Liability Criteria Firm has little discretion to avoid claim. Event giving rise to claim has already occurred. Claim can be valued with reasonable precision.

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Liability Criteria Firm has little discretion to avoid claim. Event giving rise to claim has already occurred. Claim can be valued with reasonable precision. Õ Results in “off-balance sheet” liabilities

Current Liabilities Due within one year. Valued at the amount payable. Types: Accounts Payable: suppliers Accrued Expenses: salaries, interest, taxes Short-term Debt: bank debt, commercial paper Current maturities of long-term debt Contingencies: warranties

Present Value Long-term Liabilities are valued at the present value of future payments PV of $1 = $1/(1+r) n r = discount rate n = time to payment Time Value of Money: a dollar today is worth more than a dollar in the future.

Mortgages Payable Borrow at agreed upon interest rate Principal and interest paid periodically = fixed cash payment Interest Expense = outstanding borrowing x interest rate Cash Payment - Interest Expense = Principal Payment

Bonds Payable Borrow from general public: do not agree upon rate in advance of issuance of bonds Bonds have two interest rates: Stated (Coupon) rate: fixed issue rate Effective rate: dynamic market rate

Bonds Payable Issued at Par = at face value Issued at Discount = at less than face value Issued at Premium = at greater than face value Bonds may be issued at amounts other than face value:

Bonds: Par, Premium & Discount Premium: When effective rate is below stated rate u PV of the bond is greater than face value Discount: When effective rate is above stated rate u PV of the bond is less than face value Par: When effective rate is equal to stated rate u PV of the bond is equal to face value

Interest Expense v. Cash Payment: Bonds Interest Expense = effective rate x outstanding borrowing Cash Payment = stated rate x face value Cash Payment - Interest Expense = reduction in Premium (Discount)