BUSM 2020 Principles of Accounting EXAM 3/FINAL

What are the two things that we do on the Declaration Date

1. Increase Dividends, a temporary account that is closes into Retained Earnings at the end of each period 2. Increase a Liability Account, Dividends Payable

REPORTING OPERATING ACTIVITIES Two ways to Report Operating Activities

1. Indirect Method 2. Direct Method

Advantages of a Corporation

1. Limited Liability: guarantees that the stockholders in a corp. can lose no more than the amount they invested, even in the event of bankruptcy 2. Ability to Raise Capital and Transfer Ownership

COMPLETE STATEMENT OF CASH FLOW (Important Notes)

1. Net Cash Flow MUST = Net Increase (Decrease) in Period Net Increase (Decrease) of Cash in Period = Total of the Net Cash Flows from Operating, Investing, and Financing Activities 2. Can find the NET CASH that this must equal on the Balance Sheet

What are the 3 main categories of Current Liabilities? What are some additional Current Liabilities?

1. Notes Payable 2. Accounts Payable 3. Payroll Liabilities Deferred Revenue, Sales Tax Payable, the Current Portion of Long-Term Debt

The Total Number of Issued Shares of Stock can be Divided into Two Categories

1. Outstanding Stock 2. Treasury Stock

Primary Components of Stockholders' Equity

1. Paid-in Capital 2. Retained Earnings 3. Treasury Stock

Reporting b. Increase in Common Stock (Financing Activities)

Also just reports Cash gained or lost (+ if Got Cash, - if Paid Cash)

Accounting Equation

Assets = Liabilities - Stockholders' Equity (resources) = (creditors' claims) + (owners' claims)

Assets vs. Liabilities (brief)

Assets = probably future benefits Liabilities = probable future sacrifices OF benefits

Cash Flows from Financing Activities

CASH INFLOWS: 1. Issuance of Bonds or Notes Payable 2. Issuance of Stock CASH OUTFLOWS: 1. Repayment of Bonds or Notes Payable 2. Acquisition of Treasury Stock 3. Payment of Dividends

Cash Flows from Operating Activities

CASH INFLOWS: 1. Sale of Goods or Services 2. Collection of Interest and Dividends CASH OUTFLOWS: 1. Purchase of Inventory 2. Payment for Operating Expenses 3. Payment of Interest 4. Payment of Income Taxes

Cash Flows from Investing Activities

CASH INFLOWS: 1. Sale of Investments 2. Sale of Long-term Assets 3. Collection of Notes Receivable CASH OUTFLOWS: 1. Purchase of Investments 2. Purchase of Long-Term Assets 3. Lending with Notes Receivable

Recording b. Cash Paid to Suppliers = (Direct Method)

COST OF GOOD SOLD + INCREASE in Inventory - DECREASE in Inventory = Purchases + DECREASE in Accounts Payable - INCREASE in Accounts Payable = Cash Paid to Suppliers *** Because PAID, = NEGATIVE FINAL NUMBER

____________ PAYABLE

CREDIT

Retained Earnings Balance DOES NOT =

Cash Balance

Cash Outflow

Cash PAID by the company during the period

Cash Inflow

Cash RECEIVED BY the company during the period

1. Common Stock

Common Stockholders = True Owners of a corp - in most cases, each share of common stock represents one unit of ownership

What are Stockholders' Equity accounts' Normal Balance

Credit

What is Retained Earning's Normal Balance? However...

Credit HOWEVER: if losses exceed income since the company began, Retained Earnings will have a DEBIT BALANCE

Recording Claimed Warranties

Debit = Warranty Liability Credit = Cash (recording Warranty Expenditures)

Warranties

a Contingent Liability; perhaps the most common example of a Contingent Liability often offered to increase sales

1. Notes Payable

a Current Liability; written promises to repay amounts borrowed plus Interest - companies often use short-term debt to reduce interest rates

Accumulated Deficit

a Debit Balance in Retained Earning EX: YEAR 1 on Retained Earnings Chart is an example of Accumulated Deficit

Liability

a PRESENT responsibility to sacrifice assets in the FUTURE due to a transaction or other event that happened in the PAST

3. Treasury Stock (deets)

a company's own issued stock that it has purchased/bought back/repurchased AKA: buy backs, acquisitions, repurchases (... of Treasury Stock) reported in Balance Sheet

Stock Split

a large Stock Dividend that includes a Reduction in the Par or Stated Value per share

Unemployment Taxes

a tax to cover Federal and State Unemployment costs paid by the employer on behalf of its employees

1. Noncash Items (Indirect Method)

a. Depreciation Expense b. Amortization of Intangible Assets

2. Nonoperating Items (Indirect Method)

a. Loss/Gain on Sale of Land

Fringe Benefits

additional employee benefits paid for by the employer many companies provide additional Fringe Benefits specific to the company or industry (EX: free flights for airline industry employees and their families) -some Fringe Benefits (like EX: free skiing for employees of a ski resort) are not recorded in the accounting records

Stock Dividends

additional shares of a company's own stock given to Stockholders a temporary SHE account that is closed into Retained Earnings Decreases: Retained Earnings Increases: Common Stock

Direct Method

adjusts the items in the Income Statement to directly show the Cash Inflows and Outflows from Operating Activities, such as cash received from customers and cash paid of inventory, salaries, rent, interest, and taxes

Publicly Held Corporation

allows investment by the general public and is regulated by the SEC because regulated by the SEC, often results in significant additional reporting and filing requirements

