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