Accounting Ch. 9,11,12
ex: if business earned $6 per share of common stock and the investment capitalization rate is 5%, how much would you pay for share of stock?
$6/5% = $120
What are the two ways to state dividends on preferred stock?
% of par value; or $ amt per share
what are negative items from investing activities?
(cash payments) - acquisition of plant assets; purchase of investments that are not cash equivalents; making loans to others
What are positive items from investing activities?
(cash receipts) ; sale of plant assets; sale of investments that are not cash equivalents; collections of loans receivable
Paid-in capital
(contributed capital) amount of stockholders equity the stockholders have contributed to the corporation; includes stock accounts and any additional paid-in capital
passing the dividend
(in arrears); corporations sometimes fail to pay a dividend to preferred stockholders
Stock's Market Value
(market price); price a person can buy or sell 1 share of the stock for;
formula for ROA
(net income + interest expense) / average total assets
equation for EPS
(net income - preferred dividends) / avg number of shares of common stock outstanding
what is the formula for ROE?
(net income [loss] - preferred dividends) / average common stockholders equity
How do you calculate book value if company only has common stock outstanding? (book value per share of common stock)
(total shareholders equity - preferred equity) / number of shares of common outstanding
corporations with complex capital structures present two sets of EPS figures... ?
1. Basic EPS - based on actual outstanding common shares. 2. Diluted EPS - based on outstanding common shares plus additional shares that can arise from conversion of the preferred stock into common
reasons for purchasing back stock (treasury)
1. company has issued all its authorized stock and needs stock to distribute to employees under stock purchase plans.. 2. wants to increase net assets by buying its stock low and reselling for higher price; 3. want to avoid takeover by outside party; 4.wants to increase EPS of common stock
double taxation
1. corporations pay income taxes on income. 2. stockholders pay income tax on cash dividends received from corporations
what are four purposes of the statement of cash flows?
1. predict future cash flows; 2. evaluate management decisions; 3. determine ability to pay dividends and interest; 4. shows the relationship of net income to cash flows
what are the main components of earnings quality?
1. proper revenue and expense recognition; 2. high and improving gross margin/sales ratio; 3. low operating expenses compared to sales; 4. high and improving operating earnings/sales
Why do companies issue stock dividends?
1. to continue dividends but conserve cash; 2. to reduce the per-share market price of its stock; less expensive stock makes it more attractive to investors
stockholders rights
1. vote; one vote for each share of stock owned. 2. dividends; right to receive part. 3. liquidation; right to receive portion of assets after they pay liabilities in liquidation; 4. preemption
What is considered a good rate of ROA?
10% is considered strong in most industries, but it can vary
if the est. value of a company exceeds the current mkt value of a company....
BUY the stock bc you think the stock price will go up
person at top of McDonalds Farm Inc organization chart is called the ...
CEO
Earnings per share is NOT recorded for
Comprehensive Income
purchasing treasury stock ________ assets and equity
DECREASES
Journal Entry to issue common stock
Debit: Cash; Credit: Common Stock
journal entry to record income tax for the year
Debit: Income tax expense; Credit: income tax payable and deferred tax liability
Journal Entry for dividend declaration
Debit: Retained Earnings; Credit: Dividends Payable
what happens when preferred is converted to common? and why?
EPS is diluted because more common shares are divided into net income
if the est. value of company equals current mkt value of a company...
HOLD the stock bc you think the stock price will hold steady
issuing stock ______ assets and equity
INCREASES
do financial analysts include discontinued operations in predictions of future corporate income?
NO - they will not generate future income
between ROE and ROA... which is always higher for a successful company in the long run?
ROE is always higher because stockholders take a lot more investment risk than bondholders; stockholders expect their return on investment to exceed the amount they are having to pay their creditors for borrowed funds
When making journal entry for dividend, what do you debit?
Retained Earnings; # = shares x $amt selling for
if the est. value of company is less than current mkt value of company...
