Exam 1 (Ch. 11, 12, 13)
Common/Preferred entry for par stock is calculated how:
# of shares x par value
Cash entry for stock is calculated how:
# of shares x selling price
Common/Preferred entry for no-par stock is calculated how:
# of shares x selling price
Horizontal analysis formula
(Current year amount - base year amount) / base year amount
Disadvantages of a corporation
1. Agency theory (owner is not in day-to-day operations) 2. Government regulations 3. Additional taxes
Advantages of a corporation
1. Separate legal existence 2. Limited liability of stockholders 3. Transferable ownership rights 4. Ability to acquire capital 5. Continuous life 6. Corporate management
Steps to complete the SCF
1. Template (almost always the same) 2. Identify the sources and uses of: operating, investing, and financing activities 3. Drop numbers into the template
Dividends are expressed as:
A percentage of the par or stated value. As dollar amount per share
If you use the direct method to calculate the SCF, you have to provide:
A reconciliation (indirect)
Vertical analysis (common-size analysis)
A technique that expresses each financial statement item as a percent of a base amount to compare companies without respect to size.
Investing activities
Acquiring and disposing of investments and productive long-lived assets. Lending money and collecting the loans
Adjunct accounts
Add to Ex. Premiums on bonds payable
Other comprehensive income
All changes in stockholders' equity except those resulting from: investments by stockholders, distributions to stockholders. ex, unrealized gain or loss on available-for-sale securities
Significant financing and investing activities that do not affect cash:
Are not reported in the bond of the SCF
Dividends Declaration Date
Board authorizes dividends. Record journal entry (set up a liability)
Treasury stock
Buying our own stock back (giving people their money back). Takes away from retained earnings and cash. Contra account
Ratio analysis
Can provide clues to underlying conditions that may not be apparent from an inspection of the individual components
On May 10, Pilar Corporation issues 2,500 shares of $5 par value common stock for cash at $13 per share. Journalize the issuance of the stock.
Cash (2,500 shares x $13) $32,500 (deb) Common Stock (2,500 shares x $5 par) $12,500 (cre) Additional paid-in capital on common stock $20,000 (cre)
Additional Paid-in Capital entry for stock is calculated how:
Cash - Common/Preferred stock entry
Authorized stock
Charter indicates the amount of stock that a corporation is authorized to sell. The number is often reported in the stockholders' equity section.
Paid-in capital
Comes first on the balance sheet. The money people invested to purchase ownership of the company
The SCF information comes from these sources:
Comparative balance sheet Current income statement Additional information
Sources for the indirect method
Comparative balance sheets Current income statement Additional Information (non-cash activities listed in footnotes)
Intercompany
Comparing across companies
Stockholders' equity
Contributed capital (paid-in capital) & retained earnings
No-par (no stated value) stock entry
Deb. Cash Cre. Common/Preferred Stock
Par (state value) stock entry
Deb. Cash Cre. Common/Preferred Stock Cre. Additional Paid-in Capital-Common/Preferred (plug entry)
Sagan Co. had these transactions during the current period: June 12 issued 80,000 shares of $1 par value common stock for cash of $300,000
Deb. Cash $300,000 Cre. Common Stock (80,000x$1) $80,000 Cre. Additional Paid-in Capital-Common $220,000
Tidal Corporation was organized on January 1, 2017. It is authorized to issue 20,000 shares of 6%, $50 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. The following stock transactions were completed during the first year. Mar. 1 Issued 12,000 shares of prefered stock for cash at $53 per share
Deb. Cash (12,000x$53) $636,000 Cre. Preferred Stock (12,000x$50) $600,000 Cre. Additional Paid-in Capital-Preferred $36,000
Tidal Corporation was organized on January 1, 2017. It is authorized to issue 20,000 shares of 6%, $50 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. The following stock transactions were completed during the first year. May 1 Issued 120,000 shares of common stock for cash at $6 per share
Deb. Cash (120,000x$6) $720,000 Cre. Common Stock (120,000x$1) $120,000 Cre. Additional Paid-in Capital-Common $600,000
