions affecting long-term debt.

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Debt ObligationsDebt ObligationsDebt ObligationsDebt Obligations

A firm’s short-term and long-term borrowings are obligations to creditors.

A firm’s short-term and long-term borrowings are obligations to creditors.

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As you can see in the next two slides, Mom’s Cookie Company, debt is separated into current- and

long-term amounts.

As you can see in the next two slides, Mom’s Cookie Company, debt is separated into current- and

long-term amounts.

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December 31, 2005 2004December 31, 2005 2004

Liabilities:Current liabilities:

Accounts payable $ 16,260$ 9,610Wages payable 3,590-0-Unearned revenue 2,7704,250Interest payable 810650Notes payable, current 6,000 5,000

Total current liabilities 29,43019,510

Notes payable, long-term 80,200 73,200

Total liabilities $109,630$92,710

Current debt for Mom’s Current debt for Mom’s Cookie CompanyCookie Company

Current debt for Mom’s Current debt for Mom’s Cookie CompanyCookie Company

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December 31, 2005 2004December 31, 2005 2004

Liabilities:Current liabilities:

Accounts payable $ 16,260$ 9,610Wages payable 3,590-0-Unearned revenue 2,7704,250Interest payable 810650Notes payable, current 6,000 5,000

Total current liabilities 29,43019,510

Notes payable, long-term 80,200 73,200

Total liabilities $109,630$92,710

Long-Term Debt for Mom’s Long-Term Debt for Mom’s Cookie CompanyCookie Company

Long-Term Debt for Mom’s Long-Term Debt for Mom’s Cookie CompanyCookie Company

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Long-term debt includes notes and

bonds payable.

Long-term debt includes notes and

bonds payable.


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Notes and bonds payable are contracts between borrowers

and creditors.

Notes and bonds payable are contracts between borrowers

and creditors.


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Company debts secured by specific company assets are

referred to as secured debts. Major

companies often issue debentures, or

unsecured debts.

Company debts secured by specific company assets are

referred to as secured debts. Major

companies often issue debentures, or

unsecured debts.


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Most corporate bonds are repaid at the end

of a fixed period.

Most corporate bonds are repaid at the end

of a fixed period.

What about bonds that require a portion of the bond

to be repaid each year?

What about bonds that require a portion of the bond

to be repaid each year?

Those are commonly issued by governments and are referred to as

serial bonds.

Those are commonly issued by governments and are referred to as

serial bonds.


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Callable bonds require holders of this type of debt to resell the bonds to the issuing company

if the issuer chooses to repurchase the bonds.

Callable bonds require holders of this type of debt to resell the bonds to the issuing company

if the issuer chooses to repurchase the bonds.


Yes, these bonds not only include specific dates for repurchasing,

but specific prices that the issuer must pay to reacquire them.

Yes, these bonds not only include specific dates for repurchasing,

but specific prices that the issuer must pay to reacquire them.

Don’t these bonds have to be outstanding for a specified period before they can be repurchased?

Don’t these bonds have to be outstanding for a specified period before they can be repurchased?

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Debt TransactionsDebt TransactionsDebt TransactionsDebt Transactions

Mom’s Cookie Company issued $20,000 of five-year bonds on

January 1, 2005. The bonds pay 8% annually at the end of each year.

Mom’s Cookie Company issued $20,000 of five-year bonds on

January 1, 2005. The bonds pay 8% annually at the end of each year.

maturity value or face value Stated rate

of interest

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If Mom’s Cookie Company’s bonds are issued at a price to provide the investor

with a 9% return, then this return is known as the effective rate of interest.

If Mom’s Cookie Company’s bonds are issued at a price to provide the investor

with a 9% return, then this return is known as the effective rate of interest.

How is the issue price of Mom’s 8% bonds determined if the

effective rate of interest is 9%?

How is the issue price of Mom’s 8% bonds determined if the

effective rate of interest is 9%?