SELL the stock bc you think the price will fall
Other examples of Noncash Investing and Financing Activities
acquire land by issuing note payable; payment of long-term debt by issuing common stock;
losses are __________ to net income to compute cash flow from operations
added back
after stock split.. what happens to account balances?
all are the same except for par value, shares authorized, and shares issued; equity and assets/liabilities are unaffected
earnings per share
amount of a company's net income per share of its outstanding common stock;
Book Value
amount of owners equity on company's books for each share of its stock;
Retained Earnings
amount of stockholders equity corporation has earned and not used for dividends
Liquidation Value
amount that a company must pay a preferred stock-holder in even the company sells out and goes out of business
Par Value
arbitrary amt assigned by company to a share of its stock; set value low;
The deferred tax liability is reported on...
balance sheet as long term
Common Stock
basic form of capital stock; benefit most if successful because they take greatest risk
share of stock
basic unit of ownership for a corporation
equation to find ending plant assets after selling plant assets?
beg. plant assets, net + acquisition cost - depreciation - book value of assets sold
how do you calculate average total assets?
beginning and ending balance sheets
equation to find ending investments after selling investments?
beginning investments + purchase cost of investments - cost of investments sold = ending investments
equation to find ending notes receivable after collecting notes receivable?
beginning notes receivable + new loans made - collections
who has the authority to declare a dividend?
board of directors
Declaration Date of Dividend
board of directors announces the dividend; creates liability for corporation
Obligation to pay dividends on preferred stock occurs only after.... ?
board of directors declares the dividends
two types of treasury stock transactions
buying and selling
examples of investing activities
buying and selling of land, buildings, equipment, and investments in other companies
advantages of corporation
can raise more capital than proprietorship/partnership; continuous life; ease of transferring ownership; limited liability of stockholders
Retained Earnings account
carries balance of business's net income - net losses and declared dividends over corporation's lifetime
what does the cash flow statement report?
cash receipts (where cash came from) and how it was spent (payments)
what are the three forms of dividends?
cash; stock; noncash assets
How do you calculate the avg price per share of treasury stock purchased?
change in cost / change in # of shares
CEO
chief executive officer; chairperson of board of directors
CFO
chief financial officer; vice president in charge of sales, manufacturing, accounting, finance
president (COO)
chief operating officer; in charge of day-to-day operations
what may be exchanged for convertible preferred stock?
common stock
ROE is computed only on ____________?
common stock because the return to preferred stockholders is the specified dividend
comprehensive income
company's change in total stockholders' equity from all sources other than from the owners of the business
Treasury Stock
company's own stock that it has issued and then later reacquired
Earnings per share is reported for
continuing operations, discontinued operations, extraordinary items
treasury stock is a ______ account
contra stockholders' equity;
noncumulative preferred stock
corporation is not obligated to pay dividends in arrears; until the board declares dividend
What does credit balance in retained earnings indicate?
corporation's lifetime earnings exceed lifetime losses and dividends
What does debit balance in Retained Earnings indicate?
corporation's lifetime losses and dividends exceed lifetime earnings
What can change the market value of a stock?
corporation's net income, financial position, future prospects, and general economic conditions;
prior-period adjustments
corrections to retained earnings for errors of an earlier period; appears on statement of retained earnings
treasury stock is recorded at ....
cost; without regard to stock's par value
Operating Activities
create revenues, expenses, gains, and losses - net income;
what is reported on balance sheet?
current liabilities: income tax payable
Number of shares of stock outstanding is the same as the # of shares...
currently in hands of stockholders
treasury stock carries _______ balance
debit
Resale of treasury stock journal entry
debit cash; credit treasury stock and paid-in capital from treasury stock transactions
Journal Entry for converting preferred to common
debit convertible preferred; credit common stock and paid in capital in excess of par (common)
Payment Date of Dividend (journal entry)
debit: dividends payable; credit: cash
Journal Entry to issue no-par common stock
debits asset received (cash); credits stock account for value of asset received
what transactions increase liabilities?
declaration of cash dividend
what transactions have no affect on assets?
declaration of cash dividend, stock dividend, and stock split
declaring and paying dividend does what to assets and stockholders equity?
