Accounting Ch. 11 & 12
A corporation may have different classes of stockholders. The most common class of stock is called ________________.
"common stock" - owners
Par value or ("_________") is an arbitrary number assigned to ___________. Typically very small, no __________ content, just __________.
"stated value". assigned to shares of stock in corporate charter. very small, no informational content, just the number
Things to remember about free cash flow ratio?
- If it is negative on the balance sheet, take the absolute value. - remember to convert to millions
Two examples of cash flows from financing activities?
1. Equity financing (selling/purchasing OUR stock) 2. Debt financing (selling/repaying OUR bonds)
What are two examples of cash flows from investing activities?
1. Investments in OWN COMPANY (purchasing and/or selling PP&E) 2. Investments in OTHER ENTITIES (purchasing/selling stock/bonds of other company)
The 5 advantages/characteristics of a corporation: 1. ___________ legal existence 2. ownership is evidenced by ______________. Liability is limited to _________. 3. ownership is easily transferred through ___________. Which means a stockholder may______________ without approval of the corporation or other stockholders. 4. owners (stockholders) elect _______________. 5. earnings may be distributed in ______________.
1. Separate 2. shares of stock. Their liability is limited to the amount of their investment. 3. sale of stock buy or sell stock 4. a board of directors 5. dividends
Requirements of treasury stock: 1. Must be corporations __________ stock. 2. Must have been issued (sold) to _____________. 3. Must have been repurchased from __________. 4. Must not be ____________ but held for a purpose. These purposes are: - to have shares to issue to _________ under stock option plans. - to create demand for the stock to maintain the _____________. - to reduce the number of shares ___________ which improves reported _____________.
1. own 2. investors at some point 3. stockholders (investors). 4. retired. - employees - stock's selling price - outstanding, "earnings per share"
Stock dividends Ex) On Jan. 1, Carlisle Corp had the following SHE; C/S 500,000, PIC 780,000, RE 465,000 On June 20, the board of directors of Carlisle Corp formally declares and announces to stockholders, a 4% (small stock dividend) stock dividend on its 50,000 shares of common stock. The shares will be issued (paid) on July 14. The par value of the stock is $10 per share. The market value on June 20 is $16 per share. What is the journal entry to record the declaration date? (declared and paid) (a liability to distribute the dividends is established).
6/20 Debit Stock dividends (up) (2000sh x $16 market) 32,000 Credit C/S Distributable (2000sh x $10 par) 20,000 Credit PIC- C/S [ ($16 market - $10 par) x 2000] 12,000
Stock dividends Ex) On Jan. 1, Carlisle Corp had the following SHE; C/S 500,000, PIC 780,000, RE 465,000 On June 20, the board of directors of Carlisle Corp formally declares and announces to stockholders, a 4% (small stock dividend) stock dividend on its 50,000 shares of common stock. The shares will be issued (paid) on July 14. The par value of the stock is $10 per share. The market value on June 20 is $16 per share. What is the journal entry to record the distribution date? (declared and paid) (the additional shares are mailed to the shareholders, relieving the corporation's liability).
7/14 Debit C/S Distributable 20,000 Credit C/S (2000sh x $10 par) 20,000
Example: If XYZ corporation is authorized to sell 1 million shares of common stock; 750,000 shares have been issued, and 50,000 shares have been reacquired by XYZ. How many shares are outstanding?
750,000-50,000= 700,000 outstanding
What is included in changes in current assets and current liabilities?
Accounts receivable, inventory, accounts payable, accrued liabilities "other payables", and taxes payable
How do you calculate net change in cash?
Add all 3 subtotals of each cash flows section
Cash flows from investing activities:
Add sale of PP&E - Purchases of PP&E = net cash flows provided by/used by investing activities
Assume a company with 10 shares outstanding issues a 20% stock dividend. Before stock dividend? After stock dividend?
Before: 10 shares outstanding After: 12 shares outstanding (10 x .20 = 2 additional shares. Add the 2 to 10)
Why is operating activities the most important category of the statement of cash flows?
Best measure of whether a company can generate sufficient cash to stay in business and to expand
What is the payout ratio?
Cash Dividends Declared on Common Stock/Net Income
How do you calculate if there is a loss or gain on PP&E?
Compare selling price to book value (cost-accumulated depreciation).
Stockholders equity only pertains to ________________.
Corporations
When common or preferred stock is issued (sold), the par value of the stock is _____________. Any amount received above par is credited to _____________.
Credited to the stock account. Credited to "additional paid in capital in excess of par" = (PIC)
What is the journal entry for issuing shares at par value common stock? Ex) Belson Corporation issued (sold) 1000 shares of $10 par value common stock for $17 per share.
