FSA Quiz question

sukanyalal3
Posts: 4
Joined: Sun May 13, 2012 7:21 pm

FSA Quiz question

Postby sukanyalal3 » Sun May 13, 2012 7:23 pm

Below question is from the uiz on FSA. I have not understood why will bond issuance affect CFO becoz this is CFI item and have not understood the question properly.

Mention the effect on CFO when the bond is issued at premium, compared to if it is issued at par. Consider the same coupon interest rate in both the cases and also consider bond is issued at premium or discount due to market rate available at the time of issuance.
Choose one answer. a. CFO will be overstated
b. CFO will be understated
c. No impact on CFO
.The correct answer is CFO will be understated.

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: FSA Quiz question

Postby content.pristine » Mon May 14, 2012 3:31 pm

Par Bond - Effects On:

· IS - The income statement will include an interest expense equal to the bond's coupon payment attributable to the specified accounting period.

· BS - The balance sheet will include at all times a long-term liability equal to the face value of the bond until its maturity or redemption.

· Cash flow statement - Going forward, cash flow from operations will include the interest expense recorded on the income statement. As of the issuing date, the company will account in cash flow from financing the total amount received for the bond.

Premium Bond - Effect On:

· IS - The income statement will include an interest expense equal to the bond's coupon payment minus the amortized portion of the premium received during the specified accounting period.

· BS - The balance sheet will include at all times a long-term liability equal to its carrying value. At initiation the carrying value will be equal to the face value of the bond plus the total unamortized premium. Every year the bond value recorded on the balance sheet will be reduced until the bond comes to maturity or is redeemed and the bond value displayed on the balance eventually reaches the bond's original face value.

· Cash flow statement - Going forward, cash flow from operations will include the actual coupon paid to the debt holder during the specified accounting period. Since this is a bond that was sold at a premium, it is paying out a larger coupon than is currently stated as an interest expense on the income statement. As a result, CFO will be understated relative to that of a company that sold its bond at par. The amortized portion of the bond premium will be included in cash flow from financing. This will cause the reported cash flow from financing to be overstated relative to that of a company that sold its bond at par.

Hope this helps 8-)

sukanyalal3
Posts: 4
Joined: Sun May 13, 2012 7:21 pm

Re: FSA Quiz question

Postby sukanyalal3 » Wed May 16, 2012 9:34 pm

yes its does help thanks


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