decrease assets and stockholders equity
a decrease in a current liability does what to cash...
decreases cash
increase in a current asset.. does what to cash...
decreases cash.
what is the purpose of a stock split?
decreases market price of stock - making it more attractive in market
gross profit (gross margin)
difference between net sales and CGS
What are a separate category on the income statement?
discontinued operations
dividend
distribution by a corporation to its stockholders, usually based on earnings
No Par Stock
does not have par value; may have stated value tho;
chairperson
elected by board; most powerful person in organization
board of directors
elected by stockholders and appoints officers to manage the business
to declare a dividend, a company must have...
enough retained earnings to declare the dividend; and enough cash to pay the dividend
investment capitalization rate
estimate value of investment; also called interest rate
equation to estimate the value of common stock
estimated annual income in future/investment capitalization rate
Noncash investing and financing
example would be a company issuing common stock to acquire a warehouse
Assets received in exchange for the issuance of stock should be recorded at ....
fair market value
when common stock is issued for for services, transaction is recognized at?
fair market value
changes due to dividends
financing
changes in long-term liabilities and paid-in capital accounts
financing
equity transactions are ______ activities
financing
cash equivalents
highly liquid short-term investments that can be converted to cash immediately
what is defined (by GAAP) as a small dividend?
if the new shares being issued are less than 20-25% of the total number of shares outstanding prior to the stock dividend
how do you compute income tax expense?
income before income tax (from income statement) x income tax rate
what is reported on income statement?
income before income tax, income tax expense, net income
difference btwn income statement and income tax return?
income statement reports results of operations; income tax return is filed with IRS to measure how much tax to pay the govt in the current period
to account for income tax, the corporation measures...
income tax expense and income tax payable
Investing Activities
increase and decrease long-term assets;
Stock Splits
increase in number of shares of stock authorized, issued, and outstanding, coupled with proportionate reduction in stock's par value
stock dividends increase _________ and decrease ___________
increase stock account; decrease retained earnings
an increase in a current liability does what to cash....
increases cash
decrease in a current asset does what to cash
increases cash.
changes in noncurrent assets are...
investing
what transactions increase assets?
issuance of common and preferred stock and sale of treasury stock
what transactions increase stockholders equity?
issuance of stock and sale of treasury stock
Financing transactions that affect cash and equity fall into 3 main categories... ?
issuance of stock; treasury stock; dividends
How do you find how many shares of common stock were outstanding at end of year?
issued stock - treasury stock
Possible causes of common stock increasing from year to year
issued stock; dividends (cash, stock); stock dividend declared
Examples of Financing activities
issuing stock, borrowing money, buying and selling treasury stock, and paying cash dividends; paying off a loan
What are positive items from financing activities?
issuing stock; selling treasury stock; borrowing money
Financing Activities affect...
liabilities and stockholders' equity, such as Notes Payable, Bonds Payable, Long-Term Debt, Common Stock, Paid-In Capital in Excess of Par, and Retained Earnings
is deferred tax liability long or short term?
long
investing activities affect...
long-term assets, such as Plant assets, investments, and notes receivable
extraordinary gains/losses
losses from natural disasters and expropriation of company assets by a foreign govt;
stockholders are most concerned with what value of the stock?
market value
Authorized stock
maximum number of shares the company can issue under its charter;
Return on Assets (ROA)
measures a company's use of its assets to earn income for the two groups who finance the business
cumulative preferred stock
must receive all dividends in arrears plus the current year's dividend before any dividends go to the common stockholder
when company buys from or sells its stock to its stockholders, does it incur loss or profit?
neither
what is the only item that increases retained earnings?
net income
what are the two key figures used in financial analysis?
net income (or income from continuing operations) and cash flow from operations
what two things do you need for a business to be successful?
net income and strong cash flow
why are gains subtracted from net cash provided by operations?
net income includes the gain, so we must subtract it so it can be added to the net book value of equipment removed in the investing section
What are positive items from operating activities?
net income; depreciation/amortization; loss on sale of long-term assets; decreases in current assets other than cash; increases in current liabilities
What are the negative items from operating activities?
net loss; gain on sale of long-term assets; increases in current assets other than cash; decreases in current liabilities;
what can decrease retained earnings?
net losses and dividends
depreciation's effect on cash and income...
no effect on cash; decreases net income
A journal entry on the date of record of a dividend includes...
nothing; no entry is made.
