Page 64 - Finance for Non-Financial Managers

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The Balance Sheet
Loan covenant Clauses in a loan agreement that require
the borrower to do certain things (“affirmative covenants”)
and/or not do others (“negative covenants”) during the term 45
of the loan agreement. Some typical covenants include the following:
• The company must maintain adequate insurance.
• The company must furnish financial statements quarterly and annually.
• The company cannot allow other liens on company assets.
• The company cannot merge with another company or acquire
another company.
Banks will often monitor compliance with loan covenants quarterly,
based on the financial statements, and sometimes require that a cor-
porate officer or independent accountant issue a compliance certifi-
cate that serves as evidence that no covenant violation has occurred.

the company, or perhaps even a contingent claim on the owner-
ship of the company.
Current Portion of Long-Term Debt
Refer to the discussion below of long-term debt. This “current”
caption simply represents the portion of that debt that must be
repaid within the next 12 months.

Long-Term Liabilities—Borrowed Capital
You might see a wide variety of long-term borrowings on a
company’s balance sheet, including the line items seen in
Figure 3-1. Rather than try to describe all the items you might
find listed under “Long-Term Liabilities,” let’s just look for a
moment at the types seen on our sample balance sheet.
Lease Contracts
This label shows commitments made by a company in order to
lease equipment or other assets at favorable payment terms,
usually followed with a modest payment buyout option at the
end. According to U.S. accounting rules, when a lease contract
is designed primarily to finance the intended purchase of the
asset, the asset and the liability are recorded on the lessee’s
books and accounted for as if the asset had actually been pur-