Lecture Three: January 21
Case study due next week!
*These capital assets are not depreciated or amortised: Goodwill and land
*$12000 for 5 years – residual is 1200. If 40% declining balance what is depreciation expense in 08?
*120,000 for 5 years – residual is 12,000. If straight line, depreciation is 21,600 and accumulated
depreciation is 64,800.
o Expected it will be satisfied within 12 months
o Accounts payable, wages payable, unearned revenue, etc.
o Expected it will take more than 12 months to pay off
o What do we have to pay in the next 12 months? That goes into current liabilities
o “Current portion of long term debt” this bit is the next 12 months
o May not know the amount or if you even have a liability, but you may have it
o You think you might have it, but you’re not sure of timing or amounts.
o Principle of conservatism – put in the accounting statement if there is a probability of
there being a claim on our economic resources
I.e. if you think you may be sued
Liabilities and GAAP
Three characteristics of a liability
o Requires the sacrifice or use of resources
o Is unavoidable
o Results from past transactions & economic events
Value and present value
o Exception – current liabilities
o Segregated by main class or category
o Current and long-term liabilities
Time value of money
o Future value of a specified amount o Present value of a specified amount
o Present value of an annuity
o Future value of an annuity
Why would we want to know what these values are?
o $100 on January 1 or $100 on February 28h
o $100 on January 1 or $200 on February 28
How do you calculate these values?
Future value of money
Future value of cash flows
o Amount of money you will receive in the future by investing a specified amount today at
a specified interest rate
o Great aunt leaves you $5000. If you invest at 4%, what is the future value?
o F.V = 5000 * (1+i)
i = interest rate, n = number of years
o 5000 * (1 + 0.4)
o 5000 * 1.125
o *You will be given the interest rate
o *These numbers were slightly rounded. This makes calculations much better
o *Also just use dollars – 50 cents and up.
Present value of cash flows
o The value of money that will be received at some point or points in the future
o What is the value of $1,500 today if Anne agrees to pay it to me in 3 years -assume i=5%
o P.V = 1500 * (1/(1+i)
o 1500 * (1/1.05)
o 1500 * (1/1.157625) professor made this 1.158
o 1500 * .864
o *If you’re going to get $1,500 three years from now, the amount you get now is less
o *On the tests, you have to know how to use the formula, but the time frame will be
compressed so the question doesn’t make you hate this class
Present value of an annuity
o The value today of a series of cash flows (money) received or paid at equally spaced
intervals in the future
o For example:
Your trust fund payments - $900 annually for 3 years with a discount rate is 3%
Page 439 table 9-4
P.V = 900 * 2.829
*Midterm or final will actually be given the factor *Interested amount should be less than just 900 * 3 years
*Use this to figure out financing recommendations
Lease payments - $8,000 annualy