MGMT 30A Ch 9

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27 Terms

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Financial leverage

increases when a company finances the assets it acquires with liabilities

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Current operating liabilities

  • accounts payable

  • accrued liabilities

  • deferred performance liabilities

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Current nonoperating liabilities

  • short-term interest-bearing debt

  • current maturities of long-term debt

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Cash discount of 1/10, n/30

1% cash discount if payment is made in 10 days OR full purchase price due in 30

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Net-of-discount method

when cash discounts are offered, inventory purchase is recorded at its cost; inventory is capitalized net of the discount

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To figure out the cost of not paying in the discount period (interest rate)…

= [(Discount / Days beyond Discount Period) * 365] / Discount Price

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Contingent liability

if an obligation is probable (more than 50% chance) AND amount is estimable, then it’s recognized

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Warranty

commitment by manufacturer to repair or replace defective products within a specified period

  • recognized as Liability and Expense

  • When a repair or replacement is made: Warranty Liability/Payable is decreased

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Contract liability

deferred/unearned revenue

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Accrued Interest

= Principal x Annual Rate x Portion of the Year Outstanding

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Bond sold at par

cost to the issuing company is cash interest paid

  • coupon rate = market rate

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Bond sold at discount

1. Cash interest paid and 2. Discount incurred

  • Coupon rate < Market rate

  • Discount = Par - Lower Issue Price

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Bond sold at a premium

1. Cash interest paid and 2. Cost reduction due to premium received

  • Coupon rate > Market rate

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Interest/coupon payment

= Face value x Coupon rate

  • cash amount on FSET

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Interest expense

= Amount owed x Market rate

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Ending Net Bonds Payable for Discounts

= Beginning Net Bonds Payable + Discount Amortization

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Bond Discount

Contra liability

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Net Bonds Payable for Discount

= Bonds Payable - Bond Discount

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Net Bonds Payable for Premium

= Bonds Payable + Bond Premium

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Ending Net Bonds Payable for Premium

= Beginning Net Bonds Payable - Premium Amortization

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Underestimated accruals

underestimated liabilities, underestimated expense, overestimated income

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Overestimated accruals

overestimated liabilities, overestimated expense, underestimate income

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If fair value of a bond increases…

+ Fair Value Adjustment in liabilities, + Unrealized Loss in expenses

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Call provision

part of bond agreement that lets companies repurchase bonds in the open market before maturity by paying a small premium above face value

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Gain or loss on bond repurchase

= Book value of the bond - Repurchase payment

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Default

risk that the company won’t be able to pay its obligations when they’re due (insolvency)

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Covenants

restrictions creditors put on companies’ activities to provide protection against default risk, put indirect costs on a company which increase as the company relies more on debt financing