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Lecture Financial accounting (7/e): Chapter 10 - Robert Libby, Patricia A. Libby, Daniel G. Short

Chapter 10 - Reporting and interpreting bonds. After studying this chapter, you should be able to: Describe the characteristics of bonds, report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio, report bonds payable and interest expense for bonds sold at a discount, report bonds payable and interest expense for bonds sold at a premium, analyze the debt-to-equity ratio, report the early retirement of bonds. | Reporting and Interpreting Bonds Chapter 10 Chapter 10: Reporting and Interpreting Bonds Understanding the Business The mixture of debt and equity used to finance a company’s operations is called the capital structure: Debt - funds from creditors Equity - funds from owners Capital structure is the mixture of debt and equity a company uses to finance its operations. Almost all companies employ some debt in its capital structure. Bonds are securities that corporations and governmental units issue when they borrow large amounts of money. Large corporations need to borrow billions of dollars, which makes borrowing from individual creditors impractical. Instead, these corporations issue bonds to raise debt capital. Bonds can be traded on established exchanges that provide liquidity to bondholders. The liquidity of bonds offers an important advantage to corporations. By issuing more liquid debt, corporations can reduce the cost of long-term borrowing. Characteristics of Bonds Payable Advantages of bonds: Stockholders maintain control because bonds are debt, not equity. Interest expense is tax deductible. The impact on earnings is positive because money can often be borrowed at a low interest rate and invested at a higher interest rate. Disadvantages of bonds: Risk of bankruptcy exists because the interest and debt must be paid back as scheduled or creditors will force legal action. Negative impact on cash flows exists because interest and principal must be repaid in the future. Advantages of bonds include the following: Stockholders maintain control because bonds are debt, not equity. Interest expense is tax deductible. The impact on earnings is positive because money can often be borrowed at a low interest rate and invested at a higher interest rate. Disadvantages of bonds include the following: Risk of bankruptcy exists because the interest and debt must be paid back as scheduled or creditors will force legal action. Negative impact on cash flows exists . | Reporting and Interpreting Bonds Chapter 10 Chapter 10: Reporting and Interpreting Bonds Understanding the Business The mixture of debt and equity used to finance a company’s operations is called the capital structure: Debt - funds from creditors Equity - funds from owners Capital structure is the mixture of debt and equity a company uses to finance its operations. Almost all companies employ some debt in its capital structure. Bonds are securities that corporations and governmental units issue when they borrow large amounts of money. Large corporations need to borrow billions of dollars, which makes borrowing from individual creditors impractical. Instead, these corporations issue bonds to raise debt capital. Bonds can be traded on established exchanges that provide liquidity to bondholders. The liquidity of bonds offers an important advantage to corporations. By issuing more liquid debt, corporations can reduce the cost of long-term borrowing. Characteristics of Bonds .