Accounting 242 Final

Preparing Cash Flow Statement

1. Compute the net increase or decrease in cash. 2. Compute and report the net cash provided or used by operating activities (using either the direct or indirect method) 3. Compute and report the net cash provided or used by investing activities 4. Compute and report the net cash provided or used by financing activities 5. Compute the net cash flow by combining net cash provided or used by operating, investing, and financing activities and then prove it by adding it to the beginning cash balance to show that it equals the ending cash balance.

Three Stage Process of Analyzing Cash Flow from Financing

1. Identify changes in financing related accounts. 2. Explain these changes using reconstruction analysis. 3. Report their cash flow effects.

Partnership Liquidation Situations

1. No Capital Deficiency: all partners have a zero or credit balance in their capital accounts for final distribution of cash. 2. Capital Deficiency: at least one partner has a debit balance in their capital account at the point of final distribution of cash. (That partner must cover the deficit by paying cash into the partnership if possible, if they can't then the remaining partners absorb the deficiency according to their income-and-loss-sharing ratio)

Basic Partnership Accounting

1. Uses a capital account for each partner 2. Uses a withdrawal account for each partner 3. Allocates net income or loss to partners according to the partnership agreement.

Selling (Issuing) Stock

A corporation can sell stock directly or indirectly. To sell directly,it advertises its stock issuance to potential buyers. This type of issuance is most common with privately held corporations. To sell indirectly, a corporation pays a brokerage house (investment banker) to issue its stock. Some brokerage houses underwrite an indirect issuance of stock; that is, they buy the stock from the corporation and take all gains or losses from its resale.

Privately (Closely) Held Corporation

A corporation that does not offer its stock for sale publicly and usually only has a few stockholders.

Publicly Held Corporation

A corporation that offers its stock for public sale (usually on an organized stock market) and can have thousands of shareholders.

Government Regulation (of Corporations)

Characteristic of a corporation. This is a disadvantage. A corporation must meet requirements of a state's incorporation laws, which subject the corporation to state regulation and control, whereas proprietorships and partnerships avoid many of these regulations and governmental reports.

Corporate Taxation

Characteristic of a corporation. This is a disadvantage. Corporations are subject to the same property and payroll taxes as proprietorships and partnerships plus additional taxes. The most burdensome of these are federal and state income taxes that together can take 40% or more of corporate pretax income.

Noncash Investing and Financing

When important investing and financing activities do not affect cash receipts or payments, they are still disclosed at the bottom of the statement of cash flows or in a note to the statement because of their importance and the full-disclosure principle.

Alternative Preparations of Cash Flow Statement

1. Analyzing the cash account 2. Analyzing noncash accounts

Things Included on Cash Flow Statement

1. Cash flows from operating activities 2. Cash flows from investing activities 3. Cash flows from financing activities 4. Net Increase (Decrease) in cash 5. Cash balance at prior period-end 6. Cash balance at current period-end (7). Separate note or disclosure of noncash investing and financing is required

Retained Earnings

A company's cumulative net income - net losses and dividends declared since its inception (Part of stockholders' claims on a company's net assets)

Stock Dividends

A distribution of additional shares of the corporation's own stock to its stockholders without the receipt of any payment in return. Unlike cash dividends, this does not reduce assets and equity but instead transfers a portion of equity from retained earnings to contributed capital.

Capital Stock

A general term that refers to any shares issued to obtain capital (owner financing).

No Bonus (Withdrawal)

A partner takes any combination of cash and assets agreed upon by the other partner(s). A new partnership is created between the remaining partners. A new contract and income-and-loss-sharing agreement are needed.

Bonus to Remaining Partners (Withdrawal)

A partner takes less than his recorded share of equity for one reason or another, and therefore gives remaining partners a bonus equal to the equity left behind.

General Partnership

A partnership where all partners have unlimited liability and mutual agency. Usually only a few members are involved.

Purchase of Partner Interest (Admission)

A personal transaction between one or more current partners and a new partner. To become a partner, the current partners must accept the purchaser. Accounting for the purchase of partnership interest involves reallocating current partners' capital to reflect the transaction.

Investing Assets in a Partnership (Admission)

A transaction between a new partner and the current partnership where the current partners accept assets from the new one. The invested assets become partnership property.

(Sub-Chapter) S Corporations

Corporations with 100 or fewer stockholders that can be treated as partnerships for income tax.

Mutual Agency

Each partner is a fully authorized agent of the partnership. As its agent, a partner can commit or bind the partnership to any contract within the scope of the partnership business.

Statement of Partner's Equity (Statement of Partner's Capital)

Financial statement that shows each partner's beginning capital balance, additional investments, allocated income or loss, withdrawals, and ending capital balance.

