Fin. Accounting - UNI CH. 10-13

Stock Splits

A Board of Directors can use __________ as a tool to lower the market price of a stock. There are no journal entries to prepare. Simply adjust the par value and number of shares authorized, issued, and outstanding.

the differences between beginning and ending balances of cash and cash equivalents.

A SOCF reconciles what?

An important formula for Retained Earnings:

Beginning retained earnings, plus net income, minus preferred stock dividends, minus common stock dividends, equals ending retained earnings. (To compute Preferred Stock dividends: number of preferred shares outstanding x (par value x dividend rate). The par value and the dividend rate should both be listed as an integral part of the Preferred Stock account title.)

prior to maturity. The normal reason is to take advantage of lower interest rates. If bonds are retired before maturity, the carrying value of the bonds is removed from the corporation's books. If bonds were issued at a premium, debit Bonds Payable and Premium on Bonds Payable and credit Cash. If the JE does not balance at that point, force it to balance by debiting Loss on Bond Retirement or crediting Gain on Bond Retirement, as appropriate.

Bonds are occasional retired when?

Par Value Stock, No-Par Value Stock, and Stated Value Stock. Stated Value Stock is common stock with No-Par Value that the Board of Directors has assigned a Stated Value. Par value stock is issued by 88 percent of corporations.

Depending on state laws, corporation issue stock of one of three types:

straight-line

Discounts and premiums on bonds payable are amortized on a semi-annual basis over the life of the bonds using the _____________ method.

The JE required when par value stock is issued:

Dr. Cash Cr. Common Stock, $xx par value Cr. Paid-In Capital in Excess of Par Value, Common Stock

The JE for no-par value stock:

Dr. Cash Cr. Common Stock, No Par Value

net income.

Operating activities are those transactions that determine what?

payments on bonds, payments on loans, purchase of treasury stock, and paying dividends.

Outflow examples from financing activities

buying property, plant and equipment, buying investments, buying intangible assets, and to loan money in return for notes receivable.

Outflow examples of investing activities

The direct method and indirect method is not applicable to this section. Review changes in long-term liabilities and equity on the 2-year balance sheet. Review journal entries for the changes. Use applicable debits and credits to cash affecting the long-term liabilities and equity.

Preparing the Financing Activities section

The direct method and indirect method is not applicable to this section. Review changes in long-term assets on the 2-year balance sheet Review journal entries for the changes. Use applicable debits and credits to cash affecting the long-term assets.

Preparing the Investing Activities section

Net income [from income statement] + Noncash expenses [depreciation, amortization, and depletion-from income statement] - Gains and +Losses [from income statement] +/- Changes in current assets (other than cash and cash equivalents) and current liabilities [from 2-yr balance sheet] = Cash provided by/used by operating activities

Preparing the Operating Activities section by the indirect method

the issuer must establish an interest (contract) rate to pay on the bonds. The interest rate must be appropriate to the credit rating of the issuer and the maturity date of the bonds. If the issuer establishes a rate that is "just right," the bonds will sell at par (100).

Prior to issuing bonds, the issuer must do what?

1. Compute net cash provided or used by operating activities (indirect method) 2. Compute net cash provided by investing activities. 3. Compute net cash provided by financing activities. 4. Compute net increase/decrease in cash (Sum the results from steps 1-3) 5. Report cash balance at prior year-end and current year-end. 6. Compare net increase/decrease in cash with current year-end cash minus prior year-end cash.

Steps in preparing the Statement of Cash Flows:

the number of semiannual interest periods from the date the bonds were issued until the date the bonds mature. The result is the amount of amortization for a single semi-annual period. Cash interest expense (par times contract rate) plus the amortization amount for the period equals Bond Interest Expense. The JE is debit Bond Interest Expense and credit Discount on Bonds Payable and Cash.