Sagan Co. had these transactions during the current period: July 11 issued 3,000 shares of $100 par value preferred stock for cash at $106 per share
Deb. Cash (3,000x$106) $318,000 Cre. Preferred Stock (3,000x$100) $300,000 Cre. Additional Paid-in Capital-Preferred $18,000
Tidal Corporation was organized on January 1, 2017. It is authorized to issue 20,000 shares of 6%, $50 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. The following stock transactions were completed during the first year. Nov. 1 Issued 3,000 shares of preferred stock for cash at $56 per share
Deb. Cash (3,000x$56) $168,000 Cre. Preferred Stock(3,000x$50) $150,000 Cre. Additional Paid-in Capital-Preferred $18,000
On June 1, Forrest Inc. issues 3,000 shares of no-par common stock at a cash price of $7 per share. Journalize the issuance of the shares
Deb. Cash (3,000x7) $21,000 Cre. Common Stock (3,000x7) $21,000
Tidal Corporation was organized on January 1, 2017. It is authorized to issue 20,000 shares of 6%, $50 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. The following stock transactions were completed during the first year. Sept. 1 Issued 5,000 shares of common stock for cash at $5 per share
Deb. Cash (5,000x$5) $25,000 Cre. Common Stock (5,000x$1) $5,000 Cre. Additional Paid-in Capital-Common $20,000
Layes Inc. issues 8,000 shares of $100 par value preferred stock for cash at $106 per share. Journalize the issuance of the preferred stock
Deb. Cash (8,000x106) $848,000 Cre. Preferred Stock (8,000x100) $800,000 Cre. Additional Paid-in Capital-Preferred $48,000
Dividends Declaration Date entry:
Deb. Dividends Cre. Dividends payable
Dividend Paid Date entry:
Deb. Dividends Payable Cre. Cash
Sagan Co. had these transactions during the current period: Nov. 28 purchased 2,000 shares of treasury stock for $9,000
Deb. Treasury Stock $9,000 Cre. Cash $9,000
Treasury stock entry:
Deb. Treasury stock Cre. Cash
Noncash current assets are sources when they:
Decrease
Noncash current liabilities are uses when they:
Decrease
Sustainable income includes:
Discontinued operations Other comprehensive income
Discontinued operations
Disposal of a significant component. Disclosed in statement of comprehensive income
Horizontal analysis (Trend analysis)
Evaluating a series of financial statement data over a period of time. Earliest period presented is the base. Can be in amounts or percents
Vertical analysis formula tool
For balance sheet -> total assets will be the base For income statement -> net sales will be the base
Profitability ratios
Future owners and stockholders are interested in this. Measures of the income or operating success of an enterprise for a given period of time. Deal with Net sales/income
Investing and Financing sections of the SCF
Have to be "grossed up" Have to show the source (inflow) and the use (outflow)
Liquidation rights
If the company goes bankrupt, they will get their investment back with time
Preemptive right
If there is a stock split, their ownership will not change
Operating activities
Include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income.
Noncash current assets are uses when they:
Increase
Noncash current liabilities are sources when they:
Increase
Non-cash examples
Issuance of common stock to purchase assets. Conversion of bonds into common stock. Issuance of debt to purchase assets. Exchange of plant assets.
Outstanding
Issued and someone still has it outside of the company
Examples of Financing activities
Issuing stock/bonds on long-term debt. Paying cash dividends. Purchase cash treasury stock.
Statement of Cash Flows financial statements:
It is not prepared from the adjusted trial balance. Deals with cash receipts and payments so the accrual concept is not used in the preparation.
Tidal Corporation was organized on January 1, 2017. It is authorized to issue 20,000 shares of 6%, $50 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. The following stock transactions were completed during the first year. Jan. 10 Issued 70,000 shares of common stock for cash at $4 per share
Jan. 10 Deb. Cash (70,000x$4) $280,000 Cre. Common Stock (70,000x$1) $70,000 Cre. Additional Paid-in Capital-Common $210,000
Solvency Ratios
Long-term creditors and investors are very interested in this. Finds if a company can last over a long period of time. Deal with totals
Cash dividends
Lower retained earnings
Industry averages
Median ratios for comparisons
Issue $110,000 of bonds for a piece of land. How much cash is involved?