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PV of bonds = PV of annuity + PV of single amount

PV of bonds = $1,600 x 3.88965 + $20,000 x 0.64993

$20,000 x .08$20,000 x .08$20,000 x .08$20,000 x .085 periods, 9%5 periods, 9%5 periods, 9%5 periods, 9%Face value of Face value of

bondbondFace value of Face value of

bondbond 5 periods, 9%5 periods, 9%5 periods, 9%5 periods, 9%

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PV of bonds = PV of annuity + PV of single amount

PV of bonds = $1,600 x 3.88965 + $20,000 x 0.64993

PV of bonds = $6,223 + $12,999 (rounded)

PV of bonds = $19,222

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Exhibit 3Exhibit 3 Example of the Relationship of Bond Cash Flows to Present Value

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To determine transactions recorded for the bonds, we

need to develop an amortization table for Mom’s

Cookie Company.

To determine transactions recorded for the bonds, we

need to develop an amortization table for Mom’s

Cookie Company.

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Exhibit 4Exhibit 4 Bond Amortization Table

Mom’s Cookie Company

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ASSETS =ASSETS = LIABILITIELIABILITIESS

+ OWNERS’ EQUITY+ OWNERS’ EQUITY

Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

1/1 Cash 19,222Bonds Payable 19,222

Mom’s Cookie Company would record the bond sale on January 1, 2005.

Mom’s Cookie Company would record the bond sale on January 1, 2005.

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Exhibit 4Exhibit 4 Bond Amortization Table

Mom’s Cookie Company

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Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

12/31 Interest Expense –1,730Bonds Payable 130Cash –1,600

At the end of 2005, Mom’s Cookie Company would record the amount

paid and the interest expense.

At the end of 2005, Mom’s Cookie Company would record the amount

paid and the interest expense.

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Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

12/31 Bonds Payable –20,000Cash –20,000

When the bond matures on December 31, 2009, the liability is removed when the

face value of the bond is paid.

When the bond matures on December 31, 2009, the liability is removed when the

face value of the bond is paid.

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Financial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of DebtFinancial Reporting of Debt

Balance SheetLiabilities:

Long-term debt

$19,352 Income StatementNonoperating expenses:

Interest expense

1,730 Statement of Cash FlowsCash flow from operating activities:

Interest paid

(1,600)Cash flow from financing activities:

Long-term debt issued

19,222

Dec. 31, 2005Dec. 31, 2005Dec. 31, 2005Dec. 31, 2005

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Long-term debt

$19,494Income StatementNonoperating expenses:

Interest expense

1,742 Statement of Cash FlowsCash flow from operating activities:

Interest paid

(1,600)


Dec. 31, 2006Dec. 31, 2006Dec. 31, 2006Dec. 31, 2006

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After recording the fifth interest payment and related interest expense, Mom’s Cookie

Company records paying the creditors the maturity value of the bonds:


Dec. 31, 2009Dec. 31, 2009Dec. 31, 2009Dec. 31, 2009

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Long-term debt

---- Income StatementNonoperating expenses:

Interest expense

$ 1,783 Statement of Cash FlowsCash flow from operating activities:

Interest paid

(1,600)Cash flow from financing activities:

Debt repaid

(20,000)


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22Describe appropriate accounting procedures for contingencies and commitments, including capital leases.

ObjectiveObjectiveObjectiveObjective

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ContingenciesContingenciesContingenciesContingencies

A contingency is an existing condition that may result in an economic effect

if a future event occurs.

A contingency is an existing condition that may result in an economic effect

if a future event occurs.

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ContingenciesContingenciesContingenciesContingencies

If a contingency probably will result in a loss, and the amount of the loss can be

reasonable estimated, it should be included as a liability on a company’s balance sheet.

If a contingency probably will result in a loss, and the amount of the loss can be

reasonable estimated, it should be included as a liability on a company’s balance sheet.

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CommitmentsCommitmentsCommitmentsCommitments

A commitment is a promise to engage in some future activity that

will have an economic effect.

A commitment is a promise to engage in some future activity that

will have an economic effect.

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Operating leases are expensed in the period

in which the leased assets are used.

Operating leases are expensed in the period

in which the leased assets are used.

CommitmentsCommitmentsCommitmentsCommitments

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Capital leases are recorded as liabilities, and the

related leased resources are recorded as assets.

Capital leases are recorded as liabilities, and the

related leased resources are recorded as assets.

