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Chapter 9 Current Liabilities, Contingencies, and the Time Value of Money Copyright © 2009 South-Western, a part of Cengage Learning. Financial Accounting:

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Presentation on theme: "Chapter 9 Current Liabilities, Contingencies, and the Time Value of Money Copyright © 2009 South-Western, a part of Cengage Learning. Financial Accounting:"— Presentation transcript:

1 Chapter 9 Current Liabilities, Contingencies, and the Time Value of Money Copyright © 2009 South-Western, a part of Cengage Learning. Financial Accounting: The Impact on Decision Makers 6/e by Gary A. Porter and Curtis L. Norton

2 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 340,937 Accrued compensation and related costs 288,963 Accrued occupancy costs54,868 Accrued taxes 94,010 Short-term borrowings700,000 Other accrued expenses224,154 Deferred revenue231,926 Current portion of long term debt 762 Total current liabilities $1,935,620 Starbucks Corp. Partial Balance Sheet (in thousands) Requires payment within one year 2006

3 Selected 2006 Liquidity Ratios Current Quick Industry Ratio Ratio Starbucks Food.79.39 Caribou Coffee Food.92.56 Green Mountain Food 1.74.89 LO1

4 Accounts Payable  Amounts owed for the purchase of inventory, goods, or services on credit  Discount payment terms offered to encourage early payment 2/10, n30

5 Promissory Note S.J.Devona I promise to pay $1,000 plus 12% annual interest on December 31, 2008. Date: January 1, 2008 Signed: _________ Hot Coffee Inc. Total repayment = $1,120 $1,000 + ($1,000 × 12%)

6 Discounted Promissory Note In exchange for $880 received today, I promise to pay $1,000 on December 31, 2008. Date: January 1, 2008 Signed: _________ Hot Coffee, Inc. Effective interest rate on note = 13.6% ($120 interest/$880 proceeds)

7 1/1/08 12/31/08 Notes Payable $1,000 $1,000 Less: Discount on Notes Payable 120 - 0 - Net Liability $ 880 $1,000 Balance Sheet Presentation of Discounted Notes Discount transferred to interest expense over life of note

8 Current Maturities of Long-Term Debt Principal repayment on borrowings due within one year of balance sheet date Due in upcoming year

9 Taxes Payable Record expense when incurred, not when paid Record 2007 tax expense Taxes Paid 12/31/073/15/08 LO2

10 Current Liabilities on the Statement of Cash Flows Operating Activities Net income xxx Increase in current liability + Decrease in current liability – Investing Activities Financing Activities Increase in notes payable + Decrease in notes payable – LO3

11 Contingent Liabilities  Obligation involving existing condition  Outcome not known with certainty  Dependent upon some future event  Actual amount is estimated LO4

12  Accrue estimated amount if: Liability is probable Amount can be reasonably estimated Contingent Liabilities In year criteria are met: Expense(loss)XXX Liability XXX

13  Warranties  Premium or coupon offers  Lawsuits Typical Contingent Liabilities

14 Recording Contingent Liabilities Quickkey Computer sells a computer product for $5,000 with a one-year warranty. In 2008, 100 computers were sold for a total sales revenue of $500,000. Analyzing past records, Quickkey estimates that repairs will average 2% of total sales. Example:

15 Recording Contingent Liabilities Probable liability has been incurred? Amount reasonably estimable? Warranty Expense 10,000 Estimated Liability 10,000 YES Record in 2008:

16 Disclosing Contingent Liabilities IF not probable but reasonably possible OR amount not estimable Disclose in Financial Statement notes

17 Contingent Assets  Contingent gains and assets are not recorded but may be disclosed in financial statement notes  Conservatism principle applies

18 Time Value of Money  Prefer payment at the present time rather than in the future due to the interest factor  Applicable to both personal and business decisions

19 Simple Interest I = P × R × T Principal Dollar amount of interest per year Time in years Interest rate as a percentage LO5

20 Example of Simple Interest Given following data: principal amount = $ 3,000 annual interest rate = 10% term of note = 2 years Calculate interest on the note.

