Introduction ToFinancial AccountingHKUSTLiabilities Defined and ClassifiedLiabilities are dt th imeasured at their present value at the time incurred. This is the amount a creditor wouldSlide 5Chapter Tena creditor would accept to cancel the debt.Introduction ToFinancial AccountingHKUSTSlide 6Chapter Ten
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Introduction ToFinancial AccountingHKUSTUnderstanding the BusinessThe mixture of debt and equity used to finance a company’s operations is ll d thit lttcalled the capital structure:Slide 7Chapter TenDebt - funds from creditorsEquity - funds from shareholdersIntroduction ToFinancial AccountingHKUSTCharacteristics of Bonds PayableAdvantages of bonds:•Stockholders maintain control because debtDisadvantages of bonds:`Risk of bankruptcy increases because thecontrol because debt holders can not vote.•Interest expense is tax deductible. (Tax shield of interest expense)•The impact on earnings is positive because ftbincreases because the interest and principal must be paid back as scheduled or creditors will force legal action.Slide 8Chapter Tenmoney can often be borrowed at a low interest rate and invested to earn a higher return. (increase ROE)