Accounting Chapter 10-12
times interest earned ratio? What does it measure?
(NI + Interest Exp. + Income Tax Exp) / (Interest Exp) = ratio, the higher the better measures solvency indicates the company's ability to meet interest payments as they come do
return on common stockholder's equity and what does it meaure
(NI - dividends on preferred stock) / (average common stockholder's equity) measures amount of NI to each dollar of common stockholders equity Measures profitability
Earnings per share ratio
(NI - dividends on preferred stock) / (weighted average of common shares outstanding)
pay out ratio and what does it measure
(total cash dividends on common stock) / (NI) measure the % of earnings a comapny distributes in the form of cash dividends to common stockholders
what would the journal entries look like for a mortgage note?
1/1/11 Cash $100 N/P $100 12/31/11 Interest Exp. $4 N/P $6 Cash $10 12/31/12 Interest Exp. $3.76 N/P $6.24 Cash $10
How do you journalize a discount on bond?
1/1/11 Cash (amount x discount %) XXXX Discount on B/P X B/P XXXXXX
what does it mean when a $1000 bond is quoted at 102
100 x 102% = 1020, it is selling at a premium
what does it mean when a $1000 bond is quoted at 98
100 x 98% = 980, it is selling att a discount
what does it mean when a $1000 bond is quoted at 100
1000 x 100% = 1000, it is market rate
how do you amortize a bond discount
Amount of discount/life of bonds = amount amortized each year
what does a premium look like on a balance sheet
B/P XXXX +Prem B/P XX =XXXXXX
how do you display a bond discount on the balance sheet
B/P XXXXX less: discount on B/P XX = XXX
journal entry of stock issued at PIC>PAR
Cash (#of shares * PIC value) XXXX Stock (Par value* #of shares) X PIC>Par (difference between pic& par prices) XXX
journal entry of stock issued at par
Cash (#of shares * par value) XX stock (#of shares * par value) XX
how do you journalize a premium on a bond?
Cash (amount x premium%) XXXX B/P XXX Premium on B/P X
Journal entry for date of payment of cash dividends
Dividend Payable XX Cash
Journal entry for declaration date of cash dividends
Dividends XX Dividend Payable XX
how do you journalize the interest expense with a premium?
Interest Exp XXXX Cash XXXX Premium B/P XX Interest Exp XX
how do you journalize the interest on a bond with a discount
Interest expense XXX Cash XXX Interest expense X Discount on B/P X
Why is separation of ownership and management a disadvantage of corps?
MORAL HAZARD management could make decisons that only benefit them, not the corp as a whole
debt to total assets ratio? what does it measure
Total liabilities/total assets = % solvency, lower better, measures ability to pay debt
direct issuance of stock
a corp can issue common stock directly to investors
why is seperate legal entity an advantage of corporations?
a corp is the only legal and seperate entity, it can sue and be sued, but is seperate from its owners
what is a cash dividend
a proportional-to-ownership distribution of cash to stockholders
what benefit does a premium on bonds payable offer the company
acts to reduce interest exp over the life of the bond
indirect method
adjusts net income for items that do not affect cash to determine net cash provided by operating activities favored by company's because -easier & cheaper to prepare -focuses on differences between net income& net cash flow from activities
face value/maturity value
amount owed at maturity
Date of interest payments
annual/semi annual payments
serial bonds
bond issue has staggered maturity dates
convertible bonds
bonds you can convert to stock
how can a corp easily raise large amounts of $?
by issuing bonds and stocks
Par value stock
captial stock that has been assigned a value per share in the corporate charter
Direct method operating activites, cash inflows and outflows
cash inflows from customers, interest income & dividend income cash outflows for inventory, operating expenses, salaries, taxes, interest
Treasury Stock
company buys its own stock no longer considered outstanding, but still issued not entitled to votes or dividends
maturity date/redemption at maturity date
company has to pay face to bond holder
Secured or mortgage bonds
company has to pledge collateral in order to get that bond
why is taxation a disadvantage of corps?
corporate tax rates suck :( . (really this is what my notes say)
what is the normal balance of Premium on B/P
credit
what is the current ratio? what does it measure
current assets/current liabilities = a ratio the higher it is the more liquid it is
what is the normal balance on Discount on B/P
debit
why is continuous life an advantage of corps?
don't have to stop life of compy when stock is exchanged
what are reasons for stock dividends
dont have enough cash/to conserve cash increases marketability of the stock, if it is large enough the stock price will drop
Bond certificate
evidence of a bond
Preferred stock
has contractual provisions that give it preference/priority over common stock in certain areas
why would you record a contingent liability as an actual liability
if it is probable that a loss will occur and the amount can be reasonably estimated, then you must record the loss on the I/S and as a liability on B/S
when would you report contingency in notes to financial statements?
