1. Financial Accounting:
Copyright 2004 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
PowerPoint Presentation Materials
For
Financial Accounting:
A New Perspective by
Paul Solomon

2. How Financing Activities Affect Financial Statements
CHAPTER 13
How Financing Activities Affect Financial Statements

3. PERFORMANCE OBJECTIVES 1
PO49: Calculate simple interest; record transactions related to note payable
PO50: calculate company payroll liabilities
PO51: Apply present value concept; calculate, record, present balance sheet, income statement, cash flow effects

4. PERFORMANCE OBJECTIVES 2
PO53: Distinguish financial statement effects of effective interest, straight-line bond amortization
PO55: Calculate, record, present financial statement effects of stockholder equity transactions

5. USER FOCUS Intuitive explanation of bond discount, premium
Numerical explanation of bond discount, premium
Discount, premium unrelated to bond’s profitability
How to determine estimated pension liability

6. INSIGHTS
Using a shortcut to calculate subsequent present value calculations
Why do bond transactions involve 2 interest rates?

7. FINANCING ACTIVITY TRANSACTIONSK1 L W A2
Obtained money to start business
Borrowed money from bank
Repaid credit line
Exchange noncurrent liability for asset
Cash withdrawal by owner
Inventory contribution by new owner

8. CMU Balance Sheet 12/31 Noncurrent Liability Notes payable 4,000
Owner’s Equity
Contributed capital
Retained earnings
$40,000
21,900
61,900

9. CMU Income Statement for Year Ended 12/31
Revenues
Sales
Service
Interest
Expenses
Cost of goods sold
Other
Loss on sale equipment
Net income
$86,600
600
300
$30,000
27,150
350
$87,500
57,500

10. CMU Statement of Cash Flows for Year Ended 12/31
Cash flows from financing
Contributions by owner
Proceeds from credit line
Repayment of credit line
Withdrawals by owner
Net cash from financing
$30,000
5.000
<5,000>
<8,100>
$21,900
Supplemental: noncash investing, financing
Exchanged 2-year promissory note for computer equipment

11. CMU Balance Sheet 12/31 Current liabilities Accounts payable
Salaries payable
Deferred revenue
Notes payable
Total current liabilities
$350
750
2,000
6,000
$9,100

12. MEASURING PAYABLES Transaction C1 G C2 J1 J2 Equipment purchase
Inventory purchase
Repayment
Conversion account to note

13. PROMISSORY NOTE Written contract
1 person (maker) promises to pay another (payee)
Payment on certain date (maturity date)
Principal
Interest
Interest bearing or non-interest bearing

14. MEASURING, RECORDING NOTE: Transactional Analysis
Account
Assets =
Liabilities +
Equity
Accounts payable
Notes payable - current
<6,000>
6,000

15. MEASURING, RECORDING NOTE: Journal Entry
Account
Debit
Credit
Accounts payable
Notes payable-
current
6,000

16. INTEREST EXPENSE: Transactional Analysis
Account
Assets =
Liabilities +
Equity
Interest expense
Cash 30
<30>

17. INTEREST EXPENSE: Journal Entry
Account
Debit
Credit
Interest expense
Cash 30

18. REPAYMENT OF NOTE: Transactional Analysis
Account
Assets =
Liabilities +
Equity
Notes payable –
current
Cash
<6,000>

19. REPAYMENT OF NOTE: Journal Entry
Account
Debit
Credit
Notes payable – current
Cash
6,000

20. MEASURING, REPORTING OTHER CURRENT LIABILITIES
Salaries, payroll tax liabilities
Social Security tax matching
State unemployment compensation tax
Federal unemployment compensation tax
Income tax liabilities

21. INCOME TAX LIABILITIES: Transaction Analysis
Account
Assets =
Liabilities +
Equity
Income tax expense
Income tax payable
4,500
<4,500>

22. INCOME TAX LIABILITIES: Journal Entry
Account
Debit
Credit
Income tax expense
Income tax payable
4,500

23. OTHER ACCRUED LIABILITIES: Transaction Analysis
Account
Assets =
Liabilities +
Equity
Miscellaneous expense
Accounts payable
350
<350>

24. OTHER ACCRUED LIABILITIES: Journal Entry
Account
Debit
Credit
Miscellaneous expense
Accounts payable
350

25. ACCOUNTING FOR NONCURRENT LIABILITIES
Noncurrent notes payable
Bonds

26. MEASURE NONCURRENT LIABILITIES: Present Value
Noncurrent liabilities include multiple cash flows
Financial statements include current & past amounts
More precise income measure