Outstanding Stock

Issued stock held by the stockholders.

Dividing Income or Loss: Allocation on Capital Balances

Method of allocating partnership income or loss by assigning an amount based on the ratio of each partner's relative capital balance.

Co-Ownership of Property

Partnership assets are owned jointly by all partners. Any investment by a partner becomes the joint property of all partners. Partners have a claim on partnership assets based on their capital account and the partnership contract.

Accrual Accounting

Recognizes revenues when earned and expenses when incurred.

Proxy

Shareholders that do not attend meetings sign this, which is a document giving a designated agent the right to vote the stock.

Par Value Stock

Stock that is assigned a ___ value, which is an amount assigned per share by the corporation in its charter.

Organization Expenses (Costs)

The costs to organize a corporation including legal fees, promoters' fees, and charter fees. These costs are debited to an account called ________.

Date of Declaration

The date the directors vote to declare and pay a dividend. This is when it becomes a liability to the company. (Journal entry needed)

Date of Payment

The date when the corporation makes payment; it follows the date of record by enough time to allow the corporation to arrange checks, money transfers, or other means to pay dividends. (Journal entry needed)

Date of Record

The future date specified by the directors for identifying those stockholders listed in the corporation's records to receive dividends. Usually follows the date of declaration by at least two weeks. Owners of the stock at this point are the ones that receive the dividends. (No formal journal entry is needed for this)

Authorized Stock

The number of shares that a corporation's charter allows it to sell. No journal entry is required for this, but the number is noted in the equity section of its balance sheet or notes. A corporation must apply to the state for a change in its charter if it wishes to issue more shares than previously authorized.

Limited Liability Companies ("LLC" or "LC")

The owners, who are called members, are protected with the same limited liability feature as owners of corporations. While limited partners cannot actively participate in the management of a limited partnership, the members of a ______________ can assume an active management role. This type of business is treated as a partnership for tax purposes.

Market Value per Share

The price at which a stock is bought and sold. Future earnings, growth, dividends, and other factors can influence this.

Cash Dividends

These cash flows provide a return to investors and almost always affect the stock's market value.

Stockholder's Equity (Corporate Capital)

This consists of paid-in capital, which is the total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock, and retained earnings, which is the cumulative net income (or loss) not distributed as dividends to its stockholders.

Limited Partnerships ("Ltd" or "LP")

This partnership has two classes of partners, general and ______. At least one partner must be a general partner, who assumes management duties and unlimited liability for the debts of the partnership. The _____ partners have no personal liability beyond the amounts they invest in the partnership. ______ partners have no active role except as specified in the partnership agreement. A _____ partnership agreement often specifies unique procedures for allocating income and losses between general and _____ partners. The accounting procedures are similar for both partnerships.

Investing Activities

Transactions and events that affect long-term assets—namely, the purchase and sale of long-term assets. They also include (1) the purchase and sale of short-term investments in the securities of other entities, other than cash equivalents and trading securities and (2) lending and collecting money for notes receivable. (Cash Flow Statement)

Cash and Cash Equivalents

Two things that must be in the cash flow statement. One of them has two criteria: be readily convertible to a known amount of cash, and be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

Retained Earnings Deficit

When a corporation has a debit balance for retained earnings, which arises when a company incurs cumulative losses and/or pays more dividends than total earnings from current and prior years. This is reported as a deduction on the balance sheet. Most states prohibit a corporation with this from paying a cash dividend to its stockholders.

Closing Process of Retained Earnings

1. Close credit balances in revenue accounts to Income Summary 2. Close debit balances in expense accounts to Income Summary 3. Close Income Summary to Retained Earnings (If dividends are recorded in a Dividends account, and not as an immediate reduction to Retained Earnings, a fourth step is necessary to close the Dividends account to Retained Earnings.)

Three Stage Process of Analyzing Cash Flow from Investing

1. Identify changes in investing related accounts. 2. Explain these changes using reconstruction analysis. 3. Report their cash flow effects.

Steps to Liquidate a Partnership

1. Record the sale of noncash assets for cash and any gain or loss from their liquidation. 2. Allocate any gain or loss from liquidation of the assets in step 1 to the partners using their income-and-loss-sharing ratio. 3. Pay or settle all partner liabilities. 4. Distribute any remaining cash to partners based on their capital balances.

Reasons for Stock Dividends

1. To keep market price of stock affordable. 2. To provide evidence of management's confidence that the company is doing well and will continue to do well.

Reasons to Issue Preferred Stock

1. To raise capital without sacrificing control. 2. Boost return earned by common stockholders. (Example of financial leverage) 3. Appeal to investors that are turned of by the riskiness of the corporation's common stock.

