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Ch.9 Current Liabilities and Time Value of Money

Ch.9 Current Liabilities and Time Value of Money. Part I: Current Liabilities. Current liabilities: Require payment within one year (or one operating cycle whichever is longer). Requires payment within one year. Jacuzzi Brands Partial Balance Sheet – 2004. (in millions).

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Ch.9 Current Liabilities and Time Value of Money

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  1. Ch.9Current LiabilitiesandTime Value of Money

  2. Part I: Current Liabilities • Current liabilities: • Require payment within one year (or one operating cycle whichever is longer)

  3. Requires payment within one year Jacuzzi BrandsPartial Balance Sheet – 2004 (in millions) Liabilities and shareholders' equity Current liabilities: Notes payable $ 21.1 Current maturities of long-term debt 3.9 Trade accounts payable 123.7 Income taxes payable 18.3 Accrued expenses and other current liabilities 134.4 Total current liabilities $301.4

  4. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Selected 2004 Liquidity Ratios Current Ratio Jacuzzi Brands 1.79 Sara Lee 1.06 Tommy Hilfiger 3.87 Boeing 0.72 Nike 2.50 LO1

  5. 1. Accounts Payable • Amounts owed for the purchase of inventory, goods, or services on credit

  6. 2. Note Payable (Short term) I promise to pay $1,000 plus 12% annual interest on December 31, 2007. Date: January 1, 2007 Signed:_________ Lamanski Co. S.J.Devona Total repayment = $1,120 $1,000 + ($1,000 × 12%)

  7. Effective interest rate on note = 13.6% ($120 interest/$880 proceeds) Discounted Promissory Note In exchange for $880 received today, I promise to pay $1,000 on December 31, 2007. Date: January 1, 2007 Signed:_________ Lamanski Co.

  8. 1 2 3 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 18 19 20 21 22 23 24 25 26 27 28 29 30 31 25 26 27 28 29 30 31 3. Current Maturities of Long-Term Debt Principal repayment on borrowings due within one year of balance sheet date Due in upcoming year

  9. 4. Income Taxes Payable Record expense when incurred, not when paid 12/31/07 3/15/08 Record 2007 tax expense Taxes Paid LO2

  10. 5. Contingent Liabilities • Obligation involving existing condition • Outcome not known with certainty • Dependent upon some future event • Actual amount is estimated LO4

  11. Contingent Liabilities • Accrue estimated amount if: • Liability is probable • Amount can be reasonably estimated In year criteria are met: Expense (loss) XXX Liability XXX

  12. Typical Contingent Liabilities • Warranties • Premium or coupon offers • Lawsuits

  13. Recording Contingent Liabilities Quickkey Computer sells a computer product for $5,000 with a one-year warranty. In 2007, 100 computers were sold for a total sales revenue of $500,000. Analyzing past records, Quickkey estimates that repairs will average 2% of total sales. Example:

  14. Recording Contingent Liabilities Probable liability has been incurred? Amount reasonably estimable? YES YES Record in 2007: Warranty Expense 10,000 Estimated Liability 10,000

  15. Disclose in financial statement notes Disclosing Contingent Liabilities IF not probable but reasonably possible OR amount not estimable

  16. Contingent Assets • Contingent gains and assets are not recorded but may be disclosed in financial statement notes • Conservatism principle applies

  17. Part II: Time Value of Money • Prefer payment at the present time rather than in the future due to the interest factor • Present and future value concepts allow people to compare the value of money at different point in time • Applicable to both personal and business decisions

  18. If you invest $100 now at 10% annual return. How much money would you have in your account after 100 years?

  19. Simple v. compounding interest • Simple interest: earn interest only on the principal • Compounding interest: earn interest on both principal and the interest earned in previous periods

  20. Simple Interest I = P×R×T Dollar amount of interest per year Principal Time in years Interest rate as a percentage LO5

  21. Simple Interest principal amount = $ 100 annual interest rate = 10% term of note = 100 years P×R×T Interest = $100 × .10 × 100 = $ 1,000 Total = $100 + $1,000 = $1,100

  22. Compound Interest • Interest is calculated on principal plus previously accumulated interest • Interest on interest • Compound interest amount always higher than simple interest due to interest on interest

  23. Interest Compounding principal amount = $ 100 annual interest rate = 10% term of note = 100 years Annual compounding of interest LO6

  24. Total amount after $100 years: 100(1+.1)(1+.1)(1+.1)(1+.1)(1+.1)…

  25. Compound Interest Computations Present value of a single amount Future value of a single amount Present value of an annuity Future value of an annuity

  26. 1. Future Value of Single Amount Known amount of single payment or investment Future Value + Interest =

  27. Future Value of a Single Amount Example If you invest $10,000 today @ 10% compound interest, what will it be worth 3 years from now? invest $10,000 Future Value = ? Year 1 Year 2 Year 3 + Interest @ 10% per year

  28. Future Value of a Single Amount Example – Using Formulas FV = p(1 + i)n = $10,000(1.10)3 = $13,310

  29. Future Value of a Single Amount Example – Using Tables FV = Present value × table factor = $10,000 × (3 periods @ 10%) Year 1 Year 2 Year 3 PV = $10,000 FV = ??

