CH's 8, 9, 11 Accounting
Retained Earnings
When companies earn a profit, its managers and owners often decide to reinvest some portion of the earnings in business growth rather than distribute them to shareholders. This reinvestment is reported on the balance sheet under shareholder's equity as retained earnings.
liquidity
the ability to be used as, or directly converted to, cash
depreciation
the allocation of the original cost of an asset to the periods benefited by its use
book value
the original cost of an asset minus the amount of accumulated depreciation
Stock Split (Effect on Total Share Holder's Equity)
-Definition: The creation of additional shares of stock with a reduction of the Par Value of the Stock. Doubles owned shares, and price is halved (No Journal Entry for Stock Splits). -Effect on Share Holder's Equity: There is no effect on Share Holder's Equity from a Stock Split. Rather, the note information accompanying the balance Sheet must disclose (reveal) the additional shares and the reduction of the Par Value per share.
Purpose of Stock Dividend
-Definition: To insure the additional shares of stock to existing stockholders. -Purposes: 1. Do not require the use of cash. A corporation may not have sufficient cash to declare a Cash Dividend 2. Reduce market price of stock. Lower price may make the stock more attractive to a wider range of investors. 3. Do not represent taxable income to recipients and may be attractive to some wealthy investors. -ALSO: 2 types of Stock Dividends include Small Stock Dividends and Large Stock Dividends 1. Small Stock Dividends (S.S.D.'s) are 20%-25% of Outstanding Stock or Less. Market Value/Price is used with S.S.D.'s -EXAMPLE OF S.S.D.'s JE James has 5,000 issued/Outstanding shares and distributed them on April 1st 2011 with a Market Price of $40, and a Par value of $10 per share. A 10% Stock Dividend was declared on March 1st. Debit Credit (March 1st) Retained Earnings $20,000 Additional Paid in Capital $15,000 Common Stock Dividend Distributable $5,000 ***When Stock is actually distributed Debit Credit (April 1st) Common Stock Dividend Distributable $5,000 Common Stock $5,000 -These numbers are because 10% of 5,000 shares=500 shares. 500 shares times the market value of $40= $20,000 which will be retained Earnings. Par Value of shares is recorded in Common Stock Dividend Distributable, thus Par Value=$10 times 500 shares= $5,000. And Since $20,000-$5,000= $15,000 is the Additional Paid in Capital because it is the amount received for the insurance of stock in excess of the par value of the stock. And When stocks are issued Common Stock will always equal C.S.D.D so they are both $5,000. 2. Large Stock Dividends (L.S.D.'s) are 20%-25% of Outstanding Shares or more. Par Value is used with L.S.D.'s -EXAMPLE of L.S.D.'s JE James has 5,000 issued/Outstanding shares and distributed them on April 1st 2011 with a Market Price of $40, and a Par value of $10 per share. A 100% Stock Dividend was declared on March 1st. Debit Credit (April 1st) Retained Earnings $50,000 Common Stock Dividend Distributable $50,000 ***Stock is then actually distributed Debit Credit (March 1st) Common Stock Dividend Distributable $50,000 Common Stock $50,000 -These numbers are because 100% of 5,000 shares= 5,000 shares. Par value ($10) is used for L.S.D.'s Thus, $10 times 5,000 shares= $50,000 which will be Retained Earnings. Par Value of shares is recorded in Common Stock Dividend Distributable (C.S.D.D.), thus Par Value=$10 times 5,000=$50,000. And Common Stock will always equal C.S.D.D. when stocks are issued.
Purpose of Stock Split
-Results in additional shares of stock outstanding and is nontaxable -increases number of shares, reduces market price, per share, makes stock more accessible to a wider range of investors -***Reduces Par Value of per share and no accounting transaction is done so no JE (Difference between Stock Split and Stock dividend).
Additional Paid in Capital (APIC)
-The amount received for the insurance of stock in excess of the par value of the stock. (Stock is sold for amount higher than Par Value) -Common Stock Dividend Distributable minus Retained Earnings
1. Revenue Expenditure vs 2.Capital Expenditure
1. A cost that keeps an asset in its normal operating condition and is treated as an expense 2. A cost that improves the asset and is added to the asset account
CHAPTER 11: All accounts in Stock Holder's Equity Section (Titles and in proper order) *****(BONNIE SAID YOU DO NOT HAVE TO KNOW PROPER ORDER)*****
1. Common Stock: Stocks are authorized>/=, Issued>/=, Outstanding (Common stock represents a share of ownership in the company and can be traded between shareholders) 1. Preferred Stock: Preferred because they are Participating, Cumulative, Dividends (May have the first right to dividends or assets depending on the terms of the stock). NOTE: Both Preferred Stock and Common stock are Contributed Capitol and are thus in the same category. 2. Paid in Capital: Amount of paid-in capital that exceeds the stock's par value. This is because actual cash value of a shareholder's investment in the company may not be proportional to the amount of the company's shares they own. The company may also receive more money from the investor than they return in stock, when shares are valued at par. 3. Retained Earnings: When companies earn a profit, its managers and owners often decide to reinvest some portion of the earnings in business growth rather than distribute them to shareholders. This reinvestment is reported on the balance sheet under shareholder's equity as retained earnings. 4. Treasury Stock: Represents stock that has been reacquired by the company from its shareholders in exchange for cash or other assets (Difference between Issued and Outstanding stocks, only one to have a debit or negative balance).
