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9/1/09
Accounting is analyzing and recording things for a business to show what we have, what we own and
what we owe. Recording day to day business transactions
We are doing financial accounting. There are other types of accounting such as auditing and financial
advisers.
9/3/09
The Accounting Equation
Assets = Liabilities + Owner's Equity
Everything you record will affect this. This equation must always be true.
Assets – anything you own, resources you have, things you will use in your business to create profits.
Liabilities – money you owe to creditors
Owner's Equity – money you owe to the owners of the company
–Retained Earnings – the earnings you have retained in the company from doing business
-revenue + expenses – net income (or if expenses are greater, net loss)
-dividends
-contributed capital – money you contributed to the company – common stock
The ratio at the end of chapter one is Return on Assets. This ratio is Net Income over Average Total
Assets. Net income is seen on your income statement, your Average Total Assets is on your Balance
Sheet. To find the ATA, you add the amount of assets from last year and add it to the number from this
year, then divide by two.
9/8/09
Chapter 2
Analyzing and Recording Transactions
To see what is going on in a company, you look at receipts, checks, invoices, or any other company
document talking about a transaction or event – source documents.
A general ledger is a file where a company keeps all of their accounts, and everything that happens to
your cash. Companies use several different accounts for all of the different kinds of transactions.
Some of the accounts a company uses for assets are cash (how much money they have in the comany),
accounts receivable (sums people will pay you in the future), Notes receivable (official documents –
signed papers that you will pay someone. These are usually for bigger or more important transactions,
but not always. It usually includes interest.), prepaid expense accounts (things you pay in advance for -
insurance premiums, etc), supplies, equipment, land, inventory, buildings
Some of the accounts a company uses for liabilities are accounts payable (A/P), notes payable (N/P),
unearned revenue (revenue you have nit earned yet – you have not yet provided service for someone's
money), accrued expenses/liabilities (any expenses the company accrues that they have not yet paid for
but must record)
Owner's equity is split into two parts – contributed capital (common stock) and retained earnings.
Retained earnings is revenue less expenses less dividends (things given back to the owners of the
company). You keep separate accounts for every expense needed. These can vary from corporation to
corporation.
A company must have a chart of accounts – a list of accounts a company uses. All of these accounts
come with numbers. All accounts of the same type will start with the same number.
9/10/09
Double entry accounting – every time you put in a debit, you put in a credit. Your debits have to equal
your credits.
Every company has a Journal. A Journal or General Journal is where we keep a listing of very single
transaction that happens in the company.
Sample Journal
Posting – every piece of information on the journal is transferred to the Ledger. This is done with the
push of a button on computer systems. On your journal, each transaction will have a PR (posting
reference) that will correspond to the PR on your ledger.
This is on p.56 of the book.
1) Investment by owner - debit cash, credit CS (cash is assets, CS is owner's equity) cash and CS will
show up on your balance sheet.
2) Purchase supplies for cash – debit supplies, credit cash (both asset accounts) these will both show up
on the balance sheet, and the statement of cash flow.
3) Purchase equipment for cash – debit equipment, credit cash (equipment is assets, cash is assets)
4) Purchase supplies on credit – debit supplies, credit A/P (supplies asset,, A/P liability)
5) Provide service for cash – debit cash, credit revenue (cash asset, revenue owners equity) the revenue
will sho up on your income statement, which will eventually affect balance sheet through retained
earnings. The cash will show up on your balance sheet.
6) Payment of expense with cash) expense debited, cash credited (cash asset, expense owners equity)
expense is debited because we are paying it out. Expenses will show up on the income statement,
which will eventually affect the balance sheet with retained earnings. Cash will show up on the balance
sheet and statement of cash flow.
