Which of the following statements about accounting for long-term debt is least accurate? A) For a discount coupon bond, cash flow from operations will decrease by the amount of the periodic coupon payment. B) A bond issued at a discount results in lower cash flow from operations and higher cash flow from financing than a bond issued at a premium. Ans : B Has this gotta do with the interest portion of the payment that is affecting the CFO?
Yes, from your last post as you can see the discount bond overstates the interest expense compared to a regular par value bond because it’s calculated off of the mkt rate at issuance not the coupon rate of the bond. does that make sense? CFF is understated because your getting less money in from a discount bond because it’s duh issued at a discount.
sort of. the only thing that effects CFO the actual coupon payment. so for a discount bond (lower coupon) the outflow from CFO is less then it would be for a premium bond. CFF and CFO have an inverse relationship in terms of debt financing. I like to think of CFF first. just common sense, if you issue a premium bond, the CFF inflow is higher, therefore overstated vs a discount bond. since total cash flow is the same, if CFF is overstated then CFO must be understated, and vice versa.
"the only thing that effects CFO the actual coupon payment. so for a discount bond (lower coupon) the outflow from CFO is less then it would be for a premium bond. " I’m confused here. Wouldn’t that make the CFO with a discount bond higher (as less cash is flowing out to bondholders), rather than lower as the answer says?
Answer says the LEAST accurate is: B) A bond issued at a discount results in lower cash flow from operations and higher cash flow from financing than a bond issued at a premium. So for discount bond, CFF inflow is lower & CFO is overstated (thus CFO is higher) Am i right?
Can someone confirm what I am saying is right OR wrong on the reply above? THanks
correct