Slide 1Debt Financing and Equity FinancingSlide 3Slide 4Slide 5Notes Payable: Current or Long-term LiabilitiesSlide 7Slide 8Slide 9Slide 10Slide 11Long-Term Liabilities – Bonds PayableSlide 13Slide 14Slide 15Equity Financing: Common and Preferred StockEquity Financing: Common and Preferred StockSlide 18Slide 19Slide 20Equity Financing: DividendsSlide 22Slide 23Analyze, record, and summarize transactionsAnalyze, record, and summarize transactionsLiabilities and Equity on the Balance SheetLiabilities & Equity on the Balance SheetCh. 9 - Financial Statement AnalysisCh. 9 - Financial Statement AnalysisCh. 9 - Financial Statement AnalysisLiabilities andStockholders’ EquityChapter 8A200 - Survey of AccountingUniversity of TennesseeFall 20152Debt Financing and Equity FinancingDebt Financing–Creates a liability (principal must be repaid)–Creates an additional cost: InterestEquity Financing (Stock issued) –Dilutes control of the business by creating new owners (stockholders)–Stockholders expect to receive a return on their investment:•Increase in market price per share of stock •Dividends (share of business profit) Equity Financing (Retained Earnings)–Creates no liability or new owners–Creates no additional costs–Only earnings not distributed to owners as dividends are retainedLeverage: Using borrowed funds (debt) rather than owner funds (equity) to finance asset purchases and operations. A high Debt-to-Equity ratio means high risk levels for stockholders (slide #28).Current LiabilitiesAccounts Payable, Wages Payable, etc., are recorded when a business purchases goods or services without paying for them. (Expense is incurred before cash is paid.)Transaction #1: Morton Corporation’s employees worked through the end of the month, which ended on Tuesday. Morton will pay the $12,000 of wages on Friday.Effect on Statement of Cash FlowsBalance SheetEffect on Income Stmt. and Stmt. of Retained Earnings Assets = Liabilities + EquityWages PayableRetained Earnings12,000 + (12,000) (12,000)Expense3Current LiabilitiesAccounts Payable, Wages Payable, etc., are satisfied when the business pays them. Transaction #2: Morton Corporation pays the amount owed to employees.Effect on Statement of Cash FlowsBalance SheetEffect on Income Stmt. and Stmt. of Retained Earnings Assets = Liabilities + EquityCashWages PayableRetained Earnings(12,000)Operating(12,000) = (12,000)4Current LiabilitiesUnearned Fees, Unearned Rent, etc., are recorded when a business receives cash from a customer before rendering a service or providing goods. Transaction #3: Morton Corporation received $300,000 from a customer for whom Morton performed services this year, and $5,000 from a customer as an advance on work Morton will do next year. Effect on Statement of Cash FlowsBalance SheetEffect on Income Stmt. and Stmt. of Retained Earnings Assets = Liabilities + EquityCashUnearned FeesRetained Earnings305,000Operating305,000 = 5,000 + 300,000 300,000Revenue56Notes Payable: Current or Long-term LiabilitiesNotes Payable are amounts owed by the business •under a written contract•with a stated principal (face) amount •with a stated rate of interest (market rate)•with a stated term and due date (maturity date) - Current Liability if the due date is within one year of the issue date -Long-term Liability if the due date is longer than one year. The current portion of a long-term note payable is usually recorded as a current liability.Notes Payable generate a related expense (Interest Expense) and a related liability (Interest Payable)Interest Expense is computed as (P x R x T) using a 360-day yearCurrent Liabilities – Note PayableTransaction #4: On 10-01-15, Morton Corporation purchased supplies for $40,000, giving a 90-day, 6% note payable:Effect on Statement of Cash FlowsBalance SheetEffect on Income Stmt. and Stmt. of Retained Earnings Assets = Liabilities + EquitySuppliesNote Payable40,000 = 40,0007Current Liabilities – Note PayableTransaction #5: On 10-31-15, in an end-of-period adjustment, Morton recognized that it owed 30 days of interest on the note.Effect on Statement of Cash FlowsBalance SheetEffect on Income Stmt. and Stmt. of Retained Earnings Assets = Liabilities + EquityInterest Payable +Retained Earnings200 + (200) (200)Expense8Current Liabilities – Note PayableTransaction #6: On 11-30-15, in an end-of-period adjustment, Morton recognized that it owed another 30 days of interest on the note.Effect on Statement of Cash FlowsBalance SheetEffect on Income Stmt. and Stmt. of Retained Earnings Assets = Liabilities + EquityInterest Payable +Retained Earnings200 + (200) (200)Expense9Current Liabilities – Note PayableTransaction #7: On 12-29-15, the maturity date of the note, Morton paid both principal and interest:Effect on Statement of Cash FlowsBalance SheetEffect on Income Stmt. and Stmt. of Retained Earnings Assets = Liabilities + EquityCash =Note PayableInterest Payable +Retained Earnings(40,000)Financing(600)Operating(40,600) = (40,000) (400) + (200) (200)Expense10Contingent LiabilitiesAmounts the business may owe in the future. GAAP says businesses should record contingent liabilities only if the future event is probable and the amount is estimable.Transaction #8: In April, Morton sold goods on account, $200,000, with a warranty. It is probable that some of these goods will need repair during the warranty period, and Morton can estimate the cost of repairs – historical repair costs are 3% of sales. Effect on Statement of Cash FlowsBalance SheetEffect on Income Stmt. and Stmt. of Retained Earnings Assets = Liabilities + EquityAccounts Receivable =Warranty Payable +Retained Earnings200,000 = 200,000200,000Revenue6,000 + (6,000)(6,000)Expense1112Long-Term Liabilities – Bonds PayableBond terms: •Par value = 100% of the face value (bonds often sell above or below par)•Face or Principal = the amount of each bond (the amounts borrowed). Bonds are sold in $1,000 increments. •Term = the length of the bond contract•Maturity date (redemption date) = the end of the term. The borrowing business must repay both principal and any unpaid interest on the maturity date.•Interest = amount the business must pay twice a year over the whole term (principal x rate x time)•Contract rate (coupon rate) = rate of interest promised to bondholders