Large corporations also have jumped on the bandwagon in recent years by issuing more debt than ever to finance expansion and acquisitions. The tremendous debt service costs associated with corporate borrowing can siphon away a significant portion of a company's operating cash flows.
Consider, for example, DuPont. In the 2005 balance sheet, DuPont reports total liabilities of almost $24 billion in comparison to total stockholders' equity of only approximately $9 billion. The company's heavy reliance on debt financing burdens the company with billions of dollars in debt service costs annually. Notes accompanying DuPont 's recent financial statements reveal management's intent to reduce current debt levels to improve the company's overall financial flexibility. Other major corporations are likely to do the same.
AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:
Account for notes payable and interest expense. |
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Describe the costs and the basic accounting activities relating to payrolls. |
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Prepare an amortization table allocating payments between interest and principal. |
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Describe corporate bonds and explain the tax advantage of debt financing. |
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Account for bonds issued at a discount or premium. |
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Explain the concept of present value as it relates to bond prices. |
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Explain how estimated liabilities, loss contingencies, and commitments are disclosed in financial statements. |
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Evaluate the safety of creditors' claims. |
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Describe reporting issues related to leases, postretirement benefits, and deferred taxes. |
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Define liabilities and distinguish between current and long-term liabilities. |