Financing Liabilities Cfa Level 1

Front 1

Operating liabilities

Back 1

results of credit granted to the company by suppliers. Also included, advances from customers. THey are consequences of operating decisions and arise in normal course of business

Front 2

Financing liabilities

Back 2

Include short term debt and current portion of long term liabilities. Result from fiancing decisions and indicate future need for cash or refinancing

Front 3

Shift from operating to financing liabilities

Back 3

A shift from operating to financing sources may indicate the beginning of a liquidity crisis, and the inability to repay short term credit is a sign of financial distress

Front 4

Bonds are listed at what value?

Back 4

Bonds are always listed as liabilities based on the proceeds received from the bonds which are the PV of all future payments

Front 5

Bonds sold at premium (balance sheet)

Back 5

Market rate > coupon rate Will always be shown on balance sheet as premium. Premium will be amortized to zero during life of bond

Front 6

Bonds sold at discount (balance sheet)

Back 6

Mkt rat < Coupon rate Will always be shown on balance sheet as discount. Discount will be amortized towards zero during life of the bond

Front 7

Interest expense

Back 7

Always equal to book value of bonds at beginning of period, multiplied by market rate

Front 8

Cash flow impacts of issuing bonds

Back 8

Coupon represents cash flow component as is deducted from CFO. For analytical purposes, int. exp. and amortization should be seperated and amortization should be included in CFF.

Front 9

CF impact premium bonds

Back 9

CFO understated, CFF overstated

Front 10

CF impact discount bonds

Back 10

CFO overstated, CFF understated becasue cash coupon is lower than interest expense

Front 11

Issuance of Zero coupon debt

Back 11

Same impacts as coupon debt, but more exaggerated. CFO will be severly overstated

Front 12

Convertable bonds

Back 12

reported as if no conversion feature. For analytical purposes, treat as equity if stock price is considerably above conversion price

Front 13

Changes in interest rates

Back 13

Result in changes of mkt value of debt but not reflected on financial statements. With variable rate debt, interest rate changes will change interest expense which will in turn, change NI.