1、This weeks individual HW Page 197 of In-class exercises ONLY1The Qualities of a Good Analyst Report FormatProfessional layoutsSmoothly divided into sectionsSections logically structured and connectedClearly worded2The Qualities of a Good Analyst Report Contents1.Summary of analysis2.Introduction of
2、covered company2.1 Industry analysis2.2.Company analysis3.Quality of earnings analysis4.Profitability analysis5.Growth analysis 6.Earnings forecasts7.Risk analysis8.Valuation9.Recommendation3Grading Guideline1.The format and contents of the report2.The format and contents of the presentation3.The pr
3、esenters 精神面貌4.The way to handle questions5.English is lesser an issue6.I accept challenges to grading,but reserve the rights to make the final judgment!6Obligation A social,legal,or moral requirement,such as a duty,contract,or promise that compels one to follow or avoid a particular course of actio
4、n.()7Liability Recognition An obligation is a liability if:1.It involves a probable future sacrifice of resources and the amount of the sacrifice can be reasonably precisely measured.2.There is little or no discretion to avoid the transfer3.The transaction or event that gives rise to the obligation
5、has already occurred A mutual promise(or executory contract)is not a liability because of item 3 above.This is,signing a contact is not a transaction.An example of a mutual promise is the customer promises to pay and the firm promises to deliver goods at a date.If this promise is in the form of a le
6、gal contract,it may give both parties rights but the rights are not yet considered assets and the obligations are not yet considered liabilities,because the transaction specified in the promises has not yet occurred.8Classifications of Accounting Liabilities by Degree of Certainty on repayment dates
7、 and repayment amountsRead examples 1-9 on page 478-450 of Stickney and Weil9Accounting Items:Recognized versus DisclosedAccounting items whose economic impact on the firm can be measured with reasonable precision,are recognized in the I/S or B/S,such as the liabilities to the left of the dividing l
8、ine in the previous slide.Accounting items whose economic impact on the firm can NOT be measured with reasonable precision,are sometimes disclosed in annual reports,such as contingency liabilities to the right of the dividing line.10Contingencies:Potential Liabilities Contingent liabilities are pote
9、ntial liabilities related to past events.The more probable the potential to become a legal obligation,the greater the rationale for recognizing it as a liability.Probability of a potential liability is very difficult to measure.In general,an obligation should be recognized as a liability if it is pr
10、obable that the firm will have make future sacrifices of resources.Of course,the word probable is also difficult to measure.Contingencies are normally disclosed in footnotes.But,FASB and IASC require the recognition of a loss and a contingent liability,when,given past events,It is probable that an a
11、sset has been impaired or a liability incurred,and The amount of the loss can be reasonably estimated.11Liability Valuation In general,liabilities are presented on the balance sheet at the present value of payments needed to fulfill the obligation.Present value refers to discounting the nominal paym
12、ents by an interest rate appropriate for the firm.Discounting is a mathematical computation whereby future flows are reduced to reflect the concept that money has time value.(See Appendix A at the back of the text.)Current liabilities are not generally discounted because of the short period of time
13、until they are to be resolved.The short period of time would cause the amount of any discount to be small enough to be considered immaterial.12Liability Classification Liabilities are separated into current and noncurrent based on the length of time that will elapse before the obligation must be ful
14、filled.Current liabilities are obligations that must be fulfilled within the current operating cycle which is almost always one year.Noncurrent liabilities are obligations that need not be fulfilled within the current operating cycle.Obligations calling for periodic payments such as a mortgage may b
15、e noncurrent but have a current portion;that is,the payments due within the operating cycle are current but the remaining payments are noncurrent.13Current Liabilitiesa.Accounts payableb.Short-term notes and interest payablec.Wages,salaries and other payroll itemsd.Income taxes payablee.Deferred per
16、formance liabilities:advances from customersf.Deferred performance liabilities:product warranties14Accounts Payable to Creditors Business firms often buy and sell to each other on credit.Amounts owed to other businesses for services or goods are called trade accounts payable.Typically these are shor
17、t-term liabilities.Typically,a payment grace period is allowed before these obligations must be fulfilled(or paid).A grace period may be 30 days or more.Because such a grace period represents interest-free borrowing,the prudent firm takes advantage by paying exactly on time but not before.Rarely,a f