7) Provide service on credit – a/r (account receivable) debited, revenue credited (a/r asset, revenue is
owners equity) the revenue will show on the income statement (later balance sheet) and the a/r will be
on the balance sheet
8) Payment on a/r – cash debited, a/r credited (a/r and cash assets), both show up on balance sheet
9) Pay off a/p – a/p debit (decreasing liability), cash credit (a/p liability, cash asset) both show on
balance sheet
10) Pay cash dividend - dividend debit, cash credit (dividend O/E, cash asset) cash affects balance
sheet,
11) Receive cash from customer for future service – cash debited, liability credited(Cash asset) liability
shows on balance sheet
12) Pay cash for future insurance plan. - prepaid insurance debit, cash credit. Will affect balance sheet
and cash flow statement
After journalizing and posting, you set up a trial balance. In a trial balance, you make a list of all of the
accounts in your company
ABC Co
Trial Balance
12/31/09
Cash – debit
A/R – debit
A/P – credit
C.S. - Credit
Revenue – Credit
Expenses – Debit
Dividend – Debit
There will be a credit and debit column, and you put the numbers into the market columns above.
You do a trial balance just to make sure your total debits and credits balance out. After you make a trial
balance, you can set up your Income statement, Retained Earnings statement, Balance sheet, and cash
flow statement.
First you set up your income statement, which covers a long period of time, giving you your net
income. Then you can make your statement of Retained earnings, where you put your net income, then
decrease it by the amount of dividends you payed out. This is the only place you will see dividends.
You will get your ending retained earnings now, which you put on your balance sheet. You list all of
your assets, liabilities and owners equity (including retained earnings). Then you put anything from
your trial balance on to the balance sheet in their respective categories. Your balance sheet only covers
one point in time. p. 66 in the book shows a nice balance sheet.
The Debt Ratio is the total liabilities divided by the total assets. The purpose of this number is so you
can see that the company has more assets than liabilities.
9/15/09
Time Period Principle – an organization's activities can be divided into time periods
Calendar year – January to December
Fiscal year – any 12 month period
Natural Business year – 12 month fiscal period which ends when the business's activity level is lowest
(so biggest revenues are recorded)
Adjustments
things you change at the end of he year in the journal to make sure that everything that happened in the
company is recorded. - fixing up your info to make sure we have recorded as much as possible
Accrual basis – GAAP says that you must use this system. In this system, you record information as it
happens (example – three year insurance period prepaid, slowly record pieces as you use it)
Cash basis – another system for adjustments that some companies use as well as the accrual system. In
this system, you immediately record any time money changes hands. (example – three year insurance
prepaid, record entire transaction)
Adjusting entries are always going to affect both the balance sheet and the income statement. You
NEVER adjust an account called cash.
Matching
This principle is the reason for accrual accounting. The Matching principle says that you must show the
expenses needed to create revenue. To show both of these numbers on the same sheet, you must use
accrual accounting.
Comparability – example- you record insurance payments slowly so you can compare your expenses
for a certain time
9/17/09
Adjustments (p.95)
Before -
Prepaid expense- cash went out but you don't want to record the expense yet because the service has
not been used yet
Unearned Revenue – money has come into the company before you want to record the revenue,
because you haven't completed the service yet
These are called deferred.
After -
Accrued Expenses – you will pay later, but you want to put the expense in now. (example – paying
salaries – the checks have not gone out yet, but the workers already did their jobs)
Accrued Revenue – you have received the money but you want to record it on a different month aka
account receivable
Prepaid expense
– Sept. 1, 08 -purchase insurance policy for 12 months, $1800
September 1, 08 Prepaid Insurance $1800
Cash $1800
December 31, 08 Insurance Expense $600
Prepaid Insurance $600
the adjusting entry shows how much of an asset you have used up
Supplies
1/1/08 - $1000 of supplies
Supplies $1000
Cash $1000 will
12/31/08 Supplies Expense $800
Supplies $800
this goes on your income statement and balance sheet accounts
Equipment
1/1/08 Equipment $20,000
Cash $20,000
12/31/08 Depreciation Expense $4000
Accumulated Depreciation $4000
Balance Sheet 09
Assets
Equipment $20000
Accumulated Depreciation ($8000)
Book Value $12000
If the machine will still be worth something at the end of its useful life then you subtract the value it
will have at the end and depreciate a fraction of the result.
