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PRDV201: Accounting Principles I

Unit 8: Liability Reporting   Bill Bowerman and Phil Knight started the athletic company Nike with an initial investment of $1,000 in 1972.  Just 40 years later, Nike is the world’s leader in innovative athletic footwear and apparel, and a multi-billion dollar corporation with retail stores worldwide and over 30,000 employees.  How do you grow a $1,000 investment into billions of dollars?  In some cases, the growing company has to take on debt by securing bank loans or issuing bonds to investors.  Taking on these liabilities, a company – especially a new company – can secure the cash it needs to get started or expand its scope.  In this unit, you will learn about liabilities, why they may be helpful for company operations, and when they may signal a larger operational problem.  As with managing personal finances, a company’s ability to meet current financial obligations is a key factor in maintaining finances and even credit score points.  Accordingly, you will examine where liabilities are recorded on financial statements and learn how bonds are priced to attract more investors.

In this unit, focus on the differences between current and long-term liabilities, and what they may convey about a company’s ability to meet debt obligations.  Pay close attention to the way bonds are priced and what this can mean for the purchaser.

Unit 8 Time Advisory
This unit should take approximately 3 hours to complete.

☐    Subunit 8.1: 1 hour

☐    Subunit 8.2: 0.5 hours

☐    Subunit 8.3: 1.5 hours

Unit8 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Distinguish between current and long-term liabilities. - Explain how bond prices are calculated. - Identify if a bond is issued at par, at a discount, or at a premium.

8.1 What Are Current Liabilities?   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 9: Receivables and Payables” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 9: Receivables and Payables” (PDF)

 Instructions: If you have not already saved this document to your
desktop, then click on the link above to download the PDF.  Read the
section titled “Current Liabilities,” beginning on page 406 through
page 413.  As you read, take notes on the different types of
liabilities that exist and how they are distinguished from each
other.  By the end of this reading, you should be able to identify
at least 3 types of liabilities and explain where they are recorded
on the business’s financial statements.  

 Reading this chapter and taking notes should take approximately 25
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).
  • Lecture: Dr. Larry Walther’s Principles of Accounting: “Notes Payable” Link: Dr. Larry Walther’s Principles of Accounting: “Notes Payable” (YouTube)

    Instructions: Please click on the link above and watch the lecture.  As you watch the lecture, take notes on the definition of a note and why a company would use notes in their day-to-day operations.  By the end of this lecture, you should be able to identify how notes are recorded in journal entries and explain why notes may be an important part of financing for a company.

    Watching this lecture and taking notes should take approximately 20 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Activity: Dr. Larry Walther’s Principles of Accounting: “Chapter 12: Current Liabilities and Employer Obligations: Current Liability Practice Worksheet” Link: Dr. Larry Walther’s Principles of Accounting: “Chapter 12: Current Liabilities and Employer Obligations: Current Liability Practice Worksheet”(PDF)

    Instructions: Please click on the link above and carefully read the directions before completing the worksheet.  Identify what conditions are needed for a liability to be classified as a current liability.  If you have difficulty completing the worksheet, refer back to the lecture and reading assigned in this subunit.

    Reviewing your previous readings and completing this worksheet should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

8.2 What Are Long-Term Liabilities?   - Lecture: YouTube: Susan Crosson’s “Long-Term Liabilities - Types” Link: YouTube: Susan Crosson’s “Long-Term Liabilities - Types” (YouTube)

 Instructions: Please click on the link above and watch the lecture,
which outlines how long-term liabilities are defined.  By the
completion of this lecture, you should be able to explain the
difference between current liabilities and long-term liabilities as
well as give an example of a long-term liability.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Lecture: Dr. Larry Walther’s Principles of Accounting: “Long-Term Notes” Link: Dr. Larry Walther’s Principles of Accounting: “Long-Term Notes” (YouTube)

    Instructions: Please click on the link above and watch the lecture.  As you watch the lecture, take notes on the definition of a long-term note.  By the end of this lecture, you should be able to distinguish between a current note and a long-term note as well as give an example of a long-term note and why a company would use them.

    Watching this lecture and taking notes should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Lecture: YouTube: Susan Crosson’s “Long-Term Liabilities – Bond Types” Link: YouTube: Susan Crosson’s “Long-Term Liabilities – Bond Types” (YouTube)

    Instructions: Please click on the link above and watch the lecture, which outlines how the different bond types are defined.  Remember bonds are a type of long-term liability.  In the next subunit, you will learn all about bonds and bond pricing.  By the completion of this lecture, you should be able to explain what a bond is in general terms and name at least two different types of bonds and their characteristics.

    Watching this lecture and taking notes should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

8.3 Bonds   - Reading: Dr. Larry Walther’s Principles of Accounting: “Chapter 13: Long-Term Obligations” Link: Dr. Larry Walther’s Principles of Accounting: “Chapter 13: Long-Term Obligations” (HTML)

 Instructions: Please click on the link above and read the “Bonds
Payable” section of this chapter.  As you read, take notes on the
different types of bonds.  By the end of this reading, you should be
able to identify when a company would use one bond and when a
company would use a different type of bond.  

 Reading this chapter and taking notes should take approximately 15
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

8.3.1 Bond Pricing   - Lecture: YouTube: Susan Crosson’s “Long-Term Liabilities – Bond Price” Link: YouTube: Susan Crosson’s “Long-Term Liabilities – Bond Price” (YouTube)

 Instructions: Please click on the link above and watch the lecture,
which outlines how bond prices are determined.  By the completion of
this lecture, you should be able to explain the different types of
bond pricing that exist and why a company would use each bond price
type.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Lecture: Khan Academy’s “Introduction to Bonds” Link: Khan Academy’s “Introduction to Bonds” (YouTube)

    Instructions: Please click on the link above and watch the video lecture, which continues an introduction to bonds and interest calculations.  By the end of this lecture, you should be able to calculate coupon payments of a bond.

    Watching this lecture and taking notes should take approximately 20 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

8.3.2 When Are Bonds “on Par”?   - Lecture: Dr. Larry Walther’s Principles of Accounting: “Bonds Premiums and Discounts” Link: Dr. Larry Walther’s Principles of Accounting: “Bonds Premiums and Discounts” (YouTube)

 Instructions: Please click on the link above and watch the entire
lecture.  As you watch the lecture, take notes on the three types of
bond pricing.  By the end of this lecture, you should be able to
distinguish between the three different types of bond pricing and
provide an example for each.  

 Watching this lecture and taking notes should take approximately 20
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

8.3.3 When Are Bonds “at a Premium” or “at a Discount”?   - Lecture: Khan Academy’s “Relationship between Bond Prices and Interest Rates” Link: Khan Academy’s “Relationship between Bond Prices and Interest Rates” (YouTube)

 Instructions: Please click on the link above and watch the video
lecture, which summarizes how bond prices are related to the
interest promised by an issued bond.  By the end of this lecture,
you should be able to determine if a bond is issued at a premium,
discount, or at par.  

 Watching this lecture and taking notes should take approximately 25
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.