21 Example of Simple Interest Given following data: principal amount = $ 3,000 annual interest rate = 10% term of note = 2 years Calculate interest on the note. P × R × T $3,000 ×.10 × 2 = $ 600

22 Compound Interest  Interest is calculated on principal plus previously accumulated interest Interest on interest  Compound interest amount always higher than simple interest due to interest on interest

23 Example of Interest Compounding Given following data: principal amount = $ 3,000 annual interest rate = 10% term of note = 2 years semiannual compounding of interest Calculate interest on note. LO6

24 Compound Interest Periods 4 periods @ 5% semiannual interest Year 1Year 2 10% annually 5% + 5% semiannually 5% + 5% semiannually

25 Example of Interest Compounding Principal Amount at Beginning Interest at Accumulated Period of Year 5% per Period at End of Period 1 $3,000$150 $3,150 2 3,150 158 3,308 3 3,308 165 3,473 4 3,473 174 3,647

26 Comparing Interest Methods Simple annual interest: $3,000 ×.10 × 2 = $600 Semiannual compounding: 1$150 2 158 3 165 4 174 Total $647

27 Compound Interest Computations Present value of an annuity Future value of an annuity Present value of a single amount Future value of a single amount

28 Future Value of Single Amount Known amount of single payment or investment Future Value + Interest =

29 Future Value of a Single Amount If you invest $2,000 today @ 10% compound interest, what will it be worth 2 years from now? invest $2,000 Future Value = ? + Interest @ 10% per year Year 1Year 2 Example:

30 Future Value of a Single Amount Example – Using Formulas FV = p(1 + i) n = $2,000(1.10) 2 = $2,420

31 FV = Present value × table factor = $2,000 × (2 periods @ 10%) Future Value of a Single Amount Example – Using Tables FV = ?? PV = $2,000 Year 1Year 2

32 (n) 2% 4% 6% 8% 10% 12% 15% 11.020 1.0401.0601.0801.1001.1201.150 21.0401.082 1.124 1.1661.2101.2541.323 31.0611.1251.1911.2601.3311.4051.521 41.0821.1701.2621.3601.4641.5741.749 51.1041.2171.3381.4701.6111.7622.011 61.1261.2651.4191.5871.7721.9742.313 71.1491.3161.5041.7141.9492.2112.660 81.1721.3691.5941.8512.1442.4763.059 Future Value of $1

33 FV = Present value × table factor = $2,000 × (2 periods @ 10%) = $2,000 × 1.210 = $2,420 Future Value of a Single Amount Example – Using Tables PV = $2,000 Year 1Year 2 FV = $2,420

34 Present Value of Single Amount Discount Known amount of single payment in future Present Value

35 Present Value of a Single Amount If you will receive $2,000 in two years, what is it worth today (assuming you could invest at 10% compound interest)? $2,000 Discount @ 10% Year 1Year 2 Present Value = ? Example:

36 Present Value of a Single Amount Example – Using Formulas PV = Future value × (1 + i) –n = $2,000 × (1.10) –2 = $1,652

37 PV = Future value × table factor = $2,000 × (2 periods @ 10%) Present Value of a Single Amount Example – Using Tables FV = $2,000 PV = ?? Year 1Year 2

38 (n) 2% 4% 6% 8% 10% 12% 15% 10.980 0.9620.9430.9260.9090.8930.870 20.9610.925 0.890 0.8570.8260.7970.756 30.9420.8890.8400.7940.7510.7120.658 40.9240.8550.7920.7350.6830.6360.572 50.9060.8220.7470.6810.6210.5670.497 60.8880.7900.7050.6300.5640.5070.432 70.8710.7600.6650.5830.5130.4520.376 80.8530.7310.6270.5400.4670.4040.327 Present Value of $1

39 PV = Future value × table factor = $2,000 × (2 periods @ 10%) = $2,000 × 0.826 = $1,652 Present Value of a Single Amount Example – Using Tables PV = $1,652 Year 1Year 2 FV = $2,000

40 Periods Future Value = ? + Interest Future Value of an Annuity 1 2 3 4 $0 $3,000 $3,000$3,000 $3,000

41 If we invest $3,000 each year for four years at 10% compound interest, what will it be worth 4 years from now? Future Value of an Annuity $0 $3,000 $3,000 $3,000 $3,000 Year 1 Year 2 Year 3 Year 4 FV = ?? Example:

42 $0 $3,000 $3,000 $3,000 $3,000 Year 1 Year 2 Year 3 Year 4 FV = ?? Future Value of an Annuity FV = Payment × table factor = $3,000 × (4 periods @ 10%) Example:

43 (n) 2% 4% 6% 8% 10% 12% 15% 11.000 1.0001.0001.0001.0001.0001.000 22.0202.040 2.060 2.0802.1002.1202.150 33.0603.1223.1843.2463.3103.3743.473 44.1224.2464.3754.5064.6414.7794.993 55.2045.4165.6375.8676.1056.3536.742 66.3086.6336.9757.3367.7168.1158.754 77.4347.8988.3948.923 9.48710.08911.067 88.5839.2149.897 10.637 11.43612.30013.727 Future Value of Annuity of $1

44 Future Value of an Annuity $0 $3,000 $3,000 $3,000 $3,000 Year 1 Year 2 Year 3 Year 4 FV = $13,923 PV = Payment × table factor = $3,000 × (4 periods @ 10%) = $3,000 × 4.641 = $13,923 Example:

45 Present Value of an Annuity 1 2 3 4 $0 $4,000 $4,000 $4,000 $4,000 Periods Discount Present Value = ?

46 What is the value today of receiving $4,000 at the end of the next 4 years, assuming you can invest at 10% compound annual interest? Present Value of an Annuity $0 $4,000 $4,000 $4,000 $4,000 Year 1 Year 2 Year 3 Year 4 PV = ?? Example:

47 $0 $4,000 $4,000 $4,000 $4,000 Year 1 Year 2 Year 3 Year 4 PV = ?? Present Value of an Annuity PV = Payment × table factor = $4,000 × (4 periods @ 10%) Example:

48 (n) 2% 4% 6% 8% 10% 12% 15% 10.980 0.9620.9430.9260.9090.8930.870 21.9421.886 1.833 1.7831.7361.6901.626 32.8842.7752.6732.5772.4872.4022.283 43.8083.6303.4653.3123.1703.0372.855 54.7134.4524.2123.9933.7913.6053.352 65.6015.2424.9174.6234.3554.1113.784 76.4726.0025.5825.2064.8684.5644.160 87.3256.7336.2105.7475.3354.9684.487 Present Value of Annuity of $1

49 Present Value of an Annuity $0 $4,000 $4,000 $4,000 $4,000 Year 1 Year 2 Year 3 Year 4 PV = $12,680 PV = Payment × table factor = $4,000 × (4 periods @ 10%) = $4,000 × 3.170 = $12,680 Example:

50 Solving for Unknowns Example Assume that you have just purchased a new car for $14,420. Your bank has offered you a 5-year loan, with annual payments of $4,000 due at the end of each year. What is the interest rate being charged on the loan? LO7 Year 1 Year 2 Year 3 Year 4 Year 5 $0$4,000 $4,000 $4,000 $4,000 $4,000 Discount PV = $14,420

51 Solving for Unknowns Example PV = Payment × table factor Table factor = PV/payment Year 1 Year 2 Year 3 Year 4 Year 5 $0$4,000 $4,000 $4,000 $4,000 $4,000 PV = $14,420 Rearrange equation to solve for unknown

52 Solving for Unknowns Example Year 1 Year 2 Year 3 Year 4 Year 5 $0$4,000 $4,000 $4,000 $4,000 $4,000 PV = $14,420 Table factor = PV/payment = $14,420/$4,000 = 3.605

53 (n) 2% 4% 6% 8% 10% 12% 15% 10.980 0.9620.9430.9260.9090.8930.870 21.9421.886 1.833 1.7831.7361.6901.626 32.8842.7752.6732.5772.4872.4022.283 43.8083.6303.4653.3123.1703.0372.855 54.7134.4524.2123.9933.7913.6053.352 65.6015.2424.9174.6234.3554.1113.784 76.4726.0025.5825.2064.8684.5644.160 87.3256.7336.2105.7475.3354.9684.487 Present Value of Annuity of $1 The factor of 3.605 equates to an interest rate of 12%

54 Appendix Accounting Tools: Using Excel for Problems Involving Interest Calculations

55 Using Excel Functions  Many functions built into Excel, including PV and FV calculations  Click on the PASTE function (fx) of the Excel toolbar or the Insert command

56 FV Function in Excel Find the FV of a 10% note payable for $2,000, due in 2 years and compounded annually Example: Answer: $2,420

57 PV Function in Excel How much should you invest now at 10% (compounded annually) in order to have $2,000 in 2 years? Example: Answer: $1,653 (rounded)

58 End of Chapter 9

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