When you are dealing with estimates (like depreciation), you never go back to change it.
Unearned revenue
unearned revenue is liability on balance sheet, revenue is on income statement
10/1 - $120,000 for work on 24 houses up front payment
10/1 Cash $120,000
Unearned Revenue $120,000
12/31 Unearned Revenue $100,000
Revenue $100,000
Accrued Expenses
$8750 total payroll for company, every Friday
December 31st is a Monday
January 4th is a Friday
12/31/08 Salary Expense $1750
Salary payable $1750
1/4/09 Salary Expense $7,000
Salary Payable $1,750
Cash $8750
Accrued Revenue
Billing client $12,000 after the job is completed. Start in October, finish on February 28
12/31/08 A/R $7,000
Revenue $7,000
2/28/09 Cash $12,000
A/R 7,000
Revenue 5,000
p.103 Trial Balance
journalize
post
T.B – unadjusted
Adjustments – make sure you have everything required to make your financial statement
T.B. - adjusted
Financial Statements
1.Income Statement
2. Retained Earnings
3. Balance Sheet
4. Cash Flow (can be done at any time, not contingent on anything else)
p.121
different trial balance method, makes it clearer to ee info but is more complicated
9/22/09
Chapter 3
The Closing Process
After you journalize and post., you make the unadjusted trial balance, then your adjustments, then your
adjusted trial balance, and finally your financial statements. After this process, you do the closing
process. This is how you make your books ready for the new year.
This entire process, from journalizing to closing, is called the Accounting Cycle.
Closing
Temporary accounts (AKA nominal accounts) – accounts that start fresh every year – income statement
accounts – revenue and expenses – start at zero every year
Permanent accounts – balance sheet accounts – assets, liabilities, owners equities – use info from last
year
1)Revenues (credit balance) -debit revenue and credit Income summary (Income summary is a closing
account that is only used during closing
Revenue
Income Summary
2) Expenses (debit balance) -debit income summary, credit expenses
Income Summary 2000
Revenue 2000
Income Summary-
Debit Credit
5000
2000
3000 credit – net income
Liabilities
Current Liabilities - anything to be paid within a year/operating cycle
Wages, credit card bills, etc
9/24/09
Chapter 4
Chapter 4 deals with merchandising companies
Merchandise companies buy goods and sell them to other people.
In a service company, to show income, you show revenue, subtract expenses, and you get net income.
For a merchandise company, you show sales, and subtract Cost of Goods Sold (how much it cost you to
get buy goods) to get Gross Profit. Then, you subtract the expenses from Gross Profit to get Net
Income.
Operating cycle – from the time you buy goods, sell them and then collect cash for the sales is the
operating cycle.
MI – Merchandise Inventory
Beginning Inventory + Purchases = Goods Available for Sale
Goods Available for Sale - COGS (Cost of Goods Sold) = Ending Inventory
When you send the merchandise back, you send a Debit memorandum, showing the seller than you
marked this off in your books cause you sent it back
If you send back defective goods and they give you a $100 discount, it looks like this
A/P 100
MI 100
Cost
– discounts
– returns/allowances
– transportation
all of these combined are in the merchandise inventory account.
In the perpetual system, you keep a separate account to keep all these in so you can specifically analyze
these numbers.
Sales under the perpetual system
1. Revenue
Accounts Receivable 1000
Sales 1000
2. Inventory
COGS 800
MI 800
2/10 n/30
no discount
Cash 1000
AR 1000
with discount
Cash 980
Sales Discount 20
A/R 1000
a Sales Discount is a Contra account to Sales
If the customer returns $200 of goods for this sale
1. Revenue
Sales Returns/Allowances 200
A/R 200
Sales Returns/ allowances is a contra account.
2. Expenses
MI 100
COGS 100
You will only regain the cost if you can resell the merchandise that was returned.