Issued stock
number of share the company has issued to its stockholders; cumulative total from company's beginning up thru current date
how do you calculate cash amt to issue common stock?
number of shares issued x issuance price per share
equation to calculate current market value of a company
number of shares of common stock outstanding x current market price per share
Outstanding stock
number of shares that stockholders own; issued stock - treasury stock
Financing Activities
obtain cash from investors and creditors
changes due to net income
operating
changes in current assets are...
operating
changes in current liabilities
operating
what is the most important of the three activities on a cash flow statement? why?
operating because they reflect the core of the organization; successful business generates most of its cash from operating
if company splits its stock 2 for 1.... what happens to outstanding shares and par value?
outstanding shares is doubled; each share's par value is halved;
legal capital
par value of shares issued
"large" stock dividends are recorded at _______
par-value
what transactions decrease liabilities?
payment of cash dividend
what transactions have no effect on stockholders equity?
payment of cash dividend, stock dividend, stock split
what are negative items from financing activities?
payment of dividends; purchase of treasury stock; payment of principal amounts of debts
Preferred Stock
pays fixed dividend; rare; receive dividends before common stockholders and receive assets before them if corporation liquidates;
what must be subtracted from net income to compute EPS? why?
preferred dividends because holders of preferred stock have first claim on dividends
Possible causes of preferred stock decreasing from year to year...
preferred stock converted; bought some back; retired preferred stock
order that corporation lists its accounts when reporting stockholders equity
preferred, common, additional paid-in capital; retained earnings
Redemption Value
price the corporation agrees to pay for the stock; set when stock is issued
Stock Dividend
proportional distribution by a corporation of its own stock to its stockholders
what transactions decrease stockholders equity?
purchase of treasury stock and declaration of cash dividend
what transactions decrease assets?
purchase of treasury stock and payment of cash dividend
indirect method
reconciles from net income to net cash provided by operating activities
Redeemable Preferred Stock
requires company to redeem stock at set price; is not stockholders' equity - it is liability;
cash dividends are declared from ...
retained earnings
if sold treasury stock for price below cost, debit ____________ for difference
retained earnings
revenue principle
revenue is not recognized until it is earned - when selling business has successfully completed delivering product to customer
preemption
right to maintain ownership in corporation; if you own 5% of stock, corporation must offer you opportunity to buy 5% of new shares
largest operating expenses
salaries, wages, utilities, and supplies
disadvantages of corporation
separation of ownership and management; corporate taxation; government regulation
If given retained earnings and net income, how do you find dividends?
set up retained earnings T-acct with beg. balance + income - dividends = end balance
board of directors
sets company policy and appoints officers
Return on Equity (ROE)
shows relationship between net income available to common and average common stockholders' equity;
outstanding stock
stock in the hands of the stockholder
limited liability
stockholders have no personal obligation for liabilities; most they can lose on investment is cost of it
Date of Record of Dividend
stockholders receive dividend;
how do you compute income tax payable?
taxable income (from income tax return) x income tax rate
An audit report by independent accountants gives investors assurance that..
the company's financial statement conform to GAAP
earnings quality
the higher the better
why do we add depreciation, depletion, and amortization expenses back to net income?
they have decreased net income, so to convert net income to cash flows we must add it back to cancel the earlier deduction
Why do companies retire their preferred stocks?
to avoid paying dividends on preferred stock; cannot be reissued; rare
equation for net income or net loss
total revenues and gains - total expenses and losses
comprehensive income includes net income plus
unrealized gains (losses) on available-for-sale investments; and foreign currency translation adjustments
deficit
when losses and dividends exceed earnings; subtract this amount to determine total stockholders equity