Acc200Day13 - Accy 200 Day 13 edit Master subtitle style...

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Click to edit Master subtitle style Accy 200 Day 13 Peter A. Silhan
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Agenda Long-Term Liabilities Q&A
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Balance Sheet Coverage Assets = Claims LTL OE LTA CA CL CL LTL OE LTA CA CH5: Current Assets CH6: Noncurrent Assets CH7: Liabilities CH8: Equity Day 13
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Nature of Liabilities The recognition of a liability usually means an expense is recorded. Expenses reduce income.
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ROI versus Cost of Capital ROI = Profit/Investment (i.e., return on investment) Investment = Assets ROI should be greater than cost of capital , otherwise you would be better off investing elsewhere Cost of Capital is essentially your “opportunity cost”
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Financial Leverage Assets 500,000 $ Liabilities - Owners' equity 500,000 Total 500,000 $ Income before interest 100,000 $ Interest expense - Net income 100,000 $ Balance Sheet Income Statement Without Leverage ROI = $100,000 ÷ $500,000 = 20% ROE = $100,000 ÷ $500,000 = 20% 500,000 $ Liabilities (8% interest) 150,000 Owners' equity 350,000 Total 500,000 $ Income before interest 100,000 $ Interest expense 12,000 Net income 88,000 $ With Leverage ROI = $100,000 ÷ $500,000 = 20% ROE = $88,000 ÷ $350,000 = 25.1% Note: ROI = Return on Investment; ROE = Return on Equity
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Acc200Day13 - Accy 200 Day 13 edit Master subtitle style...

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