After receiving a return, you send the buyer a credit memo that you credited their A/R.
Adjusting Entry
At the end of the year, you count up your inventory.
Beginning Inventory + Purchases = GAFS
GAFS – COGS =Ending Inventory
GAFS = Goods Available for sale
COGS = Cost of Goods Sold
Shrinkage - goods damaged, lost or stolen. - difference between the books inventory and actual
inventory
Shrinkage is usually a small amount, and it is included in the COGS.
COGS 100
MI 100
Closing Entries
1) Revenue → Income Statement
2) Expenses → Income Statement
3) I.S. → R.E.
4) Dividends → R.E.
With a merchandising company, you also have to close these accounts
1) Sales
I.S.
2) I.S.
Expenses
COGS
Sales Discounts
Sales Returns/Allowances
You can do an income statement in any way you want. There is n right or wrong IS, it depends on what
the company wants to do.
Multiple Step IS
Sales – COGS = Gross Profit
GP – Operating Expenses =Income from Operating
Single Step IS
Show all revenues, show all expenses, and you get your net income. However, you do not really see
your net income easily using this method.
Sales
A/R 1000
Sales 1000
There is only one part to the entry in the periodic system, rather than the 2 in perpetual.
2/10 n/30
Cash 980
Sales Discount 20
A/R 100
returns
Sales Returns/allowances 200
A/R 200
There are no adjusting entries for the periodic system. This is because we never actually deal with the
MI.
Closing Entries
1) Revenues → IS
2) Expenses → IS
3) IS → RE
4) Dividends → RE
1.Sales
MI – physical count
Purchase Discounts
Purchase Returns/Allowances
IS
2. Income Summary
Sales Discounts
Sales Returns/Allowances
MI -
The purpose of doing closing entries in the periodic system is to find out your COGS.
10/6/09
Chapter 4 review
Merchandising companies – selling
For merchandising companies, the IS and BS have a few new numbers.
Income Statement
Sales – COGS = Gross Profit
GP – Expenses = Net Income
instead of revenue – expenses = net income like a service company
Balance Sheet
Beginning Inventory + Purchases (Purchase Price – Discounts – Allowances + Transportation) = GAFS
Goods Available for Sale – COGS = Ending Inventory
Perpetual System
MI
Cash or A/P
A/P
MI
Cash
MI
Cash
Everything will affect Merchandise Inventory under this system
If you sell something, you will always have a two part entry
1.
A/R
Sales
2.
COGS
MI
Periodic System
Purchases
Cash or A/P
A/P
Purchase Discount
Cash
Transportation-in
Cash
If you sell you only use one entry
A/R
Sales
When you end the period, you have to make adjustments for shrinkage.
10/8/09
Goods on Consignment – you give your inventory to someone else, they sell it. You still own the
goods, so they still count towards your inventory.
If you buy something using FOB shipping point, it counts as your inventory
If you sell something using FOB destination, it counts as your inventory
If you have damaged or obsolete inventory, it does not count as inventory.
Inventory Costing
There are four methods you can use for this
1) Fifo – first in, first out
2) Lifo – last in, first out
3) Weighted Average
4) Specific Identification
You can choose whichever of these you want, but you should try to be consistent on which system you
use.
Perpetual – Fifo
1/1 Beginning Inventory – 10 units @ $5 = 50
2/15 Purchase – 4 units @ $8 = 32
3/8 Sale – 9 units
6/25 Purchase – 3 units @ $10 = 30
11/11 Sale – 6 units
Don't bother with the profits of sales, it is not important for inventory or COGS. Remove irrelevant
information at the beginning of each problem.
3/8 9 @ 5 = 45 COGS
$5 units were the first in, sell them first
Inventory – 1 @ $5, 4 @ $8 = Total Inventory $37
You do not include the 6/25 purchase because it has not happened yet, and we are using the perpetual
system where you keep track of
By using FIFO, you can make your EI look better, making you have larger assets. This can be used in a
period of rising prices to result in a higher EI. This also gives you a more accurate EI because it uses
more current prices.
