Featured Entry

MANAGING PROJECTS

-
Projects represent nonroutine business activities that often have long-term strategic ramifications for a firm. In this chapter, we examined how projects differ from routine business activities and discussed the major phases of projects. We noted how environmental changes have resulted in increased attention being paid to projects and project management over the past decade. In the second half of the chapter, we introduced some basic tools that businesses can use when planning for and controlling projects. Both Gantt charts and network diagrams give managers a visual picture of how a project is going. Network diagrams have the added advantage of showing the precedence between activities, as well as the critical path(s). We wrapped up the chapter by showing how these concepts are embedded in inexpensive yet powerful software packages such as Microsoft Project. If you want to learn more about project management, we encourage you to take a look at the Web site for the Proj...
2 comments

Long-Term Liabilities

-
CONCEPTUAL
Notes repaid over a period of time are called installment notes and usually follow one of two payment patterns: (1) decreasing payments of interest plus equal amounts of principal or (2) equal total payments. Mortgage notes also are common. Interest is allocated to each period in a note’s life by multiplying its beginning–period carrying value by its market rate at issuance. If a note is repaid with equal payments, the payment amount is computed by dividing the borrowed amount by the present value of an annuity factor (taken from a present value table) using the market rate and the number of payments.
The basic concept of present value is that an amount of cash to be paid or received in the future is worth less than the same amount of cash to be paid or received today. Another important present value concept is that interest is compounded, meaning interest is added to the balance and used to determine interest for succeeding periods. An annuity is a series of equal payments occurring at equal time intervals. An annuity’s present value can be computed using the present value table for an annuity (or a calculator).
Issuers and buyers of debt record the interest accrued when issue dates or accounting periods do not coincide with debt payment dates.
A lease is a rental agreement between the lessor and the lessee. When the lessor retains the risks and rewards of asset ownership (an operating lease), the lessee debits Rent Expense and credits Cash for its lease payments. When the lessor substantially transfers the risks and rewards of asset ownership to the lessee (a capital lease), the lessee capitalizes the leased asset and records a lease liability. Pension agreements can result in either pension assets or pension liabilities.
ANALYTICAL
Bond financing is used to fund business activities. Advantages of bond financing versus stock include (1) no effect on owner control, (2) tax savings, and (3) increased earnings due to finansial leverage. Disadvantages include (1) interest and principal payments and (2) amplification of poor performance.
Certain bonds are secured by the issuer’s assets; other bonds, called debentures, are unsecured. Serial bonds mature at different points in time; term bonds mature at one time. Registered bonds have each bondholder’s name recorded by the issuer; bearer bonds are payable to the holder. Convertible bonds are exchangeable for shares of the issuer’s stock. Callable bonds can be retired by the issuer at a set price. Debt features alter the risk of loss for creditors.
Both creditors and equity holders are concerned about the relation between the amount of liabilities and the amount of equity. A company’s financing structure is at less risk when the debt-to-equity ratio is lower, as liabilities must be paid and usually with periodic interest.
PROCEDURAL
When bonds are issued at par, Cash is debited and Bonds Payable is credited for the bonds’ par value. At bond interest payment dates (usually semiannual), Bond Interest Expense is debited and Cash credited—the latter for an amount equal to the bond par value multiplied by the bond contract rate.
Bonds are issued at a discount when the contract rate is less than the market rate, making the issue (selling) price less than par. When this occurs, the issuer records a credit to Bonds Payable (at par) and debits both Discount on Bonds Payable and Cash. The amount of bond interest expense assigned to each period is computed using the straight-line method.
Bonds are issued at a premium when the contract rate is higher than the market rate, making the issue (selling) price greater than par. When this occurs, the issuer records a debit to Cash and credits both Premium on Bonds Payable and Bonds Payable (at par). The amount of bond interest expense assigned to each period is computed using the straight-line method. The Premium on Bonds Payable is allocated to reduce bond interest expense over the life of the bonds.
Bonds are retired at maturity with a debit to Bonds Payable and a credit to Cash at par value. The issuer can retire the bonds early by exercising a call option or purchasing them in the market. Bondholders can also retire bonds early by exercising a conversion feature on convertible bonds. The issuer recognizes a gain or loss for the difference between the amount paid and the bond carrying value.
Bonds are issued at a discount when the contract rate is less than the market rate, making the issue (selling) price less than par. The amount of bond interest expense assigned to each period, including amortization of the discount, is computed using the effective interest method.
Bonds are issued at a premium when the contract rate is higher than the market rate, making the issue (selling) price greater than par. The amount of bond interest expense assigned to each period, including amortization of the premium, is computed using the effective interest method.
Guidance Answers to Decision Maker
Entrepreneur
This is a “present value” question. The market interest rate (10%) and present value ($3,000) are known, but the payment required two years later is unknown. This amount ($3,630) can be computed as $3,000 x 1.10 x 1.10. Thus, the sale price is $3,630 when no payments are received for two years. The $3,630 received two years from today is equivalent to $3,000 cash today.
Bond Investor
The debt-to-equity ratio for the first company is 0.2 ($350,000/$1,750,000) and for the second company is 1.2 ($1,200,000/$1,000,000), suggesting that the financing structure of the second company is more risky than that of the first company. Consequently, as a buyer of unsecured debenture bonds, you prefer the first company (all else equal).
Bond Rater
Bonds with longer repayment periods (life) have higher risk. Also, bonds issued by companies in finansial difficulties or facing higher than normal uncertainties have higher risk. Moreover, companies with higher than normal debt and large fluctuations in earnings are considered to be higher risk. Discount bonds are more risky on one or more of these factors.

