Week 7 –Liabilities Learning objectives: Understand liability terminology. Cal

Week 7 –Liabilities Learning objectives: Understand liability terminology. Calculate annual ratios for accounts payables. Compare calculated ratios to the nearest competitor and industry average and explore the differences. Analyze current liability accounts Read and understand long-term debt footnote terminology. Calculate and interpret common debt-related ratios. Gain familiarity with environmental matters and accounting for contingencies. Read and interpret disclosures pertaining to current liabilities and contingencies. Concepts 1. What distinguishes a current liability from other liabilities? Current liabilities are liabilities due for payment within one year. 2. Why do companies report current and noncurrent liabilities separately? Users of the financial statement needs to know the types of liabilities the company have, and also when a company have more current liabilities than current assets will be lack in liquidity. 3. Explain the differences between CVS’ secured and unsecured debit. Why would CVS distinguish between these two types of debt? Secured debits are the debits that the borrowers can get only after give up some of Assets. Unsecured debts are the debit that issued against the general credit of the borrower. As a huge cooperation, CVS needs to know how much unsecured debit they have and maximum their use for their credit. 4. Speculate as to why CVS has many different types of debt with a range of interest rates. Banks are issuing debit at different interest rate, and the interest rate for different length of time is also different. Depending on their specific needs at each time, the types of debit should be different. 5. What is a contingent liability? Explain, in your own words, when a company would record a contingent liability (i.e., a contingent loss) on its books. List some types of contingent liabilities. Do firms ever record contingent assets (i.e., contingent gains), why or why not? 6. What judgments does management need to make to account for contingent liabilities? Analysis For CVS: 1. Calculate Payables turnover & Days’ Payables; Payable turnover= Total supplier purchases (Beginning accounts payable + Ending accounts payable) / 2 Days’ Payables= ending accounts payable / (cost of sales/number of days) CVS Payables turnover Days payables 2010 18.77 19.45 2011 19.80 18.44 2012 19.85 18.39 2013 18.56 19.66 2014 17.41 20.96 2. Compare to Walgreens (for the last 5 years) and the industry average (for the current year); 3. Walgreens 2010 2011 2012 2013 2014 Payables turnover 10.57 10.75 11.7 11.02 12.71 Days payables 34.55 33.96 31.2 33.11 28.73 4. Comment on the increase or decrease in CVS’s payables, give reasons for the any fluctuation; 5. Which company do you think made the most use of financing from creditors during the operating cycle; 6. What commitments and contingencies does CVS have, why is it important to consider this information when analyzing accounts payable? 7. Calculate Debt Ratio, Debt to equity ratio & Interest coverage ratio; Debt Ratio=Total liabilities/Total Assets Interest coverage ratio=EBIT/ Interest Expense CVS 2010 2011 2012 2013 2014 Debt Ratio Interest coverage ratio 0.39 14.17 0.41 13.44 0.43 15.50 0.47 19.18 0.49 16.62 8. Compare to Walgreens (for the last 5 years) and the industry average (for the current year); Walgreens 2010 2011 2012 2013 2014 Debt Ratio Interest coverage ratio 0.45 52.80 0.46 76.77 0.46 0.45 0.45 32.24 9. Discuss how leveraged CVS and Walgreens are; 10. Are there any loan covenants and what is their impact on CVS’s future funding decisions; 11. Does CVS have any operating leases? If these leases were considered as part of the liabilities how would that impact the debt to equity ratio & the debt ratio.