By using LIFO, you can make your COGS look higher, making your net income lower, which results in
lower taxes.
Perpetual – Specific ID
3/8 6\5 units from beginning inventory, x5 = $25
4 units from 2/15, x8 = 32
$57 total
11/11 3 from BI x5 = $15
3 from 6/25 x10 = $30
$45 total
You do not have a rule for specific ID, as the numbers can fluctuate depending on which you sell.
Only Lifo and Weighted Avg change under the Periodic system.
Periodic – Lifo
15 units sold over the year – 3 @ 10, 4 @ 8, 8 @ 5 =$102
The numbers didn't change for this example, but the point is that you just take all purchases at the end
of the year and work backwards.
It is also simple to find your EI using this method.
Fifo perpetual/periodic
7/1 Sell 4 – 3/2, 1/3
COGS 9
11/1 Sell 4 1/3 3/6
COGS 21
EI – 3/6 8/9 = 90
Lifo perpetual
7/1 sell 4 2/3 2/2 COGS 10
11/1 sell 4 4/6 COGS 24
EI – 1/3 2/6 8/9 = 86
Lifo periodic
sell 8 units – 8/9 – $72 COGS
EI – 3/2 2/3 6/6 = 48
WA perpetual
7/1 4 units – 4/2.4 = 9.60(12 dollars price, divided by 5 units – 2.4/unit)
11/1 4 units -4/5.49 = 21.96 (2.4 remaining unit + 36 total price = 38/7 units = 5.49/unit)
EI – 88.47 (16.47 (3 at 5.59) + 72 = 88.47)
WA periodic
120/19 = 6.32/unit
6.32 x 8 = 50.53 COGS
69.52 EI
Fifo
COGS 30 EI 90
Lifo Perpetual
COGS 34 EI 86
Lifo Periodic
COGS 72 EI 48
WA Perpetual
COGS 31.56 EI 88.47
WA Periodic
COGS 50.53 EI 69.52
Fifo- highest income
Lifo – lowest income
WA – middle ground
10/15/09
Bank Reconciliations
Bank Balance
What the bank has recorded in your account
Book Balance
what your have in your book
It is very rare for your book and bank balance to be the same.
10/20/09
Compare your book and bank balances.
Bank Balance
-outstanding checks
deduct these from the bank balance
-deposits in transit
money placed in the bank after the bank is closed
add to balance
-bank errors
subtract or add depending on overstatement or understatement
Book Balance
-interest
add to balance
Cash 10
Interest Revenue 10
-NSF (non sufficient funds) and service fees
not enough money in a customer's account to pay for a check
subtract from balance
Accounts Receivable 10
Cash 10
-service fees
subtract from balance
Misc Expense 10
Cash 10
-debit memos/credit memos
debit memo – money wired out – subtract balance
credit memo – money wired in – add to balance
-transposed numbers
add or subtract depending on numbers
Bank Reconciliation
a) 400 deposit after banking hours
b) outstanding checks 1456
c) bank balance 10129
d) books 9000
e) bank collected note for 200
f) NSF for 120
g) service fee 25
e) transposed 253 instead of 235 on check for utility bill
Chapter 7
Receivables
Accounts Receivable and Notes Receivable
sale on credit
A/R 1000
Sales 1000
COGS 900
MI 900
When transactions happen in A/R, you also make a note in the subsidiary ledger, which has a page for
each customer.
These pages will have the customer's deb it, credit and balance.
10/22/09
Allowance Method – Matching Principle
this will show up on your Income Statement and Balance Sheet.