Debit Cash (up) (1,000 x $17 selling price) 17000 Credit Common stock (up) (1,000 x $10 par value) 10,000 Credit PIC- C/S (1,000 x $7 excess) 7,000
What is the journal entry for issuing shares at par value for preferred stock? Ex) Belson sold 1,000 share of $25 par value preferred stock for $30 per share.
Debit Cash (up) (1,000 x $30 selling price) 30,000 Credit preferred stock (1,000 x $25 par) 25,000 Credit PIC- P/S (1,000 x $5 excess) 5,000
What is the journal entry for reselling treasury stock? Ex) Lawry resold 400 shares of its treasury stock at $13 per share.
Debit cash (up) (400 x $13 selling price) 5,200 Credit treasury stock (down) (400 x $10 cost) 4000 Credit PIC- T/S (400 x $3 excess) 1200
What is the journal entry for recording repurchased shares at par value common stock? Ex) Lawry repurchased 1,000 shares of its own $5 par value common stock for $10 per share.
Debit treasury stock (up) (1,000 x $10 cost) 10,000 Credit cash (down) (1,000 x $10 cash paid) 10,0000
What is the impact of a stock split? The par value of the stock __________. The number of shares ___________. So theoretically, the market value of the stock should ____________.
Decreases Increases Decreases
Dividends are ______________. Paid on ____________ shares only.
Distribution to stockholders. Paid on outstanding shares only.
The balance sheet may show a net effect of PP&E being acquired but doesn't show the specific ____________.
Dollars involved with PP&E disposals vs. purchases
The statement of cash flows records__________.
Every dollar in and every dollar out
If preferred stock is non-cumulative, the preferred stockholder ______________.
Forfeits any passed dividends.
When do you use provided by and used by?
If your subtotal for cash flows is positive, it will be provided by. If your subtotal for cash flows is negative, it will be used by.
Obtain financing to _____________ which is then used to ____________.
Invest in assets which is then used to operate business.
What is the formula for shares?
Issued (sold to investors) - Treasury (repurchased) = Outstanding (investors still have)
Cash dividends Ex) On January 15, the board of directors of Barns Incorporated formally declares and announces to stockholders, a $0.25 per share dividend on its common stock to shareholders of record on January 31, payable on February 15. Barns has 25,000 shares of stock authorized, 10,000 shares of stock issued, and 8,000 shares outstanding. How would you record the date of payment? This date means the ____________.
Liability is paid by mailing dividend checks. 2/15 Debit dividend payable (down) 2000 Credit cash (down) 2000
What is the payout ratio definition?
Measures the percentage of earnings distributed in the form of cash dividends to C/S holders (owners) of the company only.
Cash flows from operating activities under indirect method:
Net Income + depreciation expense - gain on sale of PP&E + loss on sale of PP&E +/- changes in current asset and current liabilities accounts = net cash flows provided by/used by operating activities
Net change in cash + ___________ = ___________.
Net change in cash + cash balance beginning (first year listed) = cash balance ending
What is a stock split? What is the journal entry for a stock split?
One share of stock is split into two or more shares. No journal entry.
What is the most important category of the statement of cash flows?
Operating activities
Stock dividends are paid only on ____________.
Outstanding shares
How do you calculate dividends in arrears?
Outstanding shares x par value x dividend rate x amount of years in arrears
If preferred stock is cumulative, all dividends in arrears must be _______________.
Paid before any dividends are granted to common stockholders.
Preferred stock that is cumulative vs. non-cumulative is ________________.
Qualitative characteristics of P/S that is stated in prospectus.
Treasury stock is when we ______________________. It is a _________ account and __________ stockholder's equity.
Repurchase our own stock back from investors. Contra equity account Decreases
Example; equipment with a cost of $30,000 and accumulated depreciation of 16,000 was sold for $18000. Calculate the gain/loss associated with the sale of equipment (operating) and what will be recorded under investing.
Selling price; 18000 BV; 30,000- 16,000 = 14000 = 4000 gain operating = subtract gain on sale (4000) investing = sale of building (18000)
A small stock dividend is ______________ of outstanding stock. A large stock dividend is ____________ of outstanding stock.
Small: less than 20-25% of outstanding stock Large: greater than 20-25% of outstanding stock
How does double taxation occur?
The corporation pays taxes on its income and stockholders pay taxes on dividends received from the corporation. If the corporation is profitable, they're supposed to pay taxes, and they may distribute dividends to shareholders, and will pay taxes on dividends received.