To amortize the discount on bonds payable, divide it by

the number of semiannual interest periods from the date the bonds were issued until the date the bonds mature. The result is the amount of amortization of a single semi-annual period. Cash interest expense (par times contract rate) minus the amortization amount for the period equals Bond Interest Expense. The JE is debit Bond Interest Expense and Premium on Bonds Payable and credit Cash.

To amortize the premium on bonds payable, divide it by

charter from the state government of choice. Many corporations are chartered in Delaware because it has corporation friendly laws. It is not a legal requirement to establish the corporation's headquarters in the state that issued the charter. Once the incorporators receive a charter, the corporation is born. Incorporators can draw up articles of incorporation, elect a board of directors, and issue stock

To form a corporation, incorporators must apply for a what?

Does Not

Treasury Stock can be sold at par or sold at a premium or discount. When a corporation sells its Treasury Stock, it ___________ recognize gains or losses

Decrease increase

When a discount is amortized, the unamortized discount will __________ and the carrying value of the bond will _________ at each interest payment date. The carrying value of the bonds will be par at maturity.

Intracompany, Competitor, Industry, and guidelines or (rules of thumb).

When interpreting measures from financial statement analysis, we need to decide whether the measures indicate good, bad, or average performance. To make such judgments, we need standards (benchmarks) for comparisons that include the following: (4)

Cash dividends

___________ are generally paid on income stocks and not paid on growth stocks.

Trend analysis

a form of horizontal analysis that involves computing trend percents for a series of financial numbers and is a variation on the use of percent changes. The difference is that trend analysis does not subtract the base period amount in the numerator. To compute trend percents, do the following: 1. Select a base period and assign each item in the base period a weight of 100%. 2. Express financial numbers as a percent of their base period number.

Financial statement analysis

applies analytical tools to general-purpose financial statements and related data for making business decisions. It reduces reliance on hunches, guesses, and intuition in decision-making. It does not lessen the need for expert judgment; instead, it provides us an effective and systematic basis for making business decisions.

Prior-period adjustments

are corrections of material errors in prior period financial statements. They result in changing the beginning balance of Retained Earnings. Changes in accounting estimates are NOT considered prior-period adjustments. Changes in accounting estimates are accounted for in current and in future periods.

External users of accounting information

are not directly involved in running the company. They include shareholders, lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press. External users rely on financial statement analysis to make better and more informed decisions in pursuing their own goals.

Internal users of accounting information

are those involved in strategically managing and operating the company. They include managers, officers, internal auditors, consultants, budget directors, and market researchers. The purpose of financial statement analysis for these users is to provide strategic information to improve company efficiency and effectiveness in providing products and services

Registered bonds

bonds issued after 1986 are required to be registered meaning the issuer tracks the name, address, and SSN of the owner and sends semi-annual interest payments to the owner along with IRS form 1099 at year end.

Bearer bonds

bonds issued prior to 1986 were bearer bonds. Issuers were not required to track the owner of the bonds or send payments to registered owners. Bondholders were required to clip interest coupons and mail them to the issuer for payment. At maturity, the bondholder was required to mail the physical bond certificate to the issuer for payment.

Term bonds

bonds requiring semiannual interest payments and a single principal payment at maturity date

Serial bonds

bonds requiring semiannual principal and interest payments. (We studied term bonds.)

Callable bonds

bonds that can be retired by the issuer at a stated amount prior to maturity.

Acid-test ratio

cash + short-term investments + accounts receivable / current liabilities

Horizontal analysis

comparison of a company's financial condition and performance across time. Dollar change = analysis period amount minus base period amount. Percent change = [(analysis period amount - base period amount) / base period amount] x 100.

Vertical analysis

comparison of a company's financial condition and performance to a base amount.

Inventory turnover

cost of goods sold / average inventory

Current Ratio

current assets/current liabilities

An indenture

is a legal document identifying the rights and obligations of both the bondholders and the issuer

A corporation

is an entity created by law that is separate from its owners. Owners of corporations are stockholders. Stock of publicly held corporations is listed on stock exchanges, while stock of privately held corporations is not.