You want to match your numbers with the transactions
In these cases, you use the Allowance for Doubtful Accounts, a contra account to A/R
estimate
Bad Debt Exp
Allowance for DA
write off
Allowance for DA
A/R
recovery
A/R
Allowance for DA
Cash
A/R
a) 1% of sales = 3000
b) 5% of A/R
c) customer won't pay $500
a)
Bad Debt Expense 3000
Allowance for DA 3000
b)
Bad Debt Expense 78000
Allowance for DA 78000
c)Allowance for DA 500
A/R 500
Notes Receivable
N/R are formal, written promises to pay. An official document is signed for very large amounts. It is
rare for most customers to have one.
Maker – person who signed and said they will pay. It is called a N/P (note payable) on his end
Payee – receiver of money promised in the note – N/R
$10,000 90 day note, 5% interest Dated Feb 12
16 days Feb – 90 - 16 = 74
31 days March – 74 – 31 = 43
30 days April – 43 – 30 = 13
Matures 13th May
Feb 12th
N/R 10,000
Sales 10,000
COGS
MI
A/R 15,000
Pay 5,000
10,000 N/R
Cash 5,000
N/R 10,000
A/R 15,000
Nov 15th
N/R 5,000
Sales 5,000
Factoring
When you sell your A/R to another company and give them the rights to collect on your A/R.
You do this if you need the money for a debt right now
100,000 A/R
Sell for 80,000
Cash 80,000
Factoring Fee Expense 20,000
A/R 100,000
Pledging
If you want to borrow money, you can use your A/R as collateral.
11/3/09
Chapter 8
Plant Assets
Property/Land
Plant/Building
Equipment
On the Balance Sheet, you have a section called Plant Assets where all of the land costs go.
Equipment – whatever you need to pay to get equipment into your business is part of the cost of
equipment.
Depreciation
Cost
Salvage Value
Useful Life
Most companies choose to use Straight Line Depreciation because it is easy, efficient and can be done
automatically.
Units-of-Production Depreciation
You might have a machine that you use a lot one year, then they are not used, then they are used a lot
again. If you know this and want a more accurate depreciation number, you use this method.
Step 1
(Cost – salvage value) / # of units expected to produce
Step 2
Depreciation per unit X # units actually produced = depreciation expense
0.10 X 50,000 = $5,000
Declining Balance Method
This can be used if the value is going to go down slower as time goes on. This is what the IRS uses for
tax balances.
Step 1
Calculate the Straight Line Rate – 100%/ Useful life – 20%
Step 2
Multiply your SL rate by your rate of decline – such as double or triple declining -
double declining 40%
Step 3
DD Rate (double declining rate) X Beginning Book Value
40% X 100,000 = 40,000
If your estimates are wrong, you do not have to change old statements, you just work on with the new
estimate.
(current BV – SV) / New estimate
1. Revenue Expenditure – IS – things needed to keep your machines running smoothly – repairs etc.
These are just ordinary, day to day repairs.
Repair Expense 5000
Cash 5000
2. Capital Expenditure – BS - Capitalizing – when a repair increases the value of an object – when the
repair increases the efficiency, productivity or extends useful life of the object.
These are extraordinary betterment.
Equipment 5000
C ash 5000
Disposal
10000 Cost/10 years = 1,000/year depreciation
10 years have gone by
Intangible Assets
Patent - inventions
Copyright – writing, music, etc. - anything involving the arts
Goodwill – when you pay extra because you're buying reputation and other positive things
License
Goodwill is never amortized because you don't know what will happen to it. Instead, you test it for
impairment, so you know if your reputation etc. has changed.
Chapter 8 Ratio
Total Asset Turnover
Net Sales / Average Total Assets
1. Straight Line
2. units of production
3. double declining
Cash 45,000
Accumulated Dep – Equipment 80,000
Gain on Disposal 5,000
Equipment 120,000
3. 20% per year - double declining = 40% DDR (double declining rate)
120,000 x .4 = 48000 BV 72000
72000 x .4 = 28800 BV 43200
43200 x .4 = 17280 BV 25920
Cash 45,000
Accumulated Dep 94,080
Gain on Disposal 19080
Equipment 120,000
11/10/09
Chapter 10
Long Term Liabilities
Bonds – obligation of payment from the public – pay interest too
PAR – how much you borrow from the investor – principle
contract rate/stated rate – interest rate
People make bonds because -
If you use stocks, you lose control
You get the money instantly with bonds
Cons of bonds:
No flexibility on when to pay back interest and principle.
