MBUS 3000 1st Edition Lecture 7 Outline of Last Lecture I. Disruptive innovation as it applies to the music businessII. Disruptive innovationIII. Innovators dilemma IV. Disruptive innovationV. Examples VI. R&B/SOUL/DISCO 1979VII. Rewind back to technology:VIII. Flaws in Theory Outline of Current Lecture IX. Assets X. Liabilities XI. Financing statements Current LectureA) Assets: Current, fixed, or other 1) Current asset: assets reasonably expected to be converted into cash or used in the current operation of the business (generally taken as one year). - Examples are cash, notes receivable, account receivable, inventory, and prepaid expenses. - Example: cash, checking, paypal account - Inventory includes t-shirts and merchandise the idea is you reasonably expect the inventory to be sold over the course of the year These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2) Fixed assets OR plant assets: long-lived assets used in production of goods or services. These assets are used in the operation of the business rather than being held for sale, as are inventory items - Examples: music equipment, van recording equipment, real estate(if you’re doing really!)- A fixed asset for a band isn’t the same thing as a fixed asset for another business 3) Other assets: Various assets other than current assets, essentially just a mist category - Outside investments: Lowery had a “jingle” company that he invested in a startup company that was creating technology to deliver the commercials to broadcasters over the web. It stayed on his books as “other asset”- Intangible assets: songs and recordings, you might include these on the balance sheet asassets especially if you purchased them because there is a transactiono If you developed songs, recordings, films or software with an intent to sell them later you might “capitalize” them as an asseto In some states you may be required to take the legal costs of incorporating and make it an asset so the intangible asset is the structure of the corporation- Goodwill: come across all the time, the value of the name or company, the typical way a goodwill asset for bands iso Its made up but its represents something real o Think of it as the value of the name of the companyo If you bought a company for more than it’s book value you would have to move the extra value onto your balance sheet as an asset you’d call goodwillo Similar situation can happen when you buy someone out of the band. B) Liabilities: Current, long term, and contingent 1) Current liabilities: liabilities that are due for payment within the operating cycle or one year, whichever is longer - Money you owe to people that you must pay back - Short term debts: credit cards Seven types of current liabilities: 1) Notes payable: evidenced by written promise to pay at a later date2) Accounts payable: liabilities for goods or services purchased on account, trade payables, and also nontrade obligations- Posters, t-shirts, office supplies if you had account with merchant3) Accrued liabilities: liabilities that have been accumulated but are not yet due, as payment does not coincide with the end of the period- These are expenses - Salaries/royalties that aren’t “due”4) Withholding: amounts that have been withheld from employees pay are to be turned over to government - Deduct taxes from employees check and hold them until it comes time to pay the taxes to government, so you have to keep up with that - Not expenses of company - Income taxes, social security taxes, group insurances, etc5) Dividends payable: Dividends become payable only as declared by the board of the company- They do not accrue (accumulate)6) Unearned revenue: sometimes revenue is received in advance - Represent claims against the enterprise- Example: magazine subscriptions or rent - Example: get deposit for a show and you have this deposit but it’s money you haven’t earned yet so you treat it as a loan and it’s a liability - Generally, settled by delivery of goods or services in the next accounting period - Where these are long term advances extending well beyond the next period, they should be classes on the balance sheet as noncurrent7) Portion of long-term debt: portion of long term debt payable in the next 12 months - Includes amounts due on bonds, mortgages, or long-term notes - In order to look at health of business you might want to distinguish between what’s due this year and what’s due over a longer period.2) Long term liabilities: Where funds are needed for a long-term purpose such as construction of a building, a long-term liability account would be used- Increased earnings would be used to retire the debt - Almost always, long-tern liabilities are interest-bearing and have a fixed due date- Example: long term loans Three types of long-tern liabilities: 1) Long-term note payable: the company may be able to obtain the needed amount from one lender rather than by issuing bonds for sale to the public - Sometimes notes may be issued to await better terms for issuing bonds 2) Mortgages payable: The terms of a mortgage generally pledge the property of a company as security- The mortgage involves a lien on the property, but not a transfer of title 3) Bonds payable: If the amount of funds needed is larger than a single lender can supply, bonds may be sold to the investing public, splitting the loan into thousands of units - A bond is a written promise to pay the face amount, generally $1000, at a future date and to make interest payments semiannually at a stipulated rate of interest - Interest payments on bonds are deductible as expense for income tax purposes, but dividends paid on preferred or common stock are not; thisis an important consideration in deciding whether to use stocks or bonds for long-term financing 3) Contingent liabilities: These are potential liabilities arising from past events- Example: when a note receivable is endorsed and transferred to another person,no liability is created. o However, there is a possibility that a liability could exist in the future, because the maker of the note may not honor ito If that were to happen, the business that endorsed the note would be required to make payment - Examples: additional tax assessments, product guarantees, pending lawsuits, and litigation- Example: record advance, this isn’t really