if it is resonably possbile that a loss will occur
Why would a company issue a bond at a premium?
if the interest rate was higher than the market rate, investors will be very interesed in buying the bonds and therefore the price of thebonds will bid up. So even the interest rate is higher, they will only be paying interest on the face value of the bond, and therefore lower the interest costs
why would a company issue a bond at at discount?
if the interest rate was lower than the market rate, investors will not be interested in buying the bonds, so the value of the bonds will fall below their face value. So even though the company is getting less money on the bond, their interest rate is lower too.
debt vs. Equity financing
in general, as long as the return on assets rate exceeds the rate paid on debt, the company will increase the return on common stock holder's equity by the use of debt
effects of stock split
increase # of shares issued, outstanding and authorized reduces the par value
effects of stock dividends
increases # of shares issued & outstanding decreases of retained earnings and an increase in paid in capital
reasons for a stock-split
increases the marketbaily of the stock by decreasing the price per share
Direct method investing activities Cash inflows and outflows
inflows - sale of PP&E, sale of investments(stocks/bonds), collection of loan principal outflows - purchase of PP&E, purchase of investments (stocks/bonds), loans to others
direct method financing activities cash inflows and outflows
inflows - sale of own stock, issues of bonds payable, issue of notes payable outflows - dividends to stockholders, principal repayment on notes payable, redemption of bonds payable, treasury stock
how do you journalize an amortize of a bond discoutn
interest expense XX discount of B/P XX because once you are amortizing the discount, you are increasing the interest expense by decreasing the discount
how do you calculate the total interest expense over the life of the bond?
interest rate * bond life (+or-) discount/premium = total interest paid
How do you calculate the amount of cash paid to bondholders over the life of the bond?
interest rate * bond life + Face Value = total amount paid to bondholders
bondholders
investor, company that owes them
How do you figure out how much treasury stock a compy has?
issued stock - outstanding stock = treasury stock
indirect issuance of stock
issuing stock through an investment banking firm that specializes in bringing securities to the attention of prospective buyers
Why would you amortize a bond discount?
it spreads the costs of the discount out over time, because now it is reported as an interest expense, that way when its at maturity and you have to pay the face value, you have the money to pay the full face value back.
liquidity
measures ability to pay in the short run
solvency
measures ability to survive in the long run
retained earnings
net income that a company retains in the business
Contingent Liability
potential liabilty that depends on something happening in the future that is related to past actions
cumulative dividend
preferred stockholders must be paid both current-year dividends and any unpaid prior year dividends before common stockholders receive dividends
stock dividend
proportional to ownership distribution of the corps own stock to stock holders, results in a decrease in retained earnings and an increase paid in captial
why is gov regulation a disadvange of corps?
public corporation means you are being regulated and must file a ton of info with the gov.
contractual interest rate/stated rate
rate that is on the bond, the interst rate that is used to pay interest payments
statement of cash flows
reports detail of the inflows and outflows of cash, explains the change in cash and cash equivalents from the beginning of the year to the end of the year
if contract rate = market rate, then
sell at 100%
if contract rate > market rate, then
sell at a premium >100%
if contract rate < market rate, then
sell at discount <100%
direct method
shows operating receipts and payments prepared by adjusting each item in the income statement from the accrual basis to the cash basis
why is transferability of ownership an advantage of corps?
stock is sold and exchanged every day
Paid in Capital
the amount stockholders paid to the corporation in exchange for shares of ownership (PIC)
callable bonds
the company can retire the bond PRIOR to the scheduled maturity date
stock split
the issuance of additional shares of stock to stockholders according to their % of ownership
market intrest rate/effective rate
the rate investors are demanding for similar investments in the market place
unsecured or debenture bond
the valude of the bond rests on the good name of the company, no collateral
Why is limited liability of stockholders an advantage of corps?
this is the best advantage, because the owners are not liable for the debt of the company
reasons for treasure stock
to avoid a hostile takeover have extra cash increase/stablize stock price increase earnings per share
net increase/decrease in cash
total the net cash flows from each of the 3 activities (operating, investing, and financing), this number should represent the change in your cash account
what is common stock
when a corp only has 1 class of stock it is identified as common stock, votes, dividends, liquidation, pre-emptive right
dividends in arrears
when preferred stock is cumulative, preferred dividends not declared in a given period, not considered a liability, no obligation exist until the board of directors formally declares that the corp will pay dividend, should disclose in notes to the financia statement
Term bonds
when your entire bond issue matures at the same time
why is corporate management an advantage of corps?
you have a management team to run your business
