Accounting Ch. 9,11,12

ex: if business earned $6 per share of common stock and the investment capitalization rate is 5%, how much would you pay for share of stock?

$6/5% = $120

What are the two ways to state dividends on preferred stock?

% of par value; or $ amt per share

what are negative items from investing activities?

(cash payments) - acquisition of plant assets; purchase of investments that are not cash equivalents; making loans to others

What are positive items from investing activities?

(cash receipts) ; sale of plant assets; sale of investments that are not cash equivalents; collections of loans receivable

Paid-in capital

(contributed capital) amount of stockholders equity the stockholders have contributed to the corporation; includes stock accounts and any additional paid-in capital

passing the dividend

(in arrears); corporations sometimes fail to pay a dividend to preferred stockholders

Stock's Market Value

(market price); price a person can buy or sell 1 share of the stock for;

formula for ROA

(net income + interest expense) / average total assets

equation for EPS

(net income - preferred dividends) / avg number of shares of common stock outstanding

what is the formula for ROE?

(net income [loss] - preferred dividends) / average common stockholders equity

How do you calculate book value if company only has common stock outstanding? (book value per share of common stock)

(total shareholders equity - preferred equity) / number of shares of common outstanding

corporations with complex capital structures present two sets of EPS figures... ?

1. Basic EPS - based on actual outstanding common shares. 2. Diluted EPS - based on outstanding common shares plus additional shares that can arise from conversion of the preferred stock into common

reasons for purchasing back stock (treasury)

1. company has issued all its authorized stock and needs stock to distribute to employees under stock purchase plans.. 2. wants to increase net assets by buying its stock low and reselling for higher price; 3. want to avoid takeover by outside party; 4.wants to increase EPS of common stock

double taxation

1. corporations pay income taxes on income. 2. stockholders pay income tax on cash dividends received from corporations

what are four purposes of the statement of cash flows?

1. predict future cash flows; 2. evaluate management decisions; 3. determine ability to pay dividends and interest; 4. shows the relationship of net income to cash flows

what are the main components of earnings quality?

1. proper revenue and expense recognition; 2. high and improving gross margin/sales ratio; 3. low operating expenses compared to sales; 4. high and improving operating earnings/sales

Why do companies issue stock dividends?

1. to continue dividends but conserve cash; 2. to reduce the per-share market price of its stock; less expensive stock makes it more attractive to investors

stockholders rights

1. vote; one vote for each share of stock owned. 2. dividends; right to receive part. 3. liquidation; right to receive portion of assets after they pay liabilities in liquidation; 4. preemption

What is considered a good rate of ROA?

10% is considered strong in most industries, but it can vary

if the est. value of a company exceeds the current mkt value of a company....

BUY the stock bc you think the stock price will go up

person at top of McDonalds Farm Inc organization chart is called the ...

CEO

Earnings per share is NOT recorded for

Comprehensive Income

purchasing treasury stock ________ assets and equity

DECREASES

Journal Entry to issue common stock

Debit: Cash; Credit: Common Stock

journal entry to record income tax for the year

Debit: Income tax expense; Credit: income tax payable and deferred tax liability

Journal Entry for dividend declaration

Debit: Retained Earnings; Credit: Dividends Payable

what happens when preferred is converted to common? and why?

EPS is diluted because more common shares are divided into net income

if the est. value of company equals current mkt value of a company...

HOLD the stock bc you think the stock price will hold steady

issuing stock ______ assets and equity

INCREASES

do financial analysts include discontinued operations in predictions of future corporate income?

NO - they will not generate future income

between ROE and ROA... which is always higher for a successful company in the long run?

ROE is always higher because stockholders take a lot more investment risk than bondholders; stockholders expect their return on investment to exceed the amount they are having to pay their creditors for borrowed funds

When making journal entry for dividend, what do you debit?

Retained Earnings; # = shares x $amt selling for

if the est. value of company is less than current mkt value of company...