Common Stockholders' Rights

1. Vote at stockholders meetings. 2. Sell or otherwise dispose of their stock. 3. Purchase their proportional share of any ______ stock later issued by the corporation. 4. Receive the same dividend, if any, on each ______ share of the corporation. 5. Share in any assets remaining after creditors and preferred stockholders are paid when, and if, the corporation is liquidated. Each ______ share receives the same amount.

Partnership Agreement

Characteristic of a partnership. Partnership requires that two or more legally competent people (who are of age and of sound mental capacity) agree to be partners.

Unlimited Liability

Characteristic of a partnership. implies that each partner can be called on to pay a partnership's debts. When a partnership cannot pay its debts, creditors usually can apply their claims to partners' personal assets. If a partner does not have enough assets to meet his or her share of the partnership debt, the creditors can apply their claims to the assets of the other partners.

Dividing Income or Loss: Allocation on Stated Ratios

Method of allocating partnership income or loss by giving each partner a fraction of the total. Partners must agree on the fraction distributed to each other.

Dividing Income or Loss: Allocation on Services, Capital Balances, and Stated Ratios

Method of allocating partnership income or loss which recognizes that service and capital contributions of partners often are not equal. Salary allowances can make up for differences in service contributions. Interest allowances can make up for unequal capital contributions. Also, the allocation of income and loss can include both salary and interest allowances. (Not reported as expenses on the income statement)

Indirect Method of Reporting Operating Cash Flow

Method of reporting cash flow from operations that reports net income and then adjusts it for items necessary to obtain net cash provided or used by operating activities. It does not report individual items of cash inflows and cash outflows from operating activities. Instead, the this method reports the necessary adjustments to reconcile net income to net cash provided or used by operating activities.

Direct Method of Reporting Operating Cash Flow

Method of reporting cash flow from operations that separately lists each major item of operating cash receipts (such as cash received from customers) and each major item of operating cash payments (such as cash paid for merchandise). The cash payments are subtracted from cash receipts to determine the net cash provided (used) by operating activities.

Preferred Stock

This is stock that has special rights giving it priority (or senior status) over common stock such as preference for receiving dividends and distribution of assets if the corporation is liquidated. Carries all rights of common stock unless charter nulls them. Most of this kind of stock does not give the right to vote.

Noncumulative Preferred Stock

This kind of preferred stock confers no right to prior periods' unpaid dividends if they were not declared in those prior periods.

Convertible Preferred Stock

This kind of preferred stock gives holders the option to exchange their preferred shares for common shares at a specified rate.

Callable Preferred Stock

This kind of preferred stock gives the issuing corporation the right to purchase (retire) this stock from its holders at specified future prices and dates. The amount paid to call and retire a preferred share is its "call price", or redemption value, and is set when the stock is issued. The call price normally includes the stock's par value plus a premium giving holders additional return on their investment. When the issuing corporation calls and retires a preferred stock, the terms of the agreement often require it to pay the call price and any dividends in arrears.

Participating Preferred Stock

This kind of preferred stock has a feature allowing preferred stockholders to share with common stockholders in any dividends paid in excess of the percent or dollar amount stated on the preferred stock. This participation feature does not apply until common stockholders receive dividends equal to the preferred stock's dividend percent. Many corporations are authorized to issue _______ preferred stock but rarely do, and most managers never expect to issue it.

Nonparticipating Preferred Stock

This kind of preferred stock has a feature that limits dividends to a maximum amount each year. This maximum is often stated as a percent of the stock's par value or as a specific dollar amount per share. Once preferred stockholders receive this amount, the common stockholders receive any and all additional dividends.

Cumulative Preferred Stock

This kind of preferred stock has a right to be paid both the current and all prior periods' unpaid dividends before any dividend is paid to common stockholders.

Financing Activities

Transactions and events that affect long-term liabilities and equity. Examples are (1) obtaining cash from issuing debt and repaying the amounts borrowed and (2) receiving cash from or distributing cash to owners. These activities involve transactions with a company's owners and creditors. They also often involve borrowing and repaying principal amounts relating to both short- and long-term debt. (Cash Flow Statement)

Operating Activities

Transactions and events that determine net income. Examples are the production and purchase of merchandise, the sale of goods and services to customers, and the expenditures to administer the business. (Cash Flow Statement)

Dividend in Arrears

When preferred stock is cumulative and the directors either do not declare a dividend to preferred stockholders or declare one that does not cover the total amount of cumulative dividend, the unpaid dividend amount is called ______________.

