9.2: Other Non Current Liabilities Flashcards
What are the typical non-current liabilities that companies report, apart from long-term debt?
Apart from long-term debt, typical non-current liabilities include lease obligations, asset retirement obligations, accrued retirement benefits liability, and deferred income taxes.
How are lease liabilities accounted for from the lessee’s perspective under International Financial Reporting Standard (IFRS) 16 for long-term leases?
Under IFRS 16, for long-term leases, the lessee is required to recognize a right-of-use asset and a lease liability, both measured at the present value of future lease payments.
The right-of-use asset is depreciated over the asset’s useful life or the lease term, and the lease obligations are reduced as regular payments are made to the lessor.
What is the accounting entry made by a company (e.g., Amazon) when it signs a long-term lease for an asset under IFRS 16?
When a company signs a long-term lease under IFRS 16, it recognizes a right-of-use asset and a lease liability.
For example, if Amazon signs a lease with a present value of lease payments at $250,000, the entry would be:
Right-of-use asset: +$250,000
Lease obligations: +$250,000
What is the debt-to-equity ratio, and how is it computed?
The debt-to-equity ratio measures a company’s financial leverage by comparing its total debt to its shareholders’ equity.
It is computed as:
Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity
How is the debt-to-equity ratio interpreted, and what does a high ratio suggest about a company’s financial structure?
A high debt-to-equity ratio indicates higher financial risk and reliance on debt financing. It suggests that the company has more debt relative to equity, potentially indicating financial instability.
Investors and creditors often assess this ratio to gauge the company’s ability to manage its debt obligations and financial health.
How is the debt-to-equity ratio calculated, and what does it indicate about a company’s financing strategy?
The debt-to-equity ratio is calculated as Total Liabilities divided by Shareholder Equity.
It indicates how much debt has been used to finance the company’s acquisition of assets relative to equity financing supplied by shareholders.
A high ratio suggests heavy reliance on funds from creditors.
Why is the debt-to-equity ratio important for investors, creditors, and managers?
Investors use it to assess the level of financial risk associated with their investment, considering dividends and share value appreciation.
Creditors use it to assess the risk of a company not meeting its financial obligations during a business downturn.
Managers use the ratio to decide whether to finance acquisitions using debt.
How does the debt-to-equity ratio for Amazon compare to its competitors, and what could a high ratio indicate?
Amazon’s debt-to-equity ratio of $2.04 suggests that for every dollar of shareholders’ equity, Amazon has $2.04 of liabilities.
Compared to competitors like eBay and Walmart, Amazon’s ratio is higher.
A high ratio could indicate significant reliance on funds provided by creditors, raising concerns that require further analysis.
What caution should investors exercise when interpreting the debt-to-equity ratio, and why is it necessary to consider operating cash flows?
While the debt-to-equity ratio provides insight into debt capacity, it does not indicate whether a company’s operations can support the amount of debt it has. Investors should consider the company’s ability to generate cash from operating activities.
Debt carries obligations for interest and principal payments, which need to be evaluated in the context of the company’s cash generation capability.
How is the cash received when a company issues long-term debt reported on the statement of cash flows?
The cash received from issuing long-term debt is reported as a cash inflow from financing activities on the statement of cash flows.
How are repayments of principal on long-term debt reported on the statement of cash flows?
Repayments of principal on long-term debt are reported as cash outflows from financing activities on the statement of cash flows.
Why are interest payments typically reported as operating activities on the statement of cash flows?
Interest payments are reported as operating activities because interest expense is a component of net earnings and is reflected on the statement of earnings.
Therefore, most companies report interest payments as part of their operating activities.
How does the financing activities section of the statement of cash flows provide insights into a company’s capital structure?
The financing activities section of the statement of cash flows provides important insights into a company’s capital structure by showing the cash inflows and outflows related to long-term debt, providing information about how the company raises and repays funds, influencing its overall financial health and stability.
Why are analysts particularly interested in the financing activities section of the statement of cash flows for rapidly growing companies?
Rapidly growing companies typically report significant amounts of funds in the financing activities section, indicating their need for external funding to support expansion.
Analysts closely monitor this section to gain insights into the company’s capital raising activities, which are essential for sustaining growth.