SELL the stock bc you think the price will fall

Other examples of Noncash Investing and Financing Activities

acquire land by issuing note payable; payment of long-term debt by issuing common stock;

losses are __________ to net income to compute cash flow from operations

added back

after stock split.. what happens to account balances?

all are the same except for par value, shares authorized, and shares issued; equity and assets/liabilities are unaffected

earnings per share

amount of a company's net income per share of its outstanding common stock;

Book Value

amount of owners equity on company's books for each share of its stock;

Retained Earnings

amount of stockholders equity corporation has earned and not used for dividends

Liquidation Value

amount that a company must pay a preferred stock-holder in even the company sells out and goes out of business

Par Value

arbitrary amt assigned by company to a share of its stock; set value low;

The deferred tax liability is reported on...

balance sheet as long term

Common Stock

basic form of capital stock; benefit most if successful because they take greatest risk

share of stock

basic unit of ownership for a corporation

equation to find ending plant assets after selling plant assets?

beg. plant assets, net + acquisition cost - depreciation - book value of assets sold

how do you calculate average total assets?

beginning and ending balance sheets

equation to find ending investments after selling investments?

beginning investments + purchase cost of investments - cost of investments sold = ending investments

equation to find ending notes receivable after collecting notes receivable?

beginning notes receivable + new loans made - collections

who has the authority to declare a dividend?

board of directors

Declaration Date of Dividend

board of directors announces the dividend; creates liability for corporation

Obligation to pay dividends on preferred stock occurs only after.... ?

board of directors declares the dividends

two types of treasury stock transactions

buying and selling

examples of investing activities

buying and selling of land, buildings, equipment, and investments in other companies

advantages of corporation

can raise more capital than proprietorship/partnership; continuous life; ease of transferring ownership; limited liability of stockholders

Retained Earnings account

carries balance of business's net income - net losses and declared dividends over corporation's lifetime

what does the cash flow statement report?

cash receipts (where cash came from) and how it was spent (payments)

what are the three forms of dividends?

cash; stock; noncash assets

How do you calculate the avg price per share of treasury stock purchased?

change in cost / change in # of shares

CEO

chief executive officer; chairperson of board of directors

CFO

chief financial officer; vice president in charge of sales, manufacturing, accounting, finance

president (COO)

chief operating officer; in charge of day-to-day operations

what may be exchanged for convertible preferred stock?

common stock

ROE is computed only on ____________?

common stock because the return to preferred stockholders is the specified dividend

comprehensive income

company's change in total stockholders' equity from all sources other than from the owners of the business

Treasury Stock

company's own stock that it has issued and then later reacquired

Earnings per share is reported for

continuing operations, discontinued operations, extraordinary items

treasury stock is a ______ account

contra stockholders' equity;

noncumulative preferred stock

corporation is not obligated to pay dividends in arrears; until the board declares dividend

What does credit balance in retained earnings indicate?

corporation's lifetime earnings exceed lifetime losses and dividends

What does debit balance in Retained Earnings indicate?

corporation's lifetime losses and dividends exceed lifetime earnings

What can change the market value of a stock?

corporation's net income, financial position, future prospects, and general economic conditions;

prior-period adjustments

corrections to retained earnings for errors of an earlier period; appears on statement of retained earnings

treasury stock is recorded at ....

cost; without regard to stock's par value

Operating Activities

create revenues, expenses, gains, and losses - net income;

what is reported on balance sheet?

current liabilities: income tax payable

Number of shares of stock outstanding is the same as the # of shares...

currently in hands of stockholders

treasury stock carries _______ balance

debit

Resale of treasury stock journal entry

debit cash; credit treasury stock and paid-in capital from treasury stock transactions

Journal Entry for converting preferred to common

debit convertible preferred; credit common stock and paid in capital in excess of par (common)

Payment Date of Dividend (journal entry)

debit: dividends payable; credit: cash

Journal Entry to issue no-par common stock

debits asset received (cash); credits stock account for value of asset received

what transactions increase liabilities?

declaration of cash dividend

what transactions have no affect on assets?

declaration of cash dividend, stock dividend, and stock split

declaring and paying dividend does what to assets and stockholders equity?

