Liabilites & Equity

Liabilities

Represent the company's obligations to others that will be met through the use of cash, goods, or services.

Liability requirements

Obligation must be measurable and its occurrence probable

Current liabilities

Due within 1 year

Long-term liabilities

Not due within a year

Accounts Payable (A/P)

A current liability representing amounts owed by the company to suppliers for prior purchases or services.

Accrued Expenses

Expenses that have already been incurred but not yet paid

Wages, insurance, rents, taxes, dividends

Types of accrued expenses

Deferred (unearned) revenue

Revenue received for services not yet provided by the company

Short-term debt

Debt owed by the company due within 1 year

Current portion of long-term debt due within 1 year

Long-term debt

A long-term liability and is often a sizeable liability

Leases

Type of payment made by companies for equipment, office space, or retail locations

How are lease payments defined?

Contractually upfront between the lessee (company making lease payments) and the lessor (company collecting lease payments)

Types of leases

Operating Leases/Finance Leases

Lease accounting approach

Lease recognized as debt and the underlying asset as PP&E on the lessee's balance sheet

Lease accounting approach 2

On the IS, interest and depreciation fees make up a lease payment

Equity

Major source of funds via:

Preferred stock issuance

Equity investment

Retained Earnings

Preferred stock

When companies raise capital

Class of stock that takes priority over common stock and has special rights such as priority over dividends and claims on assets in bankruptcy

Benefit of preferred stock

Include the possibility of conversion into common stock at a pre-set exchange rate, enabling investors to benefit from a set dividend, but participate in the upside if the company's common equity value increases

Common stock

Primary way companies can raise money through the sale of common stock

Two ways of splitting common stock

Common stock par value/Additional Paid in capital

Common stock par value

Represents some value to an issued share ($0.10/share)

Additional paid in capital

Represents the excess value of the share issues over par value

Treasury stock

Shares once issued but subsequently repurchased by the company

Why is treasury stock beneficial?

Companies repurchase stock for reasons including boosting EPS or to change the company's capital structure (more debt/less equity)

How is treasury stock purchased?

Open market and buys them at current share price

Negotiation with specific shareholders

Treasury stock classification

Contra account to capture the value of common stock that was once issued but then repurchased by the company

Retained Earnings

Represent cumulative earnings (net of dividends) over a company's existence

Retained earnings accounting connection

IS is connected to the BS through RE:

All income on the IS increases retained earnings on the balance sheet (credits)

All expenses on the IS decrease retained earnings (debits)

All common and preferred dividends decrease retained earnings (debits)

Other comprehensive income

Equity line item on the BS that captures the accumulation of income or loss that a company has recognized over time that is not recognized directly on the IS and thus not captured in retained earnings

OCI components

Gains and losses from foreign currency, translations, unrealized gains and losses on available securities, etc.

OCI location

On the BS