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Financial Accounting and Reporting

In: Business and Management

Submitted By yaitza24
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Accounting in Action 3-5
Financial Accounting and Reporting
AC501-01NA
July 20, 2010

Accounting in Action 3-5 a) Name at least two advantages to Chieftain from having no long-term debt. Can you think of disadvantages? a. One advantage is that the company is more solvent. When a company carries a high level of long-term debt relative to assets, it has a lower solvency than a similar company with a low level of long-term debt. Companies with higher debt are relatively more risky, because they will need more of their assets to meet these fixed obligations. Another advantage is that the company has a short-term liquidity ratio. This ratio indicates whether the company will have the resources to pay its current and maturing obligations. Since the company has no long-term debt, it has more resources to pay obligations.
A disadvantage is that if the company has no long-term debt, it does not have any long-term investments. When a company invests in securities, such as bonds, common stock, or long-term notes, the company is anticipating its long-term life. For example, bonds are a long term debt that are cashable at a certain point in time; if a company has bonds, the company will have expected cash in the future. b) What are some advantages to Chieftain from having this large cash balance? What is the disadvantage? b. One of the advantages is that the company has a high liquidity, and does not necessarily need to pay on account when pursuing transactions. Having a large cash balance indicates that the company has the ability to handle more cash transactions than a company that does not. It also indicates that the company is financially flexible, since it has the ability to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. A disadvantage of having a big cash

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