If your contract rate ends up being lower than the market rate, you are selling at a discount, which
means your interest expense will be bigger.
If your contract rate is higher than the market rate, you sell them at a premium, raising the price of the
bond.
Discount - CR < MR
interest expense exceeds actual amount of interest
Premium – CR > MR
interest expense is less than the cash interest paid
100,000 par
1/1/08
issue @ 98 (anything less than 100 is a discount)
Cash 98,000
Discount on B/P 2,000
B/P 100,000
A discount is a contra account to bonds payable
B/P (bonds payable) account is ALWAYS the par value
Cash 102,000
B/P 100,000
Premium on B/P 2,000
A premium account is an adjunct account
Adjunct accounts add to another account
B/V = Par + premium OR Par – discount
5,000 par
1/1 year 1
CR 10%
MR is higher
term = 4 yrs
issue at discount because MR is up
issue at 97
Cash 4850
Discount 150
B/P 5000
GAAP says instead of waiting for the last year to record the whole interest payment, you show it
gradually over time.
Amortize
150/4 = 37.50
3/1
Cash 304,600
B/P 300,000
Int Pay 4500
6/30
Int Pay 4500 (2 months)
Int Exp 9000 (4 months)
Cash 13500 (6 months)
5,000 bond
sold at premium 300
10 year
4 years gone by
5180 BV after 4 years
Premium 180
BP 5000
Loss 20
Cash 5200
40,000 par
1200 discount
10 yr life
5 yrs gone by
retire at 102
Chapter 10 ratio
p. 414
Debit to Equity ratio
total liabilities to total owner's equities – does the company owe more or have more stocks
Chapter 11
Equity – Stock
Advantages of a corporation
Generates revenue – generates cash
Separate entity – it counts as a separate person, so you are not personally responsible for the company.
Also, you can make a credit card or rent a car under the company name
continuous life – the corporation will not fall apart if one person leaves
Transfers ownership easily
disadvantages of a corporation
double taxation – corporate and personal dividend taxes
triple taxation – these two and inter-company dividend taxation
more government regulation
Shareholders often do not go themselves to vote, but give someone a proxy so the person can vote
instead of them.
Preemptive right – shareholders have first dibs to buy new issuance of shares of stock going on to the
market before everyone else.
If a company liquidates, the shareholders have a right to some of the assets. However, the first people
that get assets are the creditors of the company.
Registrars – people who keep track of who owns the stocks at what point. These are often people
outside of the company that are hired.
Transfer agents – people who help with the sales and purchase of stock.
Authorized Stock – how many stocks you are allowed to sell according to your charter from the
government. This is the total number the company will be allowed to sell in its lifetime, so it is usually
a huge number. This number can also be changed at a later date.
Issued Stock – How many stocks have been sold to the public for the company's entire lifetime
Outstanding Stock – How many shares are still held by the public
Treasury Stock - when a company buys back its own shares of stock
Cash 1500
CS 1500
150,000 land
10,000 shares of stock
10 par
Land 150,000
CS 100,000
PICEP 50,000
A company will sometimes offer shares of stock instead of money for people who work for the
company, such as lawyers.
Dividends – when we give money back to the shareholders of the corporation – dividends are not
guaranteed.
A corporation might not give out dividends if they want to keep the money to expand the company, or
just in case they need the money. However, most corporations will give out dividends to keep their
investors happy.
Date of Declaration – date when they say dividends will be given out. This is declared by the board of
directors.
Date of Record – they say that people who had shares at a certain date will be entitled to dividends.
Date of Payment – when the dividends are payed out
Only the date of declaration and payment are recorded.
