Session 6 Flashcards
Operating liabilities
Accounts payable
Accrued liabilities
Leaning on the Trade
An increase in accounts payable results in an increase in cash flow from operations. This is sometimes referred to as leaning on the trade.
What are accrued expenses
Owed but not paid.
Current Non-Operating Liabilities Include:
Short term bank loans (including the accrual of interest)
Current maturities of long-term debt. The principal that is to be paid off in the next year.
Accounting for interest-bearing note (current)
Bank line of credit is commitment to lend up to certain amount that the line is to be repaid within one year.
An interest-bearing note evidences such borrowings.
Cash received is reported on the balance sheet together with an increase in liabilities (notes payable) and interest accruals create expenses.
Present Value is impacted by what?
Time and interest rate
Conceptual takeaway for Present Value
The Present Value declines as t increases, and declines as the interest rate, r, increases.
Present Value formula
PV = CF x 1/(1+r)^t
CF = cash flow to be received in period t.
r = interest rate
t = number of periods
To value a bond, the market computes:
The present value of the single sum
Present value of the annuity
And adds them together to determine the price of the bond.
Coupon rate of interest
The stated rate in the bond contact. Used by issuing firm to compute the dollar amount of interest payments.
Market rate of interest -
interest rate that investors expect to earn on the investment in the debt security.
This rate will be used to determine the periodic interest expense.
Other names for coupon rate of interest
Stated, contract
Other names for market rate
yield, effective
When bond stated rate = market rate
Par or face value
When bond stated rate > market rate
Premium to face or par value