27. NON-INTEREST-BEARING NOTE
CMU can
Buy land for $10,000 cash today or
Exchange an 8% non-interest-bearing note for land
Pay principal ($10,000) + interest ($1,664) in 2 years

28. AMORTIZATION TABLE: Non-interest-bearing Note
Year end
Interest expense (8%)
Cash payment
Balance 1 2
800
864
11,664
10,000
10,800

29. INSTALLMENT LOANS Examples Each payment is Automobile Home, building
Consumer, equipment
Each payment is
Part principal
Part interest

30. AMORTIZATION TABLE: Land Installment Loan
Time
(Debit)
Interest Expense
Note Payable
(Credit)
Cash
Unpaid Principal 1 2 3
$8,000
5,536
2,874
$30,803
33,268
35,929
$38,803
$100,000
69,197

31. INSIGHT: 13-1: Present Value Shortcut
What is the present value of the final payment for land at the end of year 2?
Payment * PVAIF
$38,803 * = $35,930
$35,930
-$38,803 1 2 3

32. MONTHLY CAR PAYMENT
Susan bought car (Transaction R) with $4,000 cash and note payable for $20,000
Principle amount = $20,000
60 monthly payments
12% annual (1% monthly) interest
Note = PVAIF * Payment
$20,000 = * Payment
Payment = $444.89

33. BUSINESS AUTOMOBILE: Transaction Analysis
Account
Assets =
Liabilities +
Equity
Automobile
Note payable
Cash
24,000
<4,000>
20,000

34. BUSINESS AUTOMOBILE: Journal Entry
Account
Debit
Credit
Automobile
Notes payable
Cash
24,000
20,000
4,000

35. AMORTIZATION TABLE: Automobile Note Payable
Month
(Debit)
Interest
Expense
Note
Payable
(Credit)
Cash
Unpaid
Balance 1 2
$200.00
197.55
$244.89
247.34
$444.89
444.89
$20,000.00
19,755.11
19,507.77

36. PAYMENTS ON NOTE: Transaction Analysis
Account
Assets =
Liabilities +
Equity
1/30
Interest expense
Note payable
Cash
<444.89>
<244.89>
<200.00>
2/29
Interest expense
Note payable
Cash
<444.89>
<247.34>
<197.55>

37. PAYMENTS ON NOTE: Journal Entry
Account
Debit
Credit
1/30
Interest expense
Note payable
Cash
200.00
244.89
444.89
2/29
Interest expense
Note payable
Cash
197.55
247.34
444.89

38. BALANCE SHEET PRESENTATION OF LIABILITY
Note
Payable
Amortization
244.89
20,000.00
1/01 PV
247.34
19,755.11
1/30 PV
19,507.77
2/29 PV

39. AMORTIZATION TABLE: Transaction L Note Payable
Bought computer for business
Month
(Debit)
Interest
Expense
Note
Payable
(Credit)
Cash
Unpaid
Balance 1 2 3
$40.00
38.52
37.02
$148.29
149.77
151.27
$188.29
188.29
$4,000.00
3,851.71
3,701.94
3,550.67

40. PAYMENTS ON NOTE: Transaction L Analysis
Payment on computer for business
Account
Assets =
Liabilities +
Equity
Interest expense
Note payable
Cash
<188.29>
<148.29>
<40.00>

41. PAYMENTS ON NOTE: Journal Entry
Payment on computer bought for business
Account
Debit
Credit
Interest expense
Note payable
Cash
40.00
148.29
188.29

42. NATURE OF BOND Formal certificate of long-term indebtedness
Used to raise large amounts of cash
Borrowed from large group unrelated investors

43. BOND TERMINOLOGY Face value Stated interest rate
Amount issuer promises to repay
Stated interest rate
Used to calculate cash interest payments
Effective interest rate
Market rate, yield
Used to price bond

44. INSIGHT 13-2: Why Do Bonds Have 2 Interest Rates?
Management sets stated interest rate as close to prevailing market rate as possible
Market rate subject to change before bonds sold
Insight: matter of timing

45. MEASURING BOND PRICE Case 1: Bonds issued at face value
Stated interest rate = Market interest (yield)
Case 2: Bonds issued at discount
Stated interest rate < Market interest (yield)
Case 3: Bonds issued at premium
Stated interest rate > Market interest (yield)

