Financial Accounting Concepts

Flashcards created from lecture notes on financial accounting principles, focusing on liabilities and their implications in financial statements.

What does the accounting equation state?

Assets = Liabilities + Equity, indicating how assets are financed.

What are current liabilities?

Short-term obligations that require payment generally within a year.

How do companies finance their current liabilities?

Typically through non-interest-bearing options to maximize financing opportunities.

What are examples of current operating liabilities?

Accounts payable, accrued liabilities, and deferred performance liabilities.

What constitutes accrued liabilities?

Liabilities and expenses incurred but not yet paid during the period.

What is a cash discount?

Incentives granted to buyers to encourage early payment, stated as a percentage of the purchase price.

How is interest expense calculated?

Interest Expense = Principal x Annual Rate x Portion of Year Outstanding.

What are bond securities?

Debt instruments that allow companies to borrow large amounts by issuing notes or bonds.

What is the difference between the coupon rate and the market rate?

Coupon rate is the rate stated in the bond contract, while market rate is the yield investors expect to earn.

What is the effect of issuing bonds at a discount?

Market Rate > Coupon Rate, bond sells for less than face value.

How are contingent liabilities recognized?

Only when the potential obligation is probable and the amount is reasonably estimable.

What is the impact of increasing accounts payable on net working capital?

Decreases net working capital because payables are deducted from current assets.

What happens to retained earnings when accrued expenses are underestimated?

Retained earnings are overestimated.

What is implied by having a debt-to-equity ratio greater than 1?

The company is relying more on debt than on equity financing.

What determines a company's credit rating?

Factors include collateral, covenants, and overall creditworthiness related to default risk.

What is a bond rating agency?

Organizations that assign ratings to debt issues, informing investors about default risk.

What is the significance of Times Interest Earned (TIE)?

It measures how many times a company's earnings can cover its interest expense.