Lecture 7 - Liabilities (Chapter 9) Flashcards
Liabilities, debt, market and nominal interest rates, bond discounts and premiums
True or false: “accounts payable”, “trade payables”, and “trade creditors” describe the same type of liability.
True
How long are credit terms usually?
Between 30 and 90 days.
True or false: “accrued liabilities” and “accrued expenses” describe two different types of liabilities.
False (they describe the same type of liability)
What’s an accrued liability? Why is it a liability?
An accrued liability is an expense that a company has incurred, but not paid yet. It’s a liability because the company owes money.
True or false: the majority of accrued liabilities are long-term/non-current.
False (the majority is short-term/current)
True or false: “unearned revenue”, “deferred revenue”, and “revenue collected in advance” describe the same type of liability.
True
What does “current portion of long-term debt” refer to?
The part of a loan that’s due in the coming financial year.
What type of liability is “current portion of long-term debt”?
Short-term/current.
What does a company’s debt ratio show?
The percentage of assets that are financed through liabilities.
How do you calculate a company’s debt ratio?
Debt ratio = Total liabilities / Total assets
True or false: every bond payable is a note payable.
True
What does the term “term bonds” refer to?
All bonds in an issue mature simultaneously.
What does the term “serial bonds” refer to?
All bonds in an issue mature in installments over a period of time.
What determines bond prices?
Bond interest rates.
What does “market price” mean?
It’s the price that investors are willing to pay.
True or false: bonds are sometimes, but not always, sold at their market price.
False (they’re always sold at their market price)
What happens to the balance sheet when a company issues bonds payable?
Both assets and liabilities increase.
Account for the three ways to finance operations.
- Retained earnings
- Issuing shares
- Selling bonds payable
What type of liability are “accounts payable”, “notes payable”, “accrued liabilities”, and “deferred revenue”?
They’re all current liabilities.
What type of liability are “long-term notes payable”, bank loans, and bonds?
They’re all non-current liabilities.
What does the term “present value” mean?
It’s the current value of a future sum of money or cash flows.
True or false: if the market interest rate is the same as the nominal interest rate, then bonds are issued at their principal amount.
True
What happens if the market interest rate is higher than the nominal interest rate?
Bonds are traded at a discount.
What happens if the market interest rate is lower than the nominal interest rate?
Bonds are issued at a premium.
How do you calculate the discount of a bond?
Discount = Principal amount - Bond price
How do you calculate the premium of a bond?
Premium = Bond price - Principal amount
What does the term “amortization” refer to?
The process of expensing the discount of a bond.