No cash is involved
Basse Corporation has 7,000 shares of common stock outstanding. It declares a $1 per share cash dividend on November 1 to stockholders of record on December 1. The dividend is paid on December 31. Prepare the entries on the appropriate dates to record the declaration and payment of the cash dividend
Nov. 1 Deb. Cash Dividends (7,000x$1) $7,000 Cre. Dividends Payable $7,000 Dec. 1 No Entry Dec. 31 Deb. Dividends Payable (7,000x$1) $7,000 Cre. Cash $7,000
Financing activities
Obtaining cash from issuing debt and repaying the amounts borrowed. Obtaining cash from stockholders and dividing them with a return on their investment
Preferred stock
Receive dividends before common stockholders during liquidation (or in general). Can have par or no-par value
Dividends Record Date
Registered shareholders are eligible for dividends. No entry
Retained earnings
Residual, what is left over over-time
Liquidity ratios
Short-term creditors are very interested in this. Deal with Current Assets/Liabilities
Cash equivalents are:
Short-term, highly liquid investments that are both: readily convertible to known amounts of cash, and so near to their maturity that their market value is relatively insensitive to changes in interest rates
Depreciation expense is always a:
Source
Net income is always a:
Source
Classify each item as an operating, investing, or financing activity. Assume all items involve cash unless there is information to the contrary (f) Issuance of capital stock
Source Financing
Classify each item as an operating, investing, or financing activity. Assume all items involve cash unless there is information to the contrary (b) Sale of building
Source Investing
Classify each item as an operating, investing, or financing activity. Assume all items involve cash unless there is information to the contrary (d) Cash received from sale of goods
Source Operating
Each of these items must be considered in preparing a statement of cash flows for Irvin Co. for the year ended December 31, 2017. For each item, state how it should be shown in the statement of cash flows for 2017. (a) Issued bonds for $200,000 cash
Source. Financing
Each of these items must be considered in preparing a statement of cash flows for Irvin Co. for the year ended December 31, 2017. For each item, state how it should be shown in the statement of cash flows for 2017. (c) Sold land costing $20,000 for $20,000 cash
Source. Investing
Losses are always:
Source. Operating
Direct method of the SCF
Specifies each section for where cash went (harder to keep up with)
Contra accounts
Take away from Ex. Bond discount
Indirect method of the SCF
Take net income/net loss and make adjustments to match cash
The difference between the direct and indirect method of the SCF
The Operating Activities section
Authorized
The amount of stocks you could issue
Issued
The amount of stocks you could issue
Dividend Payment Date
The company issues dividend checks. Record journal entry (get rid of liability)
Sustainable income
The most likely level of income to be obtained by a company in the future
Stockholders' rights
The ownership of stock entitles stockholders to four basic rights, unless specific rights are withheld by agreement. 1. vote 2. dividends 3. preemption 4. liquidation
Purpose of the Statement of Cash Flows (SCF)
To provide information about an entity's cash receipts and cash payments during a period. (1) operating, (2) investing, and (3) financing activities Only statement not on the accrual basis
Net Loss is always a:
Use
Classify each item as an operating, investing, or financing activity. Assume all items involve cash unless there is information to the contrary (c) Redemption (paying back when term expires) of bonds
Use Financing
Classify each item as an operating, investing, or financing activity. Assume all items involve cash unless there is information to the contrary (e) Payment of dividends
Use Financing
Classify each item as an operating, investing, or financing activity. Assume all items involve cash unless there is information to the contrary (a) Purchase of equipment
Use Investing
Each of these items must be considered in preparing a statement of cash flows for Irvin Co. for the year ended December 31, 2017. For each item, state how it should be shown in the statement of cash flows for 2017. (d) Declared and paid a $50,000 cash dividend
Use. Financing
Each of these items must be considered in preparing a statement of cash flows for Irvin Co. for the year ended December 31, 2017. For each item, state how it should be shown in the statement of cash flows for 2017. (b) Purchased equipment for $180,000 cash
Use. Investing
Gains are always:
Use. Operating
Intracompany
Within the company
Common stock entry will:
always be the amount of shares sold x par value