Admission of a Partner

This happens in one of two ways: by purchasing an interest from one or more current partners, or by investing cash or other assets in the partnership.

Taxation

Characteristic of a partnership. A partnership is not subject to taxes on its income. The income or loss of a partnership is allocated to the partners according to the partnership agreement, and it is included in determining the taxable income for each partner's tax return. Partnership income or loss is allocated each year whether or not cash is distributed to partners.

Limited Liability (of Stockholders)

Characteristic of a corporation. Stockholders are not liable for corporate acts or debts.

Transferable Ownership Rights

Characteristic of a corporation. The transfer of shares from one stockholder to another usually has no effect on the corporation or its operations except when this causes a change in the directors who control or manage the corporation.

Voluntary Association

Characteristic of a partnership. A partnership is a voluntary association between partners. Joining a partnership increases the risk to one's personal financial position. Some courts have ruled that partnerships are created by the actions of individuals even when there is no express agreement to form one.

Limited Life

Characteristic of a partnership. Death, bankruptcy, or any event taking away the ability of a partner to enter into or fulfill a contract ends a partnership. Any one of the partners can also terminate a partnership at will.

Treasury Stock

A company's reacquired shares. Similar to unissued stock because they are not an asset, receive no dividends, and have no voting rights. Different from unissued stock because the corporation can resell this stock at less than par without having the buyers incur a liability, provided it was originally issued at par value or higher.

Corporation

An entity created by law that is separate from its owners (stockholders/shareholders). It has most of the rights and privileges granted to individuals.

Partnership

An unincorporated association of two or more people to pursue a business for profit as co-owners.

Lack of Mutual Agency (for Stockholders)

Characteristic of a corporation. A corporation acts through its agents, who are its officers and managers. Stockholders, who are not its officers and managers, do not have the power to bind the corporation to contracts—the power referred to as ______.

Separate Legal Entity

Characteristic of a corporation. A corporation conducts its affairs with the same rights, duties, and responsibilities of a person. It takes actions through its agents, who are its officers and managers.

Continuous Life

Characteristic of a corporation. A corporation's life continues indefinitely because it is not tied to the physical lives of its owners.

Ease of Capital Accumulation

Characteristic of a corporation. Investors are interested in buying stock because of this. All the advantages of corporations allow for this.

Bonus to Withdrawing Partner (Withdrawal)

If a partner's recorded equity is understated, or remaining partners agree to remove former partner by giving assets greater than that partner's recorded equity, that partner is given a bonus of that amount.

Partnership Contract (Articles of Copartnership)

Should be in writing, but this is also binding even if its only verbally expressed. Usually includes: 1. Names and contributions 2. Rights and duties 3. Sharing of income and losses 4. Withdrawal arrangement 5. Dispute procedures 6. Admission and withdrawal of partners 7. Rights and duties in the event a partner dies

Liquidating Cash Dividend

Some states allow this, where cash dividends are paid by returning a portion of the capital contributed by stockholders. Returns part of the original investment back to stockholders. Requires a debit entry to one of the contributed capital accounts.

No-Par Value Stock

Stock not assigned a value per share by the corporate charter. Its advantage is that it can be issued at any price without the possibility of a minimum legal capital deficiency.

Management of a Corporation (Pyramid Structure)

Stockholders --> Board of Directors --> President, Vice President, and other officers --> Employees of the Corporation

Factors in Choosing a Business Form

Taxes, liability risk, tax and fiscal year-end, ownership structure, estate planning, business risks, and earnings and property distributions.

Withdrawal of a Partner

This happens in one of two ways: a partner can sell his or her interest to another person who pays for it in cash or other assets, or cash or other assets of the partnership are distributed to a certain partner in settlement of his or her interest.

Stated Value Stock

This is a no-par stock to which the directors assign a "stated" value per share. Stated value per share becomes the minimum legal capital per share in this case.

Stock Split

The distribution of additional shares to stockholders according to their percent ownership. When this occurs, the corporation "calls in" its outstanding shares and issues more than one new share in exchange for each old share.

Incorporation

The process of creating a corporation. This takes place by obtaining a charter from a state government. A charter application usually must be signed by the prospective stockholders called incorporators or promoters and then filed with the proper state official. When the application process is complete and fees paid, the charter is issued and the corporation is formed. Investors then purchase the corporation's stock, meet as stockholders, and elect a board of directors. Directors oversee a corporation's affairs.

Statement of Cash Flows

The purpose of this financial statement is to report cash receipts (inflows) and cash payments (outflows) during a period. This includes separately identifying the cash flows related to operating, investing, and financing activities. Financial statements used to create this are comparative balance sheets, current income statement, and additional information.