When and how to either accrue (FS) or disclose (FN) a contingent liability *****(BONNIE SAID YOU DONT NEED TO KNOW HOW TO DO THESE JUST WHEN)*****
1. When/How to accrue (FS): Should be accrued and recorded on balance sheet if it is probable and if the amount can be reasonably estimated. Accrued Contingent Liabilities include: Product warranties, guarantees, coupons, premiums, and lawsuits and legal claims that will result in estimable losses. Thus, you use estimated liability to estimate how much of products will become defective with warranties or guarantees that ensure repair. EXAMPLE: Computer company sells 100 computers in 2010 for $500,000, and at the end of 2010 they must recored how much of their sales are estimated liabilities. So, the estimate 2% of sales are estimated liabilities. Thus, JE looks like this: Warranty Expense 10,000 Estimated Liability 10,000 So, to record estimated liability at 2% of sales is this: BALANCE SHEET: ASSETS= LIABILITIES+ STOCK HOLDER'S EQUITY Estimated (10,000) Liability $10,000 INCOME STATEMENT: REVENUES- EXPENSES= NET INCOME Warranty (10,000) Expense $10,000 2. When/How to disclose (FN): Should be disclosed if they do not meet probable criterion (can not be reasonably estimated) but are still "reasonably possible" liabilities. These are generally disclosed in the notes but are not accused and reported on the balance sheet. Contingent Liabilities considered "remote" are not required to be disclosed.
interest bearing note
A loan between lender and borrower which accrues interest over the pre-determined loan period
non-intrest bearing note
A note without periodic interest payment, but selling at a discount and maturing at face value
Current liability classification
Accounts that will be satisfied within one year or the current operating cycle
Par Value
An arbitrary amount that represents the legal capital of the firm (Par value=Legal Capital).
Contributed Capital
An entry on the shareholders' equity section of a company's balance sheet that summarizes the total value of stock that shareholders have directly purchased from the issuing company (Composed of Preferred and Common Stock).
Common Stock
Common stock represents a share of ownership in the company and can be traded between shareholders (Common stockholders are on the bottom of the priority ladder for ownership structure).
Cumulative Preferred Stock
Dividends on Preferred Stock may be cumulative. If this is the case, dividends that are not paid are considered to be in arrears. Before a dividend on a Common Stock can be declared in a following period, the dividends in arrears as well as the current year's dividend must be paid to Preferred Stock holders.
Cash Dividends (3 Dates and JE for each)
Money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. All dividends must be declared by the board of directors and are taxable as income to the recipients. 3 Dates and JE for each Example: Debit Credit (1st Date) Retained Earnings 1000 Dividends Payable 1000 (2nd Date) Dividends Declared 1000 Dividends Payable 1000 (3rd Date) Dividends Payable 1000 Cash 1000 ALSO: Another explained example... -If 1 share of Common Stock at $20 market value with a par value of $1 is sold JE would be: Debit Credit Cash $20 Common Stock $1 Paid in Capital $19
Arrears
Overdue debt, liability or obligation. An account is said to be "in arrears" if one or more payments have been missed in transactions where regular payments are contractually required, such as mortgage or rent or Cumulative Preferred Stock.
Preferred Stock
Ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally is preferred because they are Participating, Cumulative, and have Dividends that are paid out before those of Common Stock.
Authorized Shares
The maximum number of shares a corporation may issue as indicated in the corporate charter.
Outstanding Shares
The number of shares issued minus the number of shares held as Treasury Stock.
Issued Shares
The number of shares sold or distributed to stock holder's.
contingency (contingent liability
a potential liabilities arising from acts, events, or circumstances occurring before the date of the balance sheet date. (An existing condition for which the outcome is not known but depends on some future event)
CHAPTER 9: current liability (short term liability)
accounts that will be satisfied within one year or the current operating cycle
CHAPTER 8: intangible assets
assets that do not have physical substance
current ratio
current assets divided by current liabilities