decrease assets and stockholders equity

a decrease in a current liability does what to cash...

decreases cash

increase in a current asset.. does what to cash...

decreases cash.

what is the purpose of a stock split?

decreases market price of stock - making it more attractive in market

gross profit (gross margin)

difference between net sales and CGS

What are a separate category on the income statement?

discontinued operations

dividend

distribution by a corporation to its stockholders, usually based on earnings

No Par Stock

does not have par value; may have stated value tho;

chairperson

elected by board; most powerful person in organization

board of directors

elected by stockholders and appoints officers to manage the business

to declare a dividend, a company must have...

enough retained earnings to declare the dividend; and enough cash to pay the dividend

investment capitalization rate

estimate value of investment; also called interest rate

equation to estimate the value of common stock

estimated annual income in future/investment capitalization rate

Noncash investing and financing

example would be a company issuing common stock to acquire a warehouse

Assets received in exchange for the issuance of stock should be recorded at ....

fair market value

when common stock is issued for for services, transaction is recognized at?

fair market value

changes due to dividends

financing

changes in long-term liabilities and paid-in capital accounts

financing

equity transactions are ______ activities

financing

cash equivalents

highly liquid short-term investments that can be converted to cash immediately

what is defined (by GAAP) as a small dividend?

if the new shares being issued are less than 20-25% of the total number of shares outstanding prior to the stock dividend

how do you compute income tax expense?

income before income tax (from income statement) x income tax rate

what is reported on income statement?

income before income tax, income tax expense, net income

difference btwn income statement and income tax return?

income statement reports results of operations; income tax return is filed with IRS to measure how much tax to pay the govt in the current period

to account for income tax, the corporation measures...

income tax expense and income tax payable

Investing Activities

increase and decrease long-term assets;

Stock Splits

increase in number of shares of stock authorized, issued, and outstanding, coupled with proportionate reduction in stock's par value

stock dividends increase _________ and decrease ___________

increase stock account; decrease retained earnings

an increase in a current liability does what to cash....

increases cash

decrease in a current asset does what to cash

increases cash.

changes in noncurrent assets are...

investing

what transactions increase assets?

issuance of common and preferred stock and sale of treasury stock

what transactions increase stockholders equity?

issuance of stock and sale of treasury stock

Financing transactions that affect cash and equity fall into 3 main categories... ?

issuance of stock; treasury stock; dividends

How do you find how many shares of common stock were outstanding at end of year?

issued stock - treasury stock

Possible causes of common stock increasing from year to year

issued stock; dividends (cash, stock); stock dividend declared

Examples of Financing activities

issuing stock, borrowing money, buying and selling treasury stock, and paying cash dividends; paying off a loan

What are positive items from financing activities?

issuing stock; selling treasury stock; borrowing money

Financing Activities affect...

liabilities and stockholders' equity, such as Notes Payable, Bonds Payable, Long-Term Debt, Common Stock, Paid-In Capital in Excess of Par, and Retained Earnings

is deferred tax liability long or short term?

long

investing activities affect...

long-term assets, such as Plant assets, investments, and notes receivable

extraordinary gains/losses

losses from natural disasters and expropriation of company assets by a foreign govt;

stockholders are most concerned with what value of the stock?

market value

Authorized stock

maximum number of shares the company can issue under its charter;

Return on Assets (ROA)

measures a company's use of its assets to earn income for the two groups who finance the business

cumulative preferred stock

must receive all dividends in arrears plus the current year's dividend before any dividends go to the common stockholder

when company buys from or sells its stock to its stockholders, does it incur loss or profit?

neither

what is the only item that increases retained earnings?

net income

what are the two key figures used in financial analysis?

net income (or income from continuing operations) and cash flow from operations

what two things do you need for a business to be successful?

net income and strong cash flow

why are gains subtracted from net cash provided by operations?

net income includes the gain, so we must subtract it so it can be added to the net book value of equipment removed in the investing section

What are positive items from operating activities?

net income; depreciation/amortization; loss on sale of long-term assets; decreases in current assets other than cash; increases in current liabilities

What are the negative items from operating activities?

net loss; gain on sale of long-term assets; increases in current assets other than cash; decreases in current liabilities;

what can decrease retained earnings?

net losses and dividends

depreciation's effect on cash and income...

no effect on cash; decreases net income

A journal entry on the date of record of a dividend includes...

nothing; no entry is made.

