10: Reporting and Analyzing Liabilities

Annuity

A series of equal payments received over time.

Bond

A type of long-term debt issued by large corporations, universities, and governments that involves a promise to repay a large amount of money at a fixed future date.

Collateral

Assets pledged as security for the payment of a debt.

Compound interest

Interest that is earned on interest earned in prior periods.

Contingent liabilities

Existing or possible obligations arising from past events, dependent on uncertain future events.

Coupon interest rate

The rate stated in a bond certificate used to determine the amount of interest the borrower pays and the investor receives.

Discount

The difference between a bond’s face value and its issue price when sold for less than its face value.

EBIT

Earnings (net income) before interest expense and income tax expense.

Effective-interest method

A method of amortizing a bond discount or premium using a constant percentage of the bond’s carrying amount.

Employee benefits expense

Payments made by an employer for employee benefits.

Financial liability

A contractual obligation to pay cash in the future.

Future value

The value of a cash flow at the time it will be received or paid in the future.

Gross pay

The total compensation earned by an employee.

Leverage

Using borrowed funds to finance assets.

Market interest rate

The rate that investors demand for lending funds to a corporation.

Net pay

Gross pay less payroll deductions.

Operating line of credit

A pre-arranged agreement to borrow money at a bank, up to an agreed-upon amount.

Payroll deductions

Deductions from gross pay to determine the amount of a paycheque.

Premium

The difference between the issue price and the face value of a bond when sold for more than its face value.

Present value

The value today of an amount or series of amounts to be received or paid in the future.

Principal

The original amount of a loan.

Provisions

Liabilities of uncertain timing or amount recorded based on reasonable estimates.

Time value of money

Money is worth more in the future due to interest earned over time.

Times interest earned

A measure of a company’s solvency calculated by dividing EBIT by interest expense.