Reporting and Interpreting Liabilities Chapter 09 Part 2 – Long-Term Liabilities and Present Value Techniques McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Long-Term Liabilities pledge Creditors often require the borrower to pledge specific assets as security for the long-term liability. Maturity = 1 year or less Maturity > 1 year Current Liabilities Noncurrent Liabilities
Long-Term Notes Payable and Bonds Relatively small debt needs can be filled from single sources. Banks Insurance Companies Pension Plans
Long-Term Notes Payable and Bonds Significant debt needs are often filled by issuing bonds to the public. CashBonds
Present Value Concepts Money can grow over time, because it can earn interest. $1,000 invested today at 10%. In 1 year it will be worth $1,100. In 5 years it will be worth $1,610!
Present Value Concepts The growth is a mathematical function of four variables: 1.The value today (present value). 2.The value in the future (future value). 3.The interest rate. 4.The time period. The growth is a mathematical function of four variables: 1.The value today (present value). 2.The value in the future (future value). 3.The interest rate. 4.The time period.
Present Value of a Single Amount The present value of a single amount is the worth to you today of receiving that amount some time in the future. Today Present Value Future Future Value Interest compounding periods
Calculating the Present Value of a Single Amount Need: 1.The Appropriate Interest Rate (i) 2.The number of periods (n) 3.Future Value you wish to determine its present value Multiply the PVF$ (Present Value Factor of a $) times the future value Use these to determine the PVF$
Calculating the PVF$ and PVFA
How much do we need to invest today at 10% interest, compounded annually, if we need $1,331 in three years? a. $1, b. $ c. $ d. $ How much do we need to invest today at 10% interest, compounded annually, if we need $1,331 in three years? a. $1, b. $ c. $ d. $ Present Value of a Single Amount The required future amount is $1,331. i = 10% & n = 3 years Using the present value of a single amount table, the factor is $1,331 ×.7513 = $1,000 (rounded) The required future amount is $1,331. i = 10% & n = 3 years Using the present value of a single amount table, the factor is $1,331 ×.7513 = $1,000 (rounded)
Present Values of an Annuity An annuity is a series of consecutive equal periodic payments. Today
Present Values of an Annuity What is the value today of a series of payments to be received or paid out in the future? Today Present Value Interest compounding periods Payment 1Payment 2Payment 3
Calculating the Present Value of an Annuity Need: 1.The Appropriate Interest Rate (i) 2.The number of periods (n) 3.Annual payment Multiply the PVFA (Present Value Factor of an Annuity) times the annual payment Use these to determine the PVFA
Calculating the PVF$ and PVFA
What is the present value of receiving $1,000 each year for three years at an interest rate of 10%, compounded annually? a. $3, b. $2, c. $2, d. $2, What is the present value of receiving $1,000 each year for three years at an interest rate of 10%, compounded annually? a. $3, b. $2, c. $2, d. $2, Present Values of an Annuity The consecutive equal payment amount is $1,000. i = 10% & n = 3 years Using the present value of an annuity table, the factor is $1,000 × = $2, The consecutive equal payment amount is $1,000. i = 10% & n = 3 years Using the present value of an annuity table, the factor is $1,000 × = $2,486.90
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