What are the two methods for reporting cash flow from operating activities? Which one is the method that FASB prefers?
The direct and indirect method (999% of the time this is method used in practice) FASB prefers the direct method.
What should your ending cash balance always be?
The last number on the statement of cash flows is always equal to the first number on the balance sheet (cash flow).
Cash dividends Ex) On January 15, the board of directors of Barns Incorporated formally declares and announces to stockholders, a $0.25 per share dividend on its common stock to shareholders of record on January 31, payable on February 15. Barns has 25,000 shares of stock authorized, 10,000 shares of stock issued, and 8,000 shares outstanding. How would you record the date of record? This date determines _____________.
Who receives the dividend Therefore, there is no journal entry for the date of record.
Cash flows from financing activities:
add issuance of debt (borrowing money-cash in) - payment of debt (paying off loan/bond-cash out) + issuance of stock (cash in) - repurchase of stock (cash out) - payment of CASH dividends only (cash out) = net cash flows provided by/used by financing activities
The statement of cash flows reconciles the ____________.
beginning and ending cash balances on balance sheet
Obtain financing by either _______________.
borrowing money or selling stock
What is the free cash flow ratio?
cash flow from operating activities (subtotal of operating section) - capital expenditures (purchase of PP&E on investing section) - cash dividends paid (on financing section)
cash flows from financing activities reports cash ____________ and ________ as a result of the activities _______________.
cash received (in) and paid (out) as a result of the activities to obtain outside capital (money) used to finance the operations of a company.
Examples of cash flows from operating activities;
cash received from customers, cash paid to suppliers, and cash paid to employees
The income statement may show that the company is profitable but not if _______________.
cash was generated from core business activities
Stock splits ________ selling price, which __________ demand, which __________ selling price. So eventually the selling price will get back to normal.
decreases, increases, increases
What is the main disadvantage of a corporation?
double taxation
When stock dividends are "paid", additional shares of stock are _______________ which allows the corporation to ______________ without using any of its cash.
given to the shareholders give a return to its shareholders
What is the general rule for the indirect method under operating expenses with assets and liabilities?
increase in current asset, subtract from statement of cash flows. decrease in current asset, add to statement of cash flows. increase in current liability, added onto statement of cash flows. decreases in current liability, subtracted from statement of cash flows
Receipts of cash ____________ cash balance and is _________ to the statement of cash flows. Payments of cash ___________ cash balance and is _________ to the statement of cash flows.
increases, added onto SCF decreases, subtracted from SCF
Stock is called treasury stock if:
it has been reacquired (bought back) by the corporation
Stock that is issued means:
it has been sold to stockholders
Stock that is outstanding means:
it is still owned by stockholders (investors)
Cash dividends Ex) On January 15, the board of directors of Barns Incorporated formally declares and announces to stockholders, a $0.25 per share dividend on its common stock to shareholders of record on January 31, payable on February 15. Barns has 25,000 shares of stock authorized, 10,000 shares of stock issued, and 8,000 shares outstanding. How would you record the date of declaration? (Once declared, the dividend becomes a ____________ of the corporation).
liability 1/15 Debit Cash dividend (up) 2000 Credit Dividends payable ($0.25 x 8000 outstanding) 2000
Statement of retained earnings may show that dividends were declared but ____________.
not if they were paid
Since dividends are not "guaranteed", a company may choose to ____________. Even on preferred stock that has a stated dividend rate. "passed dividends" are called "___________"
not pay dividends. "dividends in arrears"
In the statement of cash flows, activities involving cash are divided into:
operating activities, investing activities, and financing activities.
A corporation may establish additional classes of stock (______________) by granting certain shareholders preferential treatment in _______________.
preferred stock- not owners of the company in dividends and/or assets in event of liquidation.
Not all of a company's significant activities involve cash, for example: Where is it typically reported?
purchasing real estate with 100% mortgage, exchanging stock for assets in a separate schedule at the bottom of the statement of cash flows
Cash flows from investing activities reports cash ___________ and __________ as a result of _____________
received and paid as a result of changes in long-term assets.
The cash flows from operating activities reports cash ___________ and _________ in the normal ___________ of the business.
received and paid in the normal day to day activities of the business
Treasury stock is the only "stock" account that is not _____________. The cost of treasury stock is __________ to the __________ account.
recorded at par. debited to the contra equity account
Stock that is "authorized" means:_________________. Typically a very ________, stated in _________.
the number of shares the company has permission to sell over its lifetime. large number stated in corporate charter
A major right of common stockholders is the right to ___________.
vote in matters concerning the corporation.