  30. Future Value of $1 (n) 2% 4% 6% 8% 10%12% 15% 1 1.020 1.040 1.060 1.080 1.100 1.120 1.150 2 1.040 1.082 1.124 1.166 1.210 1.254 1.323 3 1.061 1.125 1.191 1.260 1.331 1.405 1.521 4 1.082 1.170 1.262 1.360 1.464 1.574 1.749 5 1.104 1.217 1.338 1.470 1.611 1.762 2.011 6 1.126 1.265 1.419 1.587 1.772 1.974 2.313 7 1.149 1.316 1.504 1.714 1.949 2.211 2.660 8 1.172 1.369 1.594 1.851 2.144 2.476 3.059

  31. Future Value of a Single Amount Example – Using Tables FV = Present value × table factor = $10,000 × (3 periods @ 10%) = $10,000 × 1.331 = $13,310 Yr. 1 Yr. 2 Yr. 3 PV = $10,000 FV = $13,310

  32. 2. Present Value of Single Amount Known amount of single payment in future Present Value Discount

  33. Present Value of a Single Amount Example If you will receive $10,000 in three years, what is it worth today (assuming you could invest at 10% compound interest)? Present Value = ? $10,000 Year 1 Year 2 Year 3 Discount @ 10%

  34. Present Value of a Single Amount Example – Using Formulas PV = Future value × (1 + i)–n = $10,000 × (1.10)–3 = $7,513

  35. Present Value of a Single Amount Example – Using Tables PV = Future value × table factor = $10,000 × (3 periods @ 10%) Year 1 Year 2 Year 3 PV = ?? FV = $10,000

  36. Present Value of $1 (n) 2% 4% 6% 8% 10%12% 15% 1 0.980 0.962 0.943 0.926 0.909 0.893 0.870 2 0.961 0.925 0.890 0.857 0.826 0.797 0.756 3 0.942 0.889 0.840 0.794 0.751 0.712 0.658 4 0.924 0.855 0.792 0.735 0.683 0.636 0.572 5 0.906 0.822 0.747 0.681 0.621 0.567 0.497 6 0.888 0.790 0.705 0.630 0.564 0.507 0.432 7 0.871 0.760 0.665 0.583 0.513 0.452 0.376 8 0.853 0.731 0.627 0.540 0.467 0.404 0.327

  37. Present Value of a Single Amount Example – Using Tables PV = Future value × table factor = $10,000 × (3 periods @ 10%) = $10,000 × 0.751 = $7,510 Yr. 1 Yr. 2 Yr. 3 PV = $7,510 FV = $10,000

  38. 1 2 3 4 $0 $3,000 $3,000 $3,000 $3,000 3. Future Value of an Annuity Periods + Interest Future Value = ?

  39. Year 1 Year 2 Year 3 Year 4 $0 $3,000 $3,000 $3,000 $3,000 FV = ?? Future Value of an Annuity Example If we invest $3,000 each year for four years at 10% compound interest, what will it be worth 4 years from now?

  40. Year 1 Year 2 Year 3 Year 4 $0 $3,000 $3,000 $3,000 $3,000 FV = ?? Future Value of an Annuity Example FV = Payment × table factor = $3,000 × (4 periods @ 10%)

  41. Future Value of Annuity of $1 (n) 2% 4% 6% 8% 10%12% 15% 1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 2 2.020 2.040 2.060 2.080 2.100 2.120 2.150 3 3.060 3.122 3.184 3.246 3.310 3.374 3.473 4 4.122 4.246 4.375 4.506 4.641 4.779 4.993 5 5.204 5.416 5.637 5.867 6.105 6.353 6.742 6 6.308 6.633 6.975 7.336 7.716 8.115 8.754 7 7.434 7.898 8.394 8.923 9.487 10.089 11.067 8 8.583 9.214 9.897 10.637 11.436 12.300 13.727

  42. Future Value of an Annuity Example PV = Payment × table factor = $3,000 × (4 periods @ 10%) = $3,000 × 4.641 = $13,923 Year 1 Year 2 Year 3 Year 4 $0 $3,000 $3,000 $3,000 $3,000 FV = $13,923

  43. 1 2 3 4 $0 $500 $500 $500 $500 4. Present Value of an Annuity Periods Discount Present Value = ?

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