Bond

is an issuer's written promise to pay an amount identified as the par (face) value of the bond to the bondholder at the maturity date of the bond AND to make semiannual interest payment to the bondholder at the interest (contract) rate specified on the bond.

Treasury Stock

is shares of a company's own stock that the company has purchased on the open market and it is holding in its treasury for a business purpose, such as employee incentives or to purchase another corporation. Treasury Stock is not an asset; it is a contra-equity account. When Treasury Stock is purchased, debit Treasury Stock and credit Cash.

Ratio analysis

measurement of key relations between two financial statement items

Profit margin

net income / net sales

Common-size financial statements

reveal changes in the relative importance of each financial statement item. All individual amounts in common-size statements are redefined in terms of common-size percents. A common-size percent is measured by dividing each individual financial statement amount under analysis by its base amount

Book value per common share

shareholders equity applicable to common stock / number of common shares outstanding

par value plus Premium on Bonds Payable.

the carrying value on bonds sold at a premium is

Outstanding Shares

the number of shares issued minus shares of Treasury Stock purchased by the company.

Issued Shares

the number of shares provided to stockholders following payment of consideration.

Authorized Stock

the number of shares the corporation's charter authorizes it to issue.

Market value of a bond

the present value of all future principal and interest payments on a bond.

Preemptive right

the right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional proportionate share of common stock.

Stock options

the right to purchase common stock at a fixed price during a specified period of time.

Debt ratio

total liabilities / total assets

Debt-to-equity

total liabilities / total equity

decrease decrease

when a premium is amortized, the unamortized premium will ____________ and the carrying value of the bond will _________ at each interest payment date. The carrying value of the bonds will be par at maturity.

report cash receipts (inflows) and cash payments (outflows) during a period. It classifies those cash flows as operating, investing, or financing activities. Accounting standards require a SOCF in a complete set of financial statements.

The purpose of the Statement of Cash Flows is to what?

1. Horizontal analysis 1a. Trend analysis 2. Vertical analysis 2a. Common-size financial statements 3. Ratio analysis

The three most common tools of financial statement analysis are what?

Date of Declaration, Date of Record, and Date of Payment. On the Date of Declaration, debit Retained Earnings and credit Common Dividends Payable, which is a current liability. There is no JE on the Date of Record. On the Date of Payment, the date checks are mailed, debit Common Dividends Payable and credit Cash.

There are three important dates for dividends:

Cash flow on total assets ratio

= Cash flow from operating activities / Average total assets [Average total assets are (prior year-end total assets + current year-end total assets) / 2]

Price-earnings ratio=

= Market price for a single share of Common / Earnings per Share (To compute earnings per share, see previous ratio.)

Basic earnings per share ratio (or simply earning per share) =

= Net Income - Preferred Stock Dividends / Weighted-Average Common Shares Outstanding (To compute weighted-average shares outstanding, sum the number of shares outstanding at the end of each of the 12 months and divide by 12.)

Book-value per preferred share

= Stockholders equity applicable to Preferred Stock / number of preferred shares outstanding.

Book-value per common share =

= Total stockholders' equity minus stockholder's equity applicable to preferred stock / # of common shares outstanding (To compute stockholder's equity applicable to preferred stock, add call price times number of preferred shares outstanding and preferred dividends in arrears, if any. If there is not a call price, use the par value.)

Debt-to-equity ratio =

= total liabilities / total equity. The higher the result, the more risky the financing structure.

common stock. Only about 27 percent of corporations issue preferred stock.

All corporations issue what?

Dividend yield per share =

Annual cash dividends per share / market price per one share (Be sure to use the total dividends paid over the past 12 months, not just the last dividend.)