18、irm is more aggressive and always pays late,but a late charge may be assessed and such a firm will develop a reputation which may affect the terms they can negotiate.15Short-Term Notes and Interest Payable A note payable is a form of short term borrowing.The note accrues interest expense and interes
19、t payable at a stated rate over time.The total amount of the note and the interest are mostly due as one payment upon maturity of the note.16Wages,Salaries and Other Payroll Items Employers pay workers directly in cash and in the form of benefits -this gives rise to payroll expense For example,vacat
20、ion time may be earned over time.The firm pays taxes on this benefit as it is earned and a liability to the worker is recorded.When vacation is taken,the liability is reduced.Employers also pay some taxes that relate to the workers-these are tax expenses.17Income Taxes PayableU.S.and most countries
21、tax business income.Corporations are taxed directly.Partnerships and sole proprietorships are not taxed but the income is assigned to the partners or proprietor who must then pay the tax.Income taxes are assumed to accrue;that is,the income tax liability increases as the firm earns income.Tax rules
22、also call for periodic payments to the IRS.So that business income taxes are estimated and paid throughout the year.The annual filing deadline(March 15)is a reporting deadline and not a payment deadline;payment in many cases is required earlier.In addition,GAAP allows for differences between income
23、tax expense(an accrual concept)and income tax liability(the amount owed to IRS).This is covered in a later chapter under deferred tax accounting.18Deferred Performance Liabilities:Advances from CustomersA mutual promise(the customer promises to pay and the firm promises to deliver)is not recorded.Ho
24、wever,if the customer pays in advance,then there is an obligation that arises and the firm records this as an increase in an asset(cash)and an increase in a liability(advances from customers,unearned revenues).The obligation is for the firm to either fulfill its promise to deliver goods or services
25、within the specifications of the contract or return the cash.An example is a magazine subscription which is typically paid in advance.The subscription is an obligation to produce and deliver the magazine.When a magazine is delivered,the obligation can be reduced(debited)and revenue can be recognized
26、(credited)because it is then earned.19Deferred Performance Liabilities:Product WarrantiesA warranty is a promise to repair or replace the good but is limited by time.When goods with a warranty are sold:revenue,the warranty expense,and the warranty liability are recognized.The amount of the liability
27、 must be estimated.When a claim is made,the warranty liability is reduced(debited)and what is given to fulfill the claim(cash or new goods or parts and labor)are credited.Any unused portion of the warranty expires at the end of the warranty period reducing the liability and creating a gain.20Long-Te
28、rm Liabilitiesa.Bondsb.Mortgages21Procedures for Recording Long-Term LiabilitiesWhereas short term liabilities may be paid at maturity,long-term liabilities are more commonly paid in installments.Also,the general rule is that long-term liabilities are recorded at the present value of the payments.Th
29、e accountant distinguishes between payment of the liability(the principle)and payment of interest(an expense of financing).Commonly,the principle,the periodic payments and the interest rates are explicitly stated in the debt contract.If not,then discounted cash flow methods may be used to separate o
30、ut the interest payment.The rate of interest that equated the present value of a given set of periodic payments with the principle is called the internal rate of return or discount rate).If you are confused with this slide,please skip and return after Finishing this chapter.22Long-term Liabilities:I
31、nterest ImputationSome contracts do not explicitly state interest payments,instead the purchase price may include carrying charges.There is no economic concept of an interest-free loan.The interest may not be expressed,but it is there.The IRS agrees and will require the tax payer to calculate intere
32、st payments even if the contract does not specifically state a rate of interest(called implicit or imputed interest).GAAP agrees and requires that long term liabilities be recorded at their present value and that repayments be separated into interest expense and reduction of the liability.Where inte
33、rest rates are not stated,they can be computed using present value methods and using the know payments with An estimate of market value(which becomes the PV),or An estimate of the interest rate for similar debt.If you are confused with this slide,please skip and return after Finishing this chapter.2