46. USER FOCUS 13-1: Intuitive Explanation Discount, Premium
Bond offers 10% interest
Market offers 12% interest
Solution: motivate buyer by offering discount
Premium
Bond offers 10%
Market offers 8%
Solution: buyers bid price up

47. 10 YEAR BONDS ISSUED AT FACE VALUE
Stated interest = Market interest = 10%
PV $100,000 (i=5%; n=20) = 100,000* =
$37,689
PVA $5,000 (i=5%; n=20) = 5,000* =
62,311
$100,000

48. USER FOCUS 13-2: 10 YEAR BONDS ISSUED AT DISCOUNT
Face value = $100,000
Stated interest = 10%
Market interest (yield) = 12%
PV $100,000 (i=6%; n=20) = 100,000* =
$31,804
PVA $5,000 (i=5%; n=20) = 5,000* =
57,350
$88,530

49. INTEREST PAYMENT WITH DISCOUNT: Transaction Analysis
6/30 End first bond interest period
Account
Assets =
Liabilities +
Equity
Interest expense
Bond discount
Cash
<5,000>
311.80
<5,311.80>

50. INTEREST PAYMENT WITH DISCOUNT: Journal Entry
6/30 End first interest period
Account
Debit
Credit
Interest expense
Bond discount
Cash
5,311.80
311.80
5,000.00

51. FINANCIAL STATEMENT EFFECTS WITH DISCOUNT
Long-term Debt
1/01/1
06/30/1
12/31/1
Bond payable
Less: Discount
Net book value
$100,000
11,470
$88,530
11,158
$88,842
10,828
$89,172

52. USER FOCUS 13-3: 10 YEAR BONDS ISSUED AT PREMIUM
Face value = $100,000
Stated interest = 10%
Market interest (yield) = 8%
PV $100,000 (i=5%; n=20) = 100,000* =
$45,639
PVA $5,000 (i=5%; n=20) = 5,000* =
67,952
$113,590

53. INTEREST PAYMENT WITH PREMIUM: Transaction Analysis
6/30 End first interest period
Account
Assets =
Liabilities +
Equity
Interest expense
Bond premium
Cash
<5,000>
311.80
<5,311.80>

54. INTEREST PAYMENT WITH DISCOUNT: Journal Entry
6/30 End first interest period
Account
Debit
Credit
Interest expense
Bond discount
Cash
5,311.80
311.80
5,000.00

55. FINANCIAL STATEMENT EFFECTS WITH PREMIUM
Long-term Debt
1/01/1
06/30/1
12/31/1
Bond payable
Less: Discount
Net book value
$100,000
13,590
$113,590
13,134
$113,134
12,659
$112,659

56. USER FOCUS 13-4: Discount/Premium & Bond Profitability
Market rate governs bond’s profitability
If stated interest rate < market rate
Bond sells at discount
If stated interest rate > market rate (yield)
Bond sells at premium

57. MEASURING CAPITAL CONTRIBUTIONS
Capital stock
Par, stated value represents legal capital
Does not represent market value
Additional Paid-in-Capital
Excess above par value paid on original sale

58. SALE COMMON STOCK: Transaction Analysis
Issued 2,000 shares of $1 par value stock at
$10 per share
Account
Assets =
Liabilities +
Equity
Cash
Common stock
Additional PIC
20,000
2,000
18,000

59. SALE COMMON STOCK: Journal Entry
Issued 2,000 shares of $1 par value stock at
$10 per share
Account
Debit
Credit
Cash
Common Stock
Additional PIC
20,000
2,000
18,000

60. STOCK DIVIDENDS Stock dividend Distribution of stock
Given to conserve cash
Shifts portion of retained earnings into contributed capital
No change total stockholders’ equity
Recorded at
Market value if < 20%
Par value if > 20%

61. STOCK SPLITS Stock split Issues shares to present owners
Proportional reduction in par value
Generally followed by reduction in market price
No change in contributed capital, retained earnings, total stockholders’ equity

62. TREASURY STOCK Corporations own shares repurchased to
Provide shares for stock option plans
Reduce outstanding shares; increase EPS
Contract business operations
Provide shares for acquisition of other companies
Buy out ownership interest; protect from hostile takeover

63. ACQUIRING TREASURY STOCK: Transaction Analysis
Repurchase 1,000 shares of own stock
for $125 per share
Account
Assets =
Liabilities +
Equity
Treasury stock
Cash
<125,000>

64. ACQUIRING TREASURY STOCK: Journal Entry
Repurchase 1,000 shares own stock
for $125
Account
Debit
Credit
Treasury stock
Cash
125,000