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3CHAPTERAnalyzingFinancingActivitiesMcGraw-Hill/Irwin©2004TheMcGraw-HillCompanies,Inc.,AllRightsReserved.Aliabilityisaprobablefuturepaymentofassetsorservicesthatacompanyispresentlyobligatedtomakeasaresultofpasttransactionsorevents.DefinitionLiabilitiesPastPresentFutureBecauseofapastevent......forfuturesacrifices.…thecompanyhasapresentobligation...Current(short-term)LiabilitiesNoncurrent(Long-Term)LiabilitiesObligationswhosesettlementrequiresuseofcurrentassetsortheincurrenceofanothercurrentliabilitywithinoneyearortheoperatingcycle,whicheverislonger.Obligationsnotpayablewithinoneyearortheoperatingcycle,whicheverislonger.LiabilitiesClassificationOperatingLiabilitiesFinancingLiabilitiesObligationsthatarisefromoperatingactivities--examplesareaccountspayable,unearnedrevenue,advancepayments,taxespayable,postretirementliabilities,andotheraccrualsofoperatingexpensesObligationsthatarisefromfinancingactivities--examplesareshort-andlong-termdebt,bonds,notes,leases,andthecurrentportionoflong-termdebtLiabilitiesAlternativeClassificationLiabilitiesDisclosuresforCurrent(Financing)LiabilitiesnCompensatingbalancearrangements,includingthosenotrequiredbylawnBalancesheetsegregationof(1)legallyrestrictedcompensatingbalancesand(2)unrestrictedcompensatingbalancesrelatedtolong-termborrowingarrangementsifbalancesarecomputableatafixedamountLiabilitiesDisclosuresforCurrent(Financing)LiabilitiesnShort-termbankandcommercialpaperborrowings,including:•Commercialpaperborrowingsseparatelylistedinbalancesheet•Weighted-averageinterestrateandtermsseparatelystatedforshort-termbankandcommercialpaperborrowings•Weighted-averageinterestrate,averageoutstandingborrowings,andmaximummonth-endoutstandingborrowingsforshort-termbankdebtandcommercialpapercombinedfortheperiodnDisclosureofamountsandtermsofunusedlinesofcreditforshort-termborrowingarrangements(withamountssupportingcommercialpaperseparatelystated)andofunusedcommitmentsforlong-termfinancingarrangementsLiabilitiesAccounting-BasedLiabilityRestrictions(Covenants)Aim:Safeguardcreditors’investmentsCommonrestrictionsinclude:nDividenddistributionrestrictionsnWorkingcapitalrestrictionsnDebt-to-equityratiorestrictionsnSeniorityofassetclaimrestrictionsnAcquisitionanddivestmentrestrictionsnLiabilityissuancerestrictionsPotentialinformationsources:Liabilityprospectus,annualreport,SECfilings,andcreditorinformationservices(e.g.,Moody’s)LeasesLeasingFactsLease–contractualagreementbetweenalessor(owner)andalessee(userorrenter)thatgivesthelesseetherighttouseanassetownedbythelessorfortheleasetermMLP–minimumleasepayments(MLP)ofthelesseetothelessoraccordingtotheleasecontractLeasesLeaseAccountingandReporting(1)CapitalLeaseAccountingForleasesthattransfersubstantiallyallbenefitsandrisksofownership—accountedforasanassetacquisitionandaliabilityincurrencebythelessee,andasasaleandfinancingtransactionbythelessorAlesseeclassifiesandaccountsforaleaseasacapitalleaseif,atitsinception,theleasemeetsanyoffourcriteria:(i)leasetransfersownershipofpropertytolesseebyendoftheleaseterm(ii)leasecontainsanoptiontopurchasethepropertyatabargainprice(iii)leasetermis75%ormoreofestimatedeconomiclifeoftheproperty(iv)presentvalueofrentalsandotherminimumleasepaymentsatbeginningofleasetermis90%ormoreofthefairvalueofleasedpropertylessanyrelatedinvestmenttaxcreditretainedbylessor(2)OperatingLeaseAccountingForleasesotherthancapitalleases—thelessee(lessor)accountsfortheminimumleasepaymentasarentalexpense(income)LeasesLeaseDisclosureandOff-Balance-SheetFinancingLeaseDisclosureLesseemustdisclose:(1)futureMLPsseparatelyforcapitalleasesandoperatingleases—foreachoffivesucceedingyearsandthetotalamountthereafter,and(2)rentalexpenseforeachperiodanincomestatementisreportedOff-Balance-SheetFinancingOff-Balance-Sheetfinancingiswhenalesseestructuresaleasesoitisaccountedforasanoperatingleasewhentheeconomiccharacteristicsoftheleasearemoreinlinewithacapitallease—neithertheleasedassetnoritscorrespondingliabilityarerecordedonthebalancesheetLeasesFrequencyofCapitalandOperatingLeasesFrequenciesofDifferentLeaseTypes-Lessee55.17%35.83%2.00%7.00%OperatingonlyBothtypesCapitalonlyNeitherLeasesAccountingforLeases–AnIllustrationLeaseFacts•AcompanyleasesanassetonJanuary1,2000--ithasnootherassetsorliabilities•Estimatedeconomiclifeofleasedassetis5yearswithnosalvagevalue--companywilldepreciatetheassetonastraight-linebasisoveritslife•Leasehasafixednon-cancelabletermof5yearswithannualMLPsof$2,505paidattheendofeachyear•Interestrateontheleaseis8%peryearLeasesAccountingforLeases–Illustration(continued)LeaseAmortizationScheduleStraight-linedepreciation$2,000peryear([$10,000-$0]/5years)YearBeg.YearLiabilityInterestandPrincipalComponentsofMLPYear-endLiabilityInterestPrincipalTotal20002001200220032004Totals$10,0008,2956,4544,4662,319$800664517358186$2,525$1,7051,8411,9882,1472,319$10,000$2,5052,5052,5052,5052,505$12,525$8,2956,4544,4662,3190LeasesAccountingforLeases–Illustration(continued)IncomeStatementEffectsofAlternativeLeaseAccountingOperatingLeaseYear20002,505$800$2,000$2,800$20012,505