Fin 324

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Week 2 Lecture: Analyzing
Financing Activities

Financial
Statement
Analysis
Overheads from
K.R. Subramanyam textbook resources as amended by F.Hui for FIN324 2016.

CHAPTER
Liabilities (including employee benefits), Equity
And off balance sheet transactions

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Overview of Chapter

Companies operations are financed by various sources:
• Liabilities
• Capital (Stockholders’ Equity)
• Off balance sheet transactions

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Companies’ Financing Sources

Liabilities
Capital (Stockholders’ Equity)
Off balance sheet transactions

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Liabilities
…show more content…
Need to determine the following related to each employee:
• Life expectancy
• Employee turnover
• Compensation growth
• Expected rates of return
• Interest rates

Answer: An Actuary

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Determining Future Annual Benefit Cost

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Postretirement Benefits
Illustration of Pension Accumulation and Disbursement for a Defined
Benefits Plan

Step 2
How much needs to be “accrued” at the time of an employee’s retirement? Step 2

Annual payments into the
Fund required to accumulate to $134,200 in 15 years with a discount rate of 8%per annum Contributions =
$4,942 per annum

Funds required at employees’ retirement: Present value of 10 payments of
$20,000 per annum with a discount rate of 8% per annum

$134,200

Benefits =
$20,000 per annum
10 years

15 years
Preretirement

Annual benefits of
$20,000 paid to employee for 10 years

Retirement

Postretirement

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Determining Future Annual Benefit Cost

Determining Future Annual Benefit Cost

Step 3
How much is required to be expensed each year so that the amount needed to be “accrued” at the time of an employee’s retirement is achieved?
How do we determine the number of years?

Step 3
How much is required to be expensed each year so that the amount needed to be “accrued” at the time of an employee’s retirement is achieved?
Answer – PV of an Annuity

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Determining Future Annual Benefit Cost
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