Chapter 16 Power Points - Chapter 16 Long-Term Liabilities...

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Chapter 16 “Long-Term Liabilities”
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LO 1 – Management Issues Related to LT Debt Long-Term Liabilities:
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LO 1 Long-Term Liabilities: … are obligations of the business that are due to be paid after one year or beyond the normal operating cycle, whichever is longer.
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LO 1 Assets = Liabilities + Stockholders’ Equity Economic = Financing of these resources resources (also called sources of these economic resources) = From creditors + From owners
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LO 1 How a company finances its operations is one of the most important factors in the company’s long-term viability (ability to survive).
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LO 1 You finance by issuing debt (= borrowing = incurring a liability) or by issuing stock (= increase to equity; more in particular, increase to contributed capital).
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LO 1 The amount and the type of debt a company incurs depend on:
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LO 1 The amount and the type of debt a company incurs depend on: - The nature of the business - Its competitive environment - The state of the financial markets - The predictability of its earnings
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LO 1 Growing businesses frequently need long- term financing to invest in R&D activities and long-term assets.
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LO 1 Management issues related to issuing LT debt: 1. Whether to take in long-term debt 2. How much long-term debt to carry 3. What types of long-term debt to carry 4. How to handle debt repayment
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LO 1 A key management decision regarding long- term funding for the company is: Stockholders’ equity versus long-term debt Journal entries…
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LO 1 Shareholders’ Equity: (DR) Cash XXX (CR) Contributed Capital XXX
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LO 1 LT Debt: (DR) Cash XXX (CR) Bond Payable XXX
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LO 1 Which one of the two do managers prefer?
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LO 1 Advantages of common stock over debt: It does not have to be paid back Dividends are paid only if the company earns sufficient income and the BOD decides to distribute dividends.
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LO 1 Advantages of long-term debt over common stock: Company does not relinquish control to stockholders Creditors do not elect directors Tax effects Bond Interest is tax-deductible (interest paid is a tax deduction). Dividends paid are not tax deductible. Financial leverage After interest is paid, all excess earnings accrue to stockholders Issuing debt is less expensive than issuing stock (you have to pay hefty fees to underwriters in the second case)
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LO 1 Disadvantages to issuing debt (debt financing):
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LO 1 Disadvantages to issuing debt (debt financing): Cash is required For periodic interest payments and to pay back the principal amount Company can become overcommitted to creditors Financial leverage can work against a company If the earnings from its investments do not exceed its interest payments
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LO 1 How much debt to carry?
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How much debt to carry? Depends on the industry.
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Chapter 16 Power Points - Chapter 16 Long-Term Liabilities...

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