CH. 3 ANALYZING FINANCING ACTIVITIES

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CH. 3ANALYZING FINANCING ACTIVITIES
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Preview

• Financing liabilities all forms of credit
  financing.
• Operating liabilities obligations that arise
  from operations.
• Liabilities are commonly reported as either
  current or noncurrent.

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Analyzing Liabilities

• We need assurance that companies account for them
  (includes disclosure of their amounts and due
  dates).
• Many companies attempt to reduce the amount of
  liabilities reported on their financial
  statements.
• Certain liabilities are more apt to be
  misclassified or inadequately described.

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Leases

• Capital lease Operating Lease
• Off-balance-sheet financing neither the leased
  asset nor its corresponding liability are
  recorded on the balance sheet when a lease is
  accounted for as an operating lease even though
  many of the benefits and risks of ownership are
  transferred to the lessee.

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Leases

• Over lease term, total expense of operating and
  capital lease is identical. But, capital lease
  lease reports more expense in the earlier years
  and less expense in later years.

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Analyzing Leases

• Impact of operating leases
• Understate liabilities gt inflate solvency ratios
• Understate assets gt inflate ROI
• Delay recognition of expenses
• Understate current liabilities gt inflate current
  ratio and other liquidity measures
• Understate operating income and interest expense
  gt inflate interest coverage ratios

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Postretirement Benefits

• Costs of providing postretirement benefits be
  recognized when the employee is in active
  service, rather than when the benefits are
  actually paid.
• Defined benefit plans Defined contribution
  plans.

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Analyzing Postretirement Benefits

• Reconciling economic and reported numbers
• Adjusting the income statement and balance sheet
• Evaluate actuarial assumptions

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Contingencies and Commitments

• Contingent liabilities potential claims on a
  companys resources.
• Commitments potential claims against a companys
  resources due to future performance under
  contract.

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Off-Balance-Sheet Financing

• Operating leases
• Special Purpose Entities (SPEs)

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Shareholders Equity

• Capital stock
• Explanation of changes in the number of capital
  shares
• Evaluation of the options held by others that
  when exercised cause the number of shares
  outstanding to increase and thus dilute ownership
• Retained Earnings
• Restrictions imposed on distributions of retained
  earnings

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Analyzing Contingent Liabilities

• Management estimates
• Analyze note disclosures for all loss (and gain)
  contingencies.
• Reserve for future losses gt big bath