34、3Bonds Bonds are debt instruments sold to the investing public.Some bonds carry no collateral（担保）and are called debenture bonds.Bonds backed by collateral are called collateral trust bonds.Bonds that can be converted to common shares of the issuing company are called convertible bonds.Bonds are reco
35、rded as a long-term liability.24How to define a bond?1.A piece of paper2.Face value(or par value):for example$1,0003.A nominal（名义上的）（名义上的）interest rate:for example 10%(the rate is annual rate if not stated otherwise.Semiannual rate is half of it at 5%).4.Duration:number of years before the principle
36、 is due,for example,5 years5.Frequency of nominal interest payment in a year:annually pays once a year;semiannually pays twice a year(so a five-year bond would have ten semiannual periods)25How to define a bond?The definition of a bond is the pattern of its cash payments to the bondholders,nothing e
37、lse(STOP:This is the first important concept in bond accounting,you must understand before you go on)The bond in the previous slide is defined as:This bond is defined by ten$50 payments of nominal interests every half a year(semiannually);and a payment of par value$1,000 at the end of the fifth year
38、.$50$50$50$50$50$50$50$50$50$50$1,00026How much will this bond sell for?Like any investment vehicles,the price of a bond is the net present value of its future cash payments(NPV)The bond price and the par value of the bond are totally two different things,they do not have to be the same.The previous
39、 bond can be sold more than or less than the par value$1,000.(STOP:This is the second important concept in bond accounting,you must understand before you go on)I assume you have learnt NPV calculations,and The use of present value tables.27How much will this bond sell for?The rate of return that we
40、use to discount the cash flows to get NPV of the bond is called discount rate（折现率）（折现率）.Discount rate is decided,at the time of the bond sale,by the risk associated with the bond.If it is more(less)likely for the bond seller to default in the future,the discount rate will higher(lower).Microsofts bo
41、nd discount rate may be 4.8%,while a small food chains bond discount rate has to be 10.7%.Discount rate has nothing to do with the bonds nominal interest rate;nominal interest rate only determines the cash payments($50 each in this case).(STOP:This is the third important concept in bond accounting,y
42、ou must understand before you go on)28How much will this bond sell for?-sold at parLet us assume the previous bonds discount rate is 10%(this 10%has nothing to do with the 10%nominal interest rate).Then the bond price is=50/(1+5%)+50/(1+5%)2+50/(1+5%)3+50/(1+5%)4+50/(1+5%)10+1000/(1+5%)10=$1,000 Why
43、 we use 5%discount rate not the 10%?Because the$50 nominal interest payment is for half a year.We use 10 periods because five years make up ten half-a-years.When bond price is equal to bond face value,we say it is sold at par.You should not rely on any calculator or tables to compute the bond price
44、in the above equation.When nominal interest rate(5%)is the same as discount rate(5%),the bond is sold at par value.(STOP:This is the fourth important concept in bond accounting,you must understand before you go on)29How much will this bond sell for?-sold at premiumLet us assume the previous bonds di
45、scount rate is 8%(that is,it is less riskier than in the previous slide to lend to the company so a lower discount rate is used).Then the bond price is=50/(1+4%)+50/(1+4%)2+50/(1+4%)3+50/(1+4%)4+50/(1+4%)10+1000/(1+4%)10=$50*8.11081+$1,000*0.675562=$1,0811 Stickney and Weil page 855,4%at n=102 Stick
46、ney and Weil page 853,4%at n=10Premium=$1,081 1,000=$81When bond price is more than bond par value,we say it is sold at premium.30How much will this bond sell for?-sold at discountLet us assume the previous bonds discount rate is 12%(that is,it is more riskier than in the previous two slide to lend
47、to the company so a higher discount rate is used).Then the bond price is=50/(1+6%)+50/(1+6%)2+50/(1+6%)3+50/(1+6%)4+50/(1+6%)10+1000/(1+6%)10=$50*7.36009*+$1,000*0.55839*=$926*Stickney and Weil page 855,6%at n=10*Stickney and Weil page 853,6%at n=10Discount=$1,000 926=$74When bond price is less than
48、 bond par value,we say it is sold at discount.31How much will this bond sell for?-summarySold at premiumSold at parSold at discountNominal Interest rate10%10%10%Discount rate8%10%12%Bond Price(cash received by the bond seller)$1,081$1,000$826Understand price difference-technicalIn the bond price equ
49、ation,compare to sold at par,the numerator is the same,but denominator is smaller,then the result gets largerIn the bond price equation,compare to sold at par,the numerator is the same,but denominator is larger,then the result gets smallerUnderstand price difference-intuitiveWhen the market demands
50、8%(discount rate,rate of return)from the bond seller,the bond seller pays cash at 10%every year.So this bond is worth more than the par value.When the market demands 10%(discount rate,rate of return)from the bond seller,the bond seller pays cash at 10%every year.So this bond is worth its par value.W
