Chapter 9 Financing 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

Financing Activities 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

Financing Activities 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

Financing Activities 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.

Financing Activities 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

Financing Activities 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)

Financing Activities 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.

Financing Activities 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’

Financing Activities 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

Financing Activities 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

Financing Activities 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

Financing Activities 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