Liabilities, Bonds and the Time Value of Money: every key term you need (+ practice quiz)
25 flashcard terms for Financial Accounting Topic 7, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
An obligation expected to be settled within one year or the operating cycle, whichever is longer, using current assets or by creating another current liability. Its size drives short-run solvency measures.
Long-term liability
An obligation not due within the coming year, such as bonds or a multi-year loan. The portion coming due in the next twelve months is reclassified as current at each reporting date.
Accounts payable
Short-term amounts owed to suppliers for goods and services bought on open account. They carry no explicit interest, which makes stretching them a tempting but reputationally costly source of funding.
Note payable
A formal written obligation with a stated principal, interest rate and maturity. Interest accrues with time, so period-end adjustments are needed whenever payment dates do not align with the year end.
Warranty liability
Estimated future repair and replacement cost for products already sold. It is recorded in the period of sale because the promise was part of what the customer paid for.
Contingent liability
A potential obligation depending on a future event such as a lawsuit outcome. It is accrued when the loss is probable and estimable, and merely disclosed when it is only reasonably possible.
Payroll withholdings
Amounts deducted from employee gross pay for taxes and benefits. The employer holds them as a liability until remitted, so gross wage expense exceeds the cash actually paid to staff.
Time value of money
A dollar today is worth more than a dollar later because it can be invested. Every long-term liability measurement rests on this idea, which is why obligations are stated at present value.
Present value
The amount today that is equivalent to a specified future payment, found by discounting at an appropriate rate. Higher rates or longer horizons both push the present value down.
Future value
The amount an investment grows to by a later date given a rate and a compounding frequency. It is the mirror image of discounting and answers what a deposit becomes over time.
Compounding
Earning return on prior returns as well as on the original principal. More frequent compounding raises the effective annual rate above the quoted nominal rate for the same stated percentage.
Discount rate
The rate used to convert future amounts into present equivalents. For a debt it reflects the return investors demand for the risk and term, and it is what bond pricing is built on.
Annuity
A series of equal payments at equal intervals. Bond interest coupons form an annuity, which is why bond pricing combines an annuity value with a single lump sum value.
Present value of an ordinary annuity
The value today of equal end-of-period payments discounted at the market rate. Payments at the beginning of each period are worth more, since each is discounted for one period less.
Bond
A debt security selling a fixed stream of interest plus repayment of face amount at maturity. Issuing bonds raises large sums from many lenders without giving up any ownership control.
Face value
The principal repaid at maturity, also the base on which each interest payment is computed. It is fixed in the contract and does not change when the bond's market price moves.
Stated interest rate
The contractual rate printed on the bond that determines the cash coupon. It is set when the bond is drafted and cannot adjust when market conditions move before issuance.
Market interest rate
The return investors currently demand for comparable risk and maturity. Its relationship to the stated rate determines whether the bond sells above, at, or below its face amount.
Bond issued at a discount
When the market rate exceeds the stated rate, investors pay less than face value. Interest expense then exceeds the cash coupon, because the discount is written off across the bond's life.
Bond issued at a premium
When the stated rate exceeds the market rate, investors pay more than face value. Interest expense is then less than the cash coupon as the premium is absorbed over the term.
Carrying amount of bonds
Face value plus unamortized premium or less unamortized discount. It moves toward face value each period and equals face value exactly on the maturity date.
Effective-interest amortization
Interest expense equals the carrying amount times the market rate at issuance, and the difference from the cash coupon adjusts the carrying amount. This gives a constant rate of return over the term.
Straight-line amortization of bond discount
Equal write-off of the discount each period, permitted only when results do not differ materially from the effective-interest computation. It produces constant expense but a drifting effective rate.
Early retirement of debt
Repurchasing bonds before maturity. The difference between the cash paid and the carrying amount is a gain or loss recognized immediately in income rather than spread over remaining periods.
Times interest earned
Income before interest and tax divided by interest expense, showing how many times earnings cover the fixed charge. Lenders watch it because a thin ratio signals fragility if profits dip.