Dividend yield

Annual cash dividends per share / market price per share

I D N E C C R R Current Assets - + Current Liabilities + -

Chart for changes in current assets (other than cash):

long-term LIABILITIES and EQUITY

Financing activities include transactions that affect

Net cash provided by operating activities Net cash provided by investing activities Net cash provided by financing activities Net increase/decrease in cash Cash balance at 2016 year-end Cash balance at 2017 year-end

Format of the Statement of Cash Flows:

Cash and credits Bonds Payable

If bonds sell at par (100) the issuer debits _______

discount premium Market rate Market rate

If the contract interest rate is lower than what the market demands, the bonds will sell at a _____________, and if the contract interest rate is higher than what the market demands, the bonds will sell at a ____________. Because of a discount or premium, the bondholder will receive the ____________ and the issuer will pay the __________.

credit Bonds Payable for the par value of the bonds, debit Cash for the cash received, and debit Discount of Bonds Payable for the difference between par value and the cash received.

If the contract interest rate is too low, the bonds will sell at a discount. The issuer will make what entry?

The issuer will debit Cash for the cash received, credit Bonds Payable for the par value of the bonds, and credit Premium on Bonds Payable for the premium.

If the contract rate is too high, the bonds will sell at a premium. The issuer will make what entry?

receipts from issuing stock, receipts from issuing bonds, receipts from loans, and receipts from selling treasury stock.

Inflow examples from financing activities

selling property, plant and equipment, selling investments (other than cash equivalents), selling intangible assets, and collecting principal on notes receivable.

Inflow examples of investing activities

cash sales to customers, collection of cash from credit customers, receipt of interest or dividends.

Inflow examples of operating activities

paying salaries and wages, paying suppliers for goods and services, paying operating expenses, paying interest, and paying taxes.

Inflow examples of operating activities

(1) income statement, (2) balance sheet, (3) statement of stockholders' equity (or statement of retained earnings), (4) statement of cash flows, and (5) notes to these statements.

Internal users are able to obtain special financial reports prepared to meet their analysis needs. However, most users must rely on general-purpose financial statements that include the (5)

ASSETS.

Investing activities affect long-term what?

at the end of each semi-annual period for the life of the bond.

Journal entries to recognize Bond Interest Expense must be prepared when?

Price to earnings

Market price per common share / earnings per share

Basic earnings per share

Net income - preferred stock dividends / weighted average common shares outstanding

stock dividend. The dollar value of a stockholder's investment in a corporation is worth the same amount of money before and after a stock dividend. With stock dividends, it must be determined if the dividend is a Large Stock Dividend (25 percent or more additional shares), or a Small Stock Dividend (less than 25 percent additional shares). Retained Earnings are reduced and Paid-In Capital accounts are increased when stock dividends are declared. For Large Stock Dividends, debit Retained Earnings and credit Common Stock, Par Value (number of additional shares time the par value of the stock.) For Small Stock Dividends, debit Retained Earnings and credit Common Stock, Par Value and Paid-In Capital in Excess of Par using the market value of the stock (computed as number of additional shares times the market value at the Date of Declaration.

The Board can lower the market price of their stock by issuing a what?

par value minus Discount on Bonds Payable

The carrying value of bonds sold at a discount is

contributed capital and retained earnings.

The equity section of a balance sheet is comprised of what

: 1) Income Statement for the current year. 2) Balance Sheet for the current year and prior year. 3) Access to the General Ledger (long-term assets, long-term liabilities, and equity accounts).

The following materials are necessary to prepare a Statement of Cash Flows (3)

reporting significant noncash investing and financing transactions.

The full disclosure principle requires what?

debit Bonds Payable and credit Cash.

The issuer must repay the amount of principal borrowed at the maturity date of the bonds. The JE is

either the direct method or the indirect method. We teach the indirect method in Principles of Financial Accounting. These two methods apply only to the operating activities section. The net cash amount provided by operating activities is identical under both the direct and indirect methods.

The operating activities section of the Statement of Cash Flows can be prepared by what?