Date of Declaration -
Retained Earnings 100,000
Common Dividend Payable 100,000
Date of Record – no entry
Date of Payment-
Common Dividend Payable 100,000
Cash 100,000
If a corporation has a deficit in retained earnings, the state will not allow the corporation to pay
dividends. This is so the owner cannot take the money out of the company so that if the company
liquidates the credits will not be able to get it.
Preferred Stock – does not allow voting, but comes with a percentage of dividends.
Same entries as common stock except you use the preferred stock account instead of common stock.
Cumulative Preferred Stock – this means that if a holder is entitled to dividends and you don't give out
dividends on certain years, you owe them those dividends for the years you didn't pay them.
These are called dividends in arrears.
Participating Preferred Stock – if you give the PS holders 8%, then the CS holders only get 8% too.
The remaining amount, if any, is split between the PS and CS holders based on the par value.
These stock types have to be set up before hand so you know what kind of stock you are getting.
Convertible PS – the holders can convert their stock to CS at a certain point if they want to.
Callable PS – the company can take back the stock. They have to pay any arrears before buying back
the stock before the callback.
Treasury Stock – this is a contra account to equity. This means that we bought back stock, and
decreased equity. This is stock that has been issued but was bought back. A company might do this to
increase earnings per share. This can also be done so the value of the stock in the marketplace goes up
because there are less stocks available. Another reason is so someone cannot do a hostile takeover
because the company has the majority of the stocks again.
Financial statement analysis report – choose a company that sells merchandise. There is a page that
shows all ratios in the book.
11/24/09
Ratios
EPS – Earnings Per Share
(NI less preferred dividends) / (weighted average of common shares)
Dividend Yield
(Cash Dividends paid per share) / (Market price per share)
BV of Preferred
How much equity do we have per share?
Equity allocated to pref. / # of shares outstanding of pref.
BV of Common
Equity allocated to common / # of shares common
Equity of Preferred
How much you have to pay to buy back shares from thee holders.
1. Call price x shares of pref. = how much you have to pay
2. Dividends in arrears
p. 471 hw
ex 11-2
a. Cash 152,000
CS 152,000
b. Cash 152,000
CS 38,000
PICEP 114,000
c..Cash 152,000
CS 95,000
PICESV 57,000
ex 11-3
a. Organization Expense 40,000
CS 40,000
b. Organization Expense 40,000
CS 2,000
PICESV 38,000
ex 11-4
a. Cash 35,000
CS 20,000
PICEP 15,000
b. Cash 60,000
CS 50,000
PICEP 10,000
1. Operating
Net Income
Revenue
Expenses
2. Investing - assets
Property
Investments (Stock or Bonds from other corporations)
Plant
Equipment
Notes Receivable
We are investing in PIPENs
After these three sections, there is a supplementary section where we put non-cash investing and
financing activities.
Some examples of this are – trading, converting preferred stock to common stock, issuing stock or
bonds in exchange for assets
Chapter 13
Who wants to analyze a corporation?
External users, board of directors, CEOs, managers
Horizontal Analysis – compare a company's performance this year to its performance in past years
Look at each account and note the change in dollar values
Another way to do this is to look at the percent of change
% change = [( analysis year (08) – base year (07) ) / Base year (07) ] x 100
Trend Analysis – take the analysis year and divide it by another year, then multiply by 100
Vertical Analysis – you compare all of the items on the balance sheet to total assets because total assets
is 100% of what a company has.
Ratio Analysis – p. 557 – all the ratios in the book STUDY THESE
Current Ratio – Current Assets / Current Liabilities
can a company meet its obligations
Acid Test/ Quick Ratio – (Cash + A/R + Short Term Investments ) / Assets
better idea of if company can meet short term obligations
it uses the three most liquid assets
Solvency
Debt Ratio – Total Liabilities / Total Assets
Equity Ratio – Total Equity / Total Assets
Debt to Equity Ratio – Total Liabilities / Total Equity
Profitability
Profit margin ratio – total profit
Gross Margin