Capital LeasesCapital LeasesCapital LeasesCapital Leases

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Mom’s Cookie Company signs a lease on January

1, 2005 to acquire computer equipment. The lease is for three

years, the assumed life of the equipment. The

company agrees to pay $10,000 a year, including

8% interest.

Mom’s Cookie Company signs a lease on January

1, 2005 to acquire computer equipment. The lease is for three

years, the assumed life of the equipment. The

company agrees to pay $10,000 a year, including

8% interest.


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Using a table:

PVA = A x IF (Table 4)

PVA = $10,000 x 2.57710

$25,771 = $10,000 x 2.57710

Using Excel:

Enter: =PV(0.08,3,-10000)


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Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

1/1 Leased Assets 25,771Capital Lease Obligation 25,771

Mom’s Cookie Company records the present value of lease payments.

Mom’s Cookie Company records the present value of lease payments.


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Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

12/31 Capital Lease Obligation –7,938Interest Expense –2,062Cash –10,000

Mom’s Cookie Company records the $10,000 payment, which includes interest expense.

Mom’s Cookie Company records the $10,000 payment, which includes interest expense.


$25,771 x .08$25,771 x .08

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33Identify information reported in the stockholders’ equity section of a corporate balance sheet and distinguish contributed capital from retained earnings.


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December 31, 2006 2005December 31, 2006 2005Common stock, $1 par value,

50,000 shares authorized,20,000 and 10,000 issued $ 20,000 $ 10,000

Paid-in capital in excess of par 190,000 90,000 Retained earnings 130,417 42,990 Treasury stock, 1,000 shares

at cost (12,000) 0Total stockholders’ equity $328,417 $142,990

Exhibit 8Exhibit 8Exhibit 8Exhibit 8 Stockholders’ Equity for Mom’s Cookie Company

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Stockholders’ EquityStockholders’ EquityStockholders’ EquityStockholders’ Equity

Contributed Capital is the direct investment made by stockholders

in a corporation.

Contributed Capital is the direct investment made by stockholders

in a corporation.

Treasury stock is stock repurchased by a company

from its stockholders.

Treasury stock is stock repurchased by a company

from its stockholders.

Retained earnings is the accumulation of profits

reinvested in a corporation.

Retained earnings is the accumulation of profits

reinvested in a corporation.

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Contributed CapitalContributed CapitalContributed CapitalContributed Capital

Corporations primarily issue shares of stock in exchange for cash. Common stock or

capital stock represents the ownership rights of investors in a corporation.

Corporations primarily issue shares of stock in exchange for cash. Common stock or

capital stock represents the ownership rights of investors in a corporation.

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A charter is the legal right granted by a state that permits

a corporation to exist.

A charter is the legal right granted by a state that permits

a corporation to exist.

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What is meant by par value?

What is meant by par value?

The par value of stock is the value assigned to each share by a

corporation in its corporate charter.

The par value of stock is the value assigned to each share by a

corporation in its corporate charter.

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Paid-in capital in excess of par value is the

amount in excess of the stock’s par value

received by a corporation from the sale of its stock.

Paid-in capital in excess of par value is the

amount in excess of the stock’s par value

received by a corporation from the sale of its stock.

Issued shares are shares that have been sold by a corporation to

investors.

Issued shares are shares that have been sold by a corporation to

investors.

Outstanding shares are shares currently held by investors.

Outstanding shares are shares currently held by investors.

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Retained EarningsRetained EarningsRetained EarningsRetained Earnings

YearYearNet Net

IncomeIncome DividendsDividends

Increase in Increase in Retained Retained EarningsEarnings

Balance of Balance of Retained Retained EarningsEarnings

2004 $ 0 2005 $ 52,990 $10,000 $42,990 42,990 2006 107,427 20,000 87,427 130,417

Mom’s Cookie Company for 2005 and 2006.Mom’s Cookie Company for 2005 and 2006.

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44Explain transactions affecting stockholders’ equity and describe how these transactions are reported in a company’s financial statements.


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Exhibit Exhibit 1010Exhibit Exhibit 1010 Examples of Transactions That Affect Common Stockholders’ Equity

ContinuedContinuedContinuedContinued

*An increase in treasury stock decreases stockholders’ equity.

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Transfers net Transfers net income earned income earned during 2005 to during 2005 to

Retained EarningsRetained Earnings..