Comments

Post a Comment

Populer

OPERATIONS AND SUPPLY CHAIN STRATEGIES

-
The operations and supply chain areas are important providers of value in any organization. To ensure that managers make sound operations and supply chain decisions, firms must develop strategies for these functions that are tied to the overall business strategy. This chapter has presented a top-down model of the strategic planning process, with particular attention to the concepts of value, competitive advantage, and core competency. In the second half of the chapter, we defined the major operations and supply chain decision variables, outlined the four generic performance dimensions (quality, time, flexibility, and cost), and discussed the need to make trade-offs between these key dimensions. We showed how order winner and order qualifier information can help managers understand exactly what their customers demand, so they can make trade-offs in a logical fashion. We ended the chapter with a discussion of the four stages of alignment in operations and supply chain strategy, sho...
Read more

MANAGING QUALITY

-
As an area of intense business interest, quality is here to stay. Operations and supply chain personnel in particular need to be familiar with the major quality topic areas, including the different philosophical perspectives on quality and the tools used to manage quality levels on a day-to-day basis. In this chapter, we gave you a solid introduction to quality topics, ranging from high-level discussions of quality issues to detailed descriptions of tools and techniques. We started by defining quality and describing a total cost of quality model. We then presented an overview of total quality management (TQM), as well as a section on statistical quality control (SQC). We ended the chapter with a discussion of how organizations manage quality across the supply chain and some of the issues they face. We encourage you not to let your quality education end here. The American Society for Quality ( www.asq.org ), the Juran Institute ( www.juran.com ), the W. Edwards Deming Institute ( www....
Read more

INTRODUCTION to OPERATIONS and SUPPLY CHAIN MANAGEMENT

-
Operations and supply chains are pervasive in business. Every organization must provide a product or service that someone values. This is the primary responsibility of the operations function. Furthermore, most organizations do not function independently but find that their activities are linked with those of other organizations through supply chains. Careful management of operations and supply chains is, therefore, vital to the long-term health of nearly every organization. Because operations and supply chain activities cover everything from planning and control activities to sourcing and logistics, there are numerous career opportunities for students interested in the area. Trends in e-commerce and global competition, as well as the growing importance of maintaining good relationships with other supply chain partners, will only increase these opportunities. Fortunately, there are many professional organizations, including APICS, CSCMP, and ISM, that cater to the career development ...
Read more

Internal Analysis: Resources, Capabilities, and Core Competencies

-
This chapter demonstrated various approaches to analyzing the firm’s internal environment . Differentiate among a firm’s resources, capabilities, core competencies, and activities. Core competencies are unique, deeply embedded, firm-specific strengths that allow companies to differentiate their products and services and thus create more value for customers than their rivals, or offer products and services of acceptable value at lower cost. Resources are any assets that a company can draw on when crafting and executing strategy. Capabilities are the organizational and managerial skills necessary to orchestrate a diverse set of resources to deploy them strategically. Activities are distinct and fine-grained business processes that enable firms to add incremental value by transforming input into goods and services. The compare and contrast tangible and intangible resources . Tangible resources have physical attributes and are visible. Intangible resources have...
Read more

BUSINESS PROCESS

-
Although the term business processes has been in the management lexicon for years, not all organizations clearly understand the importance of business processes and their effects on operations and supply chain performance. In this chapter, we defined the concept of business processes and showed how the business process perspective is different from the traditional, functionally oriented view of business. Business processes change the focus from “How is the business organized?” to “What does the business do?” Fortunately, practitioners and theorists continue to develop various tools and approaches for managing business processes. In this chapter, we described two process mapping approaches and demonstrated how they can be used. We also spent considerable time talking about various approaches to managing and improving business processes, including performance measurement and benchmarking, the Six Sigma methodology, and continuous improvement tools. We concluded the chapter with a discu...
Read more