Finance Asset Information

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Accounting for intangible assets : cf slide.

LIABILITIES

Operating liabilities : obligations that arise from operating activities : accounts payable , unearned revenue, advance payment, taxes payable, post retirement liabilities, and other accruals of operating expenses.

Financing liabilities : obligations that arise from financing activities : short and long term debt, bonds, notes, leases, and the current portion of long term debt.

- Important features in analysing liabilities

- Cf slide

- Classification

- Current ( short term) liabilities : obligations whose settlement requires use of current assets or the incurrence of another current liability within one year or the operating cycle, whichever is longer

- Non current : obligations not payable within one year

Share holders’s equity

Equity : refers to owner ( shareholder) financing; its usual characteristics include:

- Reflects claims of owners ( shareholders) on net assets

- Equity holders usually subordinate to creditors

- Variation across equity holders on seniority

- Exposed to maximum risk and return

Equity analysis :

- Classifying and distinguishing different equity sources

- Examining rights for equity classes and priorities in liquidation

- Evaluating legal restrictions for equity distribution

- Reviewing restrictions on retained earnings distribution.

Components of capital stock :

[pic 1]

Section 2 : solvency

A company completes a sale on credit for $1,000, with an associated 5% sales tax. The goods sold have a cost of $650. The sales journal entry is:

- [debit] Accounts receivable for $1,050 ( or cash if paied in cash)

- [debit] Cost of goods sold for $650

- [credit] Revenue for $1,000 ( sales)

- [credit] Inventory for $650

- [credit] Sales tax liability for $50

A solvency is a company’s long run viability and ability to honour long term obligations.

A major component of solvency analysis is the company’s capital structure.

Why ? Because in a capitalist system, shareholders’ equity is the ultimate guarantee in the event of liquidation since the claims of creditors are met before those of shareholders.

- Capital structure

- Equity vs Debt

- Motivation for debt

- Debt Ratios cf slide