Slide 1Ch. 8: Debt Financing or Equity FinancingSlide 3Slide 4Slide 5Ch. 8: Notes PayableSlide 7Slide 8Slide 9Slide 10Slide 11Ch. 8: Long-Term Liabilities – Bonds PayableSlide 13Slide 14Slide 15Ch. 8: Equity Financing - Common and Preferred StockCh. 8: Equity Financing - Common and Preferred StockSlide 18Slide 19Slide 20Ch. 8: Equity Financing - DividendsSlide 22Slide 23Ch. 8: Analyze, record, and summarize transactionsCh. 8: Analyze, record, and summarize transactionsCh. 8: Liabilities and Equity on the Balance SheetCh. 8: Liabilities & Equity on the Balance SheetCh. 9: Financial Statement AnalysisCh. 9: Financial Statement AnalysisCh. 9: Financial Statement AnalysisCh. 9: Financial Statement AnalysisLiabilities andStockholders’ EquityChapter 8 and Chapter 9 A200 - Survey of AccountingUniversity of Tennessee2Ch. 8: Debt Financing or 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 #29).Ch. 8: Current Liabilities CL are increased when a business purchases goods or services prior tomaking payment (expense is incurred before cash is paid). Transaction #1: Simba Corporation’s employees worked through the end of the month, which ended on Tuesday. Simba will pay the $12,000 of wages on Friday. STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + Equity= Wages Payable+ Retained Earnings= 12,000 + (12,000) (12,000) Wages Expense3Ch. 8: Current Liabilities CL are decreased when the business satisfies them. Transaction #2: Simba Corporation pays the amount owed to employees. STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash = Wages Payable(12,000)Cash outOperating(12,000) = (12,000)4Ch. 8: Current Liabilities CL are increased when a business receives cash from a customer before rendering a service or providing goods. (cash is received before revenue is earned).Transaction #3: Simba Corporation received $300,000 from a customer for whom Simba performed services this year, and $5,000 from a customer as an advance on work Simba will do next year. STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash = Unearned Fees+ Retained Earnings305,000Cash in Operating305,000 = 5,000 + 300,000 300,000Fees Revenue56Ch. 8: Notes PayableNotes 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 portion of a long-term note payable due within the year 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 yearCh. 8: Current Liabilities – Note Payable Transaction #4: On 10-01-12, Simba Corporation purchased supplies for $40,000, giving a 90-day, 6% note payable: STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquitySupplies =Note Payable40,000 = 40,0007Ch. 8: Current Liabilities – Note Payable Transaction #5: On 10-31-12, in an end-of-period adjustment, Simba recognized that it owed 30 days of interest on the note. STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityInterest Payable +Retained Earnings200 + (200) (200)Interest Expense8Ch. 8: Current Liabilities – Note Payable Transaction #6: On 11-30-12, in an end-of-period adjustment, Simba recognized that it owed another 30 days of interest on the note. STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityInterest Payable +Retained Earnings200 + (200) (200)Interest Expense9Ch. 8: Current Liabilities – Note Payable Transaction #7: On 12-29-12, the maturity date of the note, Simba paid both principal and interest:STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityCash =Note PayableInterest Payable +Retained Earnings(40,600)Cash outOperating(40,600) = (40,000) (400) + (200) (200)Interest Expense10Ch. 8: Contingent LiabilitiesAmounts the business will owe in the future if certain events occur. GAAP requires businesses to record contingent liabilities only if the future event is probable and the amount is estimable. Transaction #8: In April, Simba 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 Simba can estimate the cost of repairs – historical repair costs are 3% of sales. STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityAccounts Receivable =Warranty Payable +Retained Earnings200,000 = 200,000200,000Sales Revenue6,000 + (6,000)(6,000)Warranty Expense1112Ch. 8: Long-Term Liabilities – Bonds PayableBond terms: •Par value = 100% of the face value (bonds often sell above or below par). If a bond sells “at par”, then the buyer paid what the seller was asking.•Face or Principal = the amount of each bond (the amounts borrowed/loaned). Bonds are sold in $1,000 increments. •Term = the length of the bond contract, “aka” the number of years until the face amount/principal must be paid back•Maturity date (redemption date) = the