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Chapter3[2] - Analyzing Financing Activities CHAPTER 3...

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3 CHAPTER Analyzing Financing Activities
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Current (Short-term) Liabilities Noncurrent (Long- Term) Liabilities Obligations whose settlement requires use of current assets or the incurrence of another current liability within one year or the operating cycle, whichever is longer. Obligations not payable within one year or the operating cycle, whichever is longer. Liabilities Classification
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Operating Liabilities Financing Liabilities Obligations that arise from operating activities--examples are accounts payable, unearned revenue, advance payments, taxes payable, postretirement liabilities, and other accruals of operating expenses Obligations that arise from financing activities--examples are short- and long-term debt, bonds, notes, leases, and the current portion of long-term debt Liabilities Alternative Classification
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Liabilities Important Features in Analyzing Liabilities Terms of indebtedness (such as maturity, interest rate, payment pattern, and amount). Restrictions on deploying resources and pursuing business activities. Ability and flexibility in pursuing further financing. Obligations for working capital, debt to equity, and other financial figures. Dilutive conversion features that liabilities are subject to. Prohibitions on disbursements such as dividends.
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Leases Leasing Facts Lease – contractual agreement between a lessor (owner) and a lessee (user or renter) that gives the lessee the right to use an asset owned by the lessor for the lease term MLP – minimum lease payments (MLP) of the lessee to the lessor according to the lease contract
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Leases Lease Accounting and Reporting (1) Capital Lease Accounting For leases that transfer substantially all benefits and risks of ownership—accounted for as an asset acquisition and a liability incurrence by the lessee, and as a sale and financing transaction by the lessor A lessee classifies and accounts for a lease as a capital lease if, at its inception, the lease meets any of four criteria: (i) lease transfers ownership of property to lessee by end of the lease term (ii) lease contains an option to purchase the property at a bargain price (iii) lease term is 75% or more of estimated economic life of the property (iv) present value of rentals and other minimum lease payments at beginning of lease term is 90% or more of the fair value of leased property less any related investment tax credit retained by lessor (2) Operating Lease Accounting For leases other than capital leases—the lessee (lessor) accounts for the minimum lease payment as a rental expense (income)
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Leases Lease Disclosure and Off-Balance-Sheet Financing Lease Disclosure Lessee must disclose: (1) future MLPs separately for capital leases and operating leases — for each of five succeeding years and the total amount thereafter, and (2) rental expense for each period an income statement is reported Off-Balance-Sheet Financing Off-Balance-Sheet financing is when a lessee structures a lease so it is accounted for as an operating lease when the economic characteristics of the lease are more in line with a capital lease— neither the leased asset nor its corresponding liability are recorded on the balance sheet
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Leases Frequency of Capital and Operating Leases
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