Issued stock

number of share the company has issued to its stockholders; cumulative total from company's beginning up thru current date

how do you calculate cash amt to issue common stock?

number of shares issued x issuance price per share

equation to calculate current market value of a company

number of shares of common stock outstanding x current market price per share

Outstanding stock

number of shares that stockholders own; issued stock - treasury stock

Financing Activities

obtain cash from investors and creditors

changes due to net income

operating

changes in current assets are...

operating

changes in current liabilities

operating

what is the most important of the three activities on a cash flow statement? why?

operating because they reflect the core of the organization; successful business generates most of its cash from operating

if company splits its stock 2 for 1.... what happens to outstanding shares and par value?

outstanding shares is doubled; each share's par value is halved;

legal capital

par value of shares issued

"large" stock dividends are recorded at _______

par-value

what transactions decrease liabilities?

payment of cash dividend

what transactions have no effect on stockholders equity?

payment of cash dividend, stock dividend, stock split

what are negative items from financing activities?

payment of dividends; purchase of treasury stock; payment of principal amounts of debts

Preferred Stock

pays fixed dividend; rare; receive dividends before common stockholders and receive assets before them if corporation liquidates;

what must be subtracted from net income to compute EPS? why?

preferred dividends because holders of preferred stock have first claim on dividends

Possible causes of preferred stock decreasing from year to year...

preferred stock converted; bought some back; retired preferred stock

order that corporation lists its accounts when reporting stockholders equity

preferred, common, additional paid-in capital; retained earnings

Redemption Value

price the corporation agrees to pay for the stock; set when stock is issued

Stock Dividend

proportional distribution by a corporation of its own stock to its stockholders

what transactions decrease stockholders equity?

purchase of treasury stock and declaration of cash dividend

what transactions decrease assets?

purchase of treasury stock and payment of cash dividend

indirect method

reconciles from net income to net cash provided by operating activities

Redeemable Preferred Stock

requires company to redeem stock at set price; is not stockholders' equity - it is liability;

cash dividends are declared from ...

retained earnings

if sold treasury stock for price below cost, debit ____________ for difference

retained earnings

revenue principle

revenue is not recognized until it is earned - when selling business has successfully completed delivering product to customer

preemption

right to maintain ownership in corporation; if you own 5% of stock, corporation must offer you opportunity to buy 5% of new shares

largest operating expenses

salaries, wages, utilities, and supplies

disadvantages of corporation

separation of ownership and management; corporate taxation; government regulation

If given retained earnings and net income, how do you find dividends?

set up retained earnings T-acct with beg. balance + income - dividends = end balance

board of directors

sets company policy and appoints officers

Return on Equity (ROE)

shows relationship between net income available to common and average common stockholders' equity;

outstanding stock

stock in the hands of the stockholder

limited liability

stockholders have no personal obligation for liabilities; most they can lose on investment is cost of it

Date of Record of Dividend

stockholders receive dividend;

how do you compute income tax payable?

taxable income (from income tax return) x income tax rate

An audit report by independent accountants gives investors assurance that..

the company's financial statement conform to GAAP

earnings quality

the higher the better

why do we add depreciation, depletion, and amortization expenses back to net income?

they have decreased net income, so to convert net income to cash flows we must add it back to cancel the earlier deduction

Why do companies retire their preferred stocks?

to avoid paying dividends on preferred stock; cannot be reissued; rare

equation for net income or net loss

total revenues and gains - total expenses and losses

comprehensive income includes net income plus

unrealized gains (losses) on available-for-sale investments; and foreign currency translation adjustments

deficit

when losses and dividends exceed earnings; subtract this amount to determine total stockholders equity