chapter 9 financing activities the fundamental accounting issues associated with financing...

Chapter 9Financing Activities

The Fundamental Accounting Issues Associated with

Financing Activities


• Liabilities

– are an organization’s obligations to deliver payments, goods, or services in the future.

– have the following attributes• A present responsibility exists to transfer resources to

another entity at some future time.• The organization cannot choose to avoid the transfer.• The event creating the responsibility has already occurred.

– include Accounts payable, Wages payable, Unearned revenue, Interest payable, Notes payable, Bonds payable


• Debt Obligations– A firm’s short-term and long-term borrowings

are obligations to creditors.– Long-term debt includes notes and bonds

payable.• contracts between borrowers and creditors.• contracts require borrower to repay the amount

borrowed at a specific date• contracts require borrower to pay specified amount

of interest


• Notes– Agreement between a

company and financial institution.

• Bonds– Certificate in which

issuer agrees to pay maturity value

– Sold by brokers– Brought and sold by

individuals, companies, and institutions

– Issued by corporation in $1,000 increments


• Bond Terms

– Secured debt is backed by specific assets that act as collateral.

– Unsecured debt (Debenture) has no assets attached as collateral.

– Serial bonds require a portion a portion of the bond be repaid each year.

• Most corporate bonds require principal repayment at the end of the bond.

– Callable bonds can be reacquired by the company after a specified period at the companies discretion.


• Other Obligations– Contingencies

• An existing condition that may result in a gain or loss if a future event occurs.

• GAAP requires companies to report contingencies that could result in future loss.

– If the loss is probably and the amount is estimatible, a contingency liability is reported in the balance sheet.

– If the loss is possible and/or unestimatible, a footnote is reported.

• Common Contingencies– Gaurantee

– Environmental Cost

– Litigation


• Other Obligations– Commitments

• A promise to engage in some future activity that will have an economic effect.

• Agreements to purchase or sell something• Requires at least a footnote disclosure• Leased assets are a common form of

commitments– Capital Leases are financing arrangements (Assets/

Liabilities)– Operating Leases are rental agreements (Expenses)


• Other Obligations– Capital Leases

• Asset is leased for most of its useful life• Asset is controlled primarily by the leasee/ buyer

(not the leasor/ seller)• Accounting treatment

– The lease payments are recorded as a liability– The PV of Future lease payments is recorded as a asset– The difference between the lease payments and PV of

the lease is interest.


• Stockholder’s Equity– Claims by investors who own a corporation’s stock– Claims include the company’s profits– Company is not obligated to make payments to its

stockholders– Claims of stockholders decreases when

• Dividends are paid• Net loss is incurred

– Claims of creditors are honored before the claims of stockholders’


• Stockholder’s Equity– Contributed Capital

• Direct investment of shareholders• Common Stock or Capital Stock

– Represent the ownership rights of investors – Par Value

» The value assigned to each share by a corporation in its charter

• Additional Paid in Capital (APIC) or Paid in Excess of Par (PIE)

– The amount received in excess of par value

• Shares authorized, issued, and outstanding are reported


• Stockholder’s Equity– Retained Earnings

• Accumulation of profits reinvested in a company• Less Dividends or Dividends Declared (Contra-

Equity Account)

– Treasury Stock• Stock repurchased by a company from its

shareholders• Contra-Equity Account


• Changes in Stockholders Equity– Reported on the statement of stockholder’s equity

(See Exhibit 9 Page 334)– Equity Transactions

• Issuance or Sale of Stock• Closing Revenues & Expense to Retained Earnings• Declaration or Payment of Dividends• Purchase of Treasury Stock (recorded at cost)• Resale of Treasury Stock (excess recorded as APIC.)

– Affect on Financial Statements• Balance Sheet• Statement of Stockholders’ Equity• Statement of Cashflow

Financing Activities• Cash Dividends

– Cash distributed by a company to current stockholders.

– Decreases Retained Earnings

– Paid on outstanding shares only

– Dates of Importance• Date of Declaration• Date of Record• Date of Payment

• Stock Dividends– Shares of stock

distributed by a company to current stockholders.

– Decreases Retained Earnings

– Increases the number of shares outstanding and Contributed Capital

– Stock split is a large stock dividend

• Special Accounting


• Preferred Stock– A second class of stock with

• Higher claim to dividends• Higher claim to assets (liquidation preference)• No voting rights

– Preferred Dividends• At set dividend rate• Cumulative

– Prior preferred dividends accumulate when not paid– Must be paid before any common dividends

chapter 9 financing activities the fundamental accounting issues associated with financing...

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