Lecture 03 - January 21.docx

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Western University
Business Administration
Business Administration 2257
Baldwin Wallace

Lecture Three: January 21 Case study due next week! Clicker questions: *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? 4800 *120,000 for 5 years – residual is 12,000. If straight line, depreciation is 21,600 and accumulated depreciation is 64,800. Liabilities  Liability: o  Current liability: o Expected it will be satisfied within 12 months o Accounts payable, wages payable, unearned revenue, etc.  Long-term liability: 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  Contingent liability: 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 o Valuation o Recording o Disclosure  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  Disclosure 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?  Compare: o $100 on January 1 or $100 on February 28h st th 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 5625 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) 3 o 1500 * (1/1.05) o 1500 * (1/1.157625)  professor made this 1.158 o 1500 * .864 o 1296 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  2,546  *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
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