Project Planning

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ACC-400Week 3
Individual Assignment (Exercises)

Resource:Financial Accounting: Tools for Business Decision Making Prepare responses to the following assignment from the e-text:

* Ch. 10: Questions 1, 7, 8, & 19; Brief Exercise BE10-1; and Financial Reporting Problem BYP10-1 * Ch. 11: Ethics Case: BYP11-10

Resources:Financial and Managerial Accounting: The Basis for Business Decisions Prepare responses to the following assignment from the e-text:

Ch. 11: Internet Assignment 11-1
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Problem 10.1
Georgia Lazenby believes a current liability is a debtthat can be expected to be paid in one year. Is Georgiacorrect? Explain.

ANSWER
Yes, Georgia Lazenbyhas the correct idea in her understanding of current liabilities. In accounting, a current liability is a debt or obligation that is expected to be paid off within a year or within the company’s operating cycle, whichever is longer. The current liabilities can be paid from existing current assets or by creating additional current liabilities.

Problem 10.7
(a) What are long-term liabilities? Give two examples.
(b) What is a bond?

ANSWER
a. Long-term liabilities are debts or obligations expected to be paid in more than one year. What differentiates current from long-term liabilities is how long into the future the liability is due. Current liabilities are expected to be settled within a year but long-term liabilities are expected to be settled in a timeframe longer than a year. Examples of long-term liabilities are corporate bonds and notes with maturities greater than one year.

b. A bond is an interest bearing debt security issued with a maturity longer than one year. Bonds can be issued by corporations or governments to raise funds to finance capital needs. The funds are borrowed for a period of time at a fixed interest rate.

Problem 10.8
Contrast these types of bonds:
(a) Secured and unsecured.
(b) Convertible and callable.

ANSWER
(a) The difference between secured and unsecured bonds is the pledging of collateral. With a secured bond the borrower pledges specific assets as collateral; should the borrower default on the debt, title of the collateral assets would be transferred to the lender.With unsecured bonds the borrower pledges no collateral; as they carry more risk, interest charged on unsecured bonds is normally higher than interest charged on secured bonds.

(b) A callable bond, also referred to as a redeemable bond, is one in which the issuer can redeem the bond before its maturity date. Usually bonds that are called prior to their maturity date will pay a premium to the lender (bondholder.) A convertible bond is a corporate bond that gives the bondholder the option of converting it into a predetermined number of shares of common stock.

Problem 10.19
ValentinZukovsky says that liquidity andsolvency are the same thing. Is he correct? If not, howdo they differ?

ANSWER
ValentinZukovsky is mistaken. The terms solvency and liquidity refer to two different things. Solvency is the ability of a corporation or entity to honor its long-term fixed expenses, expand and grow. When a company is insolvent, it cannot continue operations and has to declare bankruptcy.

Liquidity refers to the availability of cash or the ease with which assets can be converted into cash. Liquid assets can be easily converted into cash without a significant loss of value. Liquid assets can be quickly and easily bought and sold. If a company has enough liquidity, it can pay current liabilities as they become due, as well as meet ongoing operating expenses. While solvency is the ability to meet its long-term obligations, liquidity is concerned with immediate cash needs.

There is a relationship between liquidity and solvency though in that companies that lack sufficient liquid assets face solvency issues. If the companydoesn’t have sufficient liquid assets to pay current and long-term liabilities, the company would...
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