Chapter 9 with solution

# Chapter 9 with solution - Introduction To Financial...

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Introduction To Financial Accounting HKUST Chapter 9 Reporting and Interpreting Liabilities Slide 1 Chapter Nine ACCT 101 Fall 2010 Allen Huang Introduction To Financial Accounting HKUST Learning Objectives for Ch 9 • Define, measure, and report current liabilities. • Report long-term liabilities. • Report contingent liabilities and capital lease. • Report notes payable and explain the time value of money. Apply the concepts of the future and present values. Slide 2 Chapter Nine • Apply present value concepts to liabilities.

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Introduction To Financial Accounting HKUST Understanding the Business The acquisition of assets is financed from two sources: Slide 3 Chapter Nine Debt - funds from creditors Equity - funds from stockholders Introduction To Financial Accounting HKUST Understanding the Business Debt vs Equity Cost? Benefit? Slide 4 Chapter Nine
Introduction To Financial Accounting HKUST Tax Shield of Interest Expense Income Statement Company A Company B Revenue 10,000 10,000 Expense 4,000 4,000 Net Income Before Interest and Tax 6,000 6,000 Interest 40,000*10%=4,000 0 Net Income Before Tax 2,000 6,000 Tax 2,000*30%=600 6,000*30%=1,800 Slide 5 Chapter Nine Net Income After Tax 1,400 4,200 Total Cash Flow Available for Shareholder and Bondholder 5,400 (1,400 + 4,000) 4,200 (4,200 + 0) \$40,000 * 10% (interest rate) * 30% (tax rate) = \$1,200 Introduction To Financial Accounting HKUST Using Debt to Enhance ROE Company A’s return on capital is 10%. Assume A has \$1,000,000 equity and no income tax, the net income is \$1,000,000 * 10% = 100,000. A’s ROE (Return on Equity) = Net Income / Equity = 10% Let’s say A can borrow at a 5% interest rate. If A borrows \$2,000,000. What’s A’s net income? (\$1,000,000 + \$2,000,000) * 10% \$2,000,000 * 5% = \$200,000 Slide 6 Chapter Nine A’s ROE (return on equity) = \$200,000 / \$1,000,000 = 20% As long as A’s borrowing cost is lower than its return on capital. A can enhance its ROE by borrowing.

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Introduction To Financial Accounting HKUST Liabilities Defined and Classified Defined as probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services. Maturity = 1 year or less Maturity > 1 year Slide 7 Chapter Nine Current Liabilities Noncurrent Liabilities Introduction To Financial Accounting HKUST Current Liabilities Account Name Also Called Definition Trade Obligations to pay for goods and Accounts Payable Payable services used in the basic operating activities of the business. Accrued Liabilities Accrued Expenses Obligations related to expenses that have been incurred, but will not be paid until the subsequent period. Notes N/A Obligations due supported by a formal Slide 8 Chapter Nine Payable written contract. Deferred Revenues Unearned Obligations arising when cash is received prior to the related revenue being earned.
Introduction To Financial Accounting HKUST Liabilities Defined and Classified An important indicator of a company’s ability to meet its current obligations.

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## This note was uploaded on 02/13/2012 for the course ACCT 101 taught by Professor Na during the Fall '10 term at HKUST.

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Chapter 9 with solution - Introduction To Financial...

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