Transfers net Transfers net income earned income earned during 2005 to during 2005 to



Deducts the amount Deducts the amount of dividends paid of dividends paid during 2005 from during 2005 from


Deducts the amount Deducts the amount of dividends paid of dividends paid during 2005 from during 2005 from


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Records the Records the purchase of purchase of

treasury stock.treasury stock.

Records the Records the purchase of purchase of

treasury stock.treasury stock.

Records the Records the amount received amount received from the sale of from the sale of common stock.common stock.

Records the Records the amount received amount received from the sale of from the sale of common stock.common stock.

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Equity TransactionsEquity TransactionsEquity TransactionsEquity Transactions

A company cannot earn profit from equity transactions.

A company cannot earn profit from equity transactions.

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Cash DividendsCash DividendsCash DividendsCash DividendsThree dates are important for dividend transactions:1) The date of declaration is the date on

which a corporation’s board of directors announces that dividends will be paid.

2) The date of record is the date used to determine who will receive the dividend.

3) The date of payment is the date on which the dividends are mailed.

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Issuing New StockIssuing New StockIssuing New StockIssuing New Stock

The right to maintain the same percentage of ownership when new

shares are issued is the stockholder’s preemptive right.

The right to maintain the same percentage of ownership when new

shares are issued is the stockholder’s preemptive right.

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Issuing New StockIssuing New StockIssuing New StockIssuing New Stock

When a new stock issue is prepared, stock rights are issued to existing

owners. These rights authorize the recipient to purchase new shares.

When a new stock issue is prepared, stock rights are issued to existing

owners. These rights authorize the recipient to purchase new shares.

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Stock DividendsStock DividendsStock DividendsStock Dividends

So, we had 1,000 shares before the stock dividend.

Now we have 1,050.

So, we had 1,000 shares before the stock dividend.

Now we have 1,050.

Stock dividends are shares of stock distributed by the company to the

stockholders without any charge. Druid Company distributed a 5% stock dividend.

Stock dividends are shares of stock distributed by the company to the

stockholders without any charge. Druid Company distributed a 5% stock dividend.

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Stock DividendsStock DividendsStock DividendsStock Dividends

An important point about issuing stock dividends is that the firm’s total stockholders’

equity does not change.

An important point about issuing stock dividends is that the firm’s total stockholders’

equity does not change.

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Stock SplitStock SplitStock SplitStock Split

When a corporation issues a stock split, it issues a multiple

of the number of shares of stock outstanding before the split.

When a corporation issues a stock split, it issues a multiple

of the number of shares of stock outstanding before the split.

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55Distinguish between preferred stock and common stock, and discuss why corporations may issue more than one type of stock.


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Preferred StockPreferred Stock

Preferred stock is stock with a higher claim on

dividends and assets than common stock.

Preferred stock is stock with a higher claim on

dividends and assets than common stock.

Cash dividends must be paid to preferred

stockholders before they can be paid to common

stockholders.

Cash dividends must be paid to preferred

stockholders before they can be paid to common

stockholders.

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Preferred stockholders

normally do not have voting rights in a

corporation.

Preferred stockholders

normally do not have voting rights in a

corporation.

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Some companies issue redeemable preferred stock. This is stock the issuing company

plans to repurchase at a particular time

in the future.

Some companies issue redeemable preferred stock. This is stock the issuing company

plans to repurchase at a particular time

in the future.

Redeemable preferred stock is not included

as part of stockholders’ equity.

It is reported as a separate item between

liabilities and stockholders’ equity.

Redeemable preferred stock is not included

as part of stockholders’ equity.

It is reported as a separate item between

liabilities and stockholders’ equity.

Preferred stock that can be converted

into shares of common stock are

referred to as convertible

preferred stock.

Preferred stock that can be converted

into shares of common stock are

referred to as convertible

preferred stock.

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THE ENDTHE END

CCHAPTERHAPTER F9 F9

9-1 financing activities electronic presentation by douglas cloud pepperdine university chapter f9

Documents

current debt

bonds payable

debt obligationsnotes

debt obligationsas

debt obligationscallable

debt obligationscompany

payable810650notes payable

total liabilities