Recording an Un-claimed Warranty

Debit = Warranty Expense Credit = Warranty Liability

Statement of Cash Flows

- A financial statement that measures activities involving Cash Receipts and Cash Payments over an interval of time; - Provides a summary of Cash Inflows and Cash Outflows during the Reporting Period

List of Employee Payroll Liabilities/Costs

- Federal and State Income Taxes - Employee Portion of Social Security and Medicade (FICA Taxes) - Employee Contributions for Health, Dental, Disability, and Life Insurance - Employee Investments in Retirement or Savings Plans Employee Salaries are REDUCED by these things

List of Employer Payroll Liabilities/Costs

- Federal and State Incomes Taxes - Employer MATCHING Portion of Social Security and Medicare (FICA Taxes) - Employer Contributions for Health, Dental, Disability, and Life Insurance - Employer Investments in Retirement or Savings Plans The Employer must also pay these items

Recording a. Depreciation Expense (Noncash Item)

- Reduces Net Income Debit = Depreciation Expense Credit = Accumulated Depreciation ***Because we Deducted Depreciation Expense, we need to add back that amount in Calculating Operating Cash Flows + TO NET INCOME IN RECORDING STATEMENT OF CASH FLOWS

Recording a Contingent Liability with Likelihood of Payment is Probable, WITH A RANGE

- if one amount with a range appears more likely, we record that amount - when NO amount appears more likely than others, we record the MINIMUM amount and disclose the range of potential loss

Noncash Activities

- significant Investing and Financing Activities that do not affect cash - transactions that do not increase or decrease cash but result in significant Investing and Financing Activities These are reported as Noncash Activities either directly after the Cash Flow Statement or in a Note to the Financial Statements

ABOUT Recording Treasury Stock

- we record Treasury Stock as a separate "negative" or "contra" account rather than decreasing it directly Recall that SHE accounts normally have Credit balances, THEREFORE, Treasury Stock has a normal DEBIT BALANCE

Example Chart of Retained Earnings over 4 Years

---------- Net Income/Net Loss ----- Dividends ----- Balance in RE Year 1 ---------$ (1,000)-------------------$ 0 ------------ $ (1,000) Year 2 -----------3,000 ---------------------0----------------2,000 Year 3 -----------4,000 ------------------1,000 --------------5,000 Year 4 ----------10,000 ------------------3,000 -------------12,000 (Using Retained Earnings Equation)

Chart: Effects of a Stock Split and Stock Dividend

------------------------------Stock Split--------------Stock Dividend Total SHE:------------------NO CHANGE-------------NO CHANGE Common Stock:------------NO CHANGE--------------INCREASE Retained Earnings:---------NO CHANGE--------------DECREASE Par Value Per Share:---------DECREASE--------------NO CHANGE

A Contingent Liability is Recorded ONLY IF

1. A loss is PROBABLE 2. The amount is REASONABLY ESTIMABLE

Disadvantages of a Corporation

1. Additional Taxes: corporate earnings are taxed TWICE - at the corp. level and at the individual level 2. More Paperwork: Fed and State Govts. impose additional reporting requirements

Different Types of Common Stock

1. Authorized 2. Issued (3. Outstanding) (4. Treasury)

Steps in Preparing the Statement of Cash Flows

1. Calculating Net Cash Flows from Operating Activities 2. Calculating Net Cash Flows from Investing Activities 3. Calculating Net Cash Flows from Financing Activities 4. Calculating the Sum of these 3 Steps to verify it Equals the amount of Cash reported in the Balance Sheet this year vs. last year (the Change in Cash)

2 Types of Contingencies

1. Contigent Liability 2. Contingent Gains (flipside)

3 Primary Sources for Preparing the Statement of Cash Flows?

1. Income Statement (Revenues and Expenses provide info in determining cash flows from OPERATING Activities) 2. Balance Sheet (Changes in Assets, Liabilities, and SHE from the end of the last period to the end of this period help to identify cash flows from OPERATING, INVESTING, AND FINANCING Activities) 3. Detailed Accounting Records (sometimes Additional Information from the accounting records is needed to determine Cash Inflows and Cash Outflows for the period)

Examples of Significant Noncash Investing Financing Activites

1. Purchase of Long-Term Assets by Issuing Debt 2. Purchase of Long-Term Assets by Issuing Stock 3. Conversions of Bonds Payable into Common Stock 4. Exchange of Long-Term Assets

What do our options for Reporting Contingent Liabilities DEPEND ON?

1. The Likelihood of Payment 2. The Ability to Estimate the Amount of Payment

Criteria for Reporting a Contingent Liability

1. The Likelihood of Payment is... a. Probable: likely to occur b. Reasonably Possible: more than Remote but less than Probable c. Remote: the chance is slight 2. The Amount of Payment is... a. Reasonably Estimable b. Not Reasonably Estimable

Stockholder Rights

1. The Right to Vote 2. Right to Receive Dividends 3. Right to Share in the Distribution of Assets

Why Corporations Purchase Their Stock (Treasury Stock)

1. To Boost Underpriced Stock: When company management feels the market price is too low, it may attempt to support the price by decreasing the supply of stock in the marketplace 2. To Distribute Surplus Cash without Paying Dividends: Under a stock purchase, only shareholders selling back their stock to the company at a profit incur taxable income 3. To Boost Earnings Per Share: (Earnings Per Share = Earnings / # of Shares Outstanding) Stock purchases reduce the # of shares outstanding, therefore increasing earnings per share However, with less cash in the company, it is more difficult for companies to maintain the same level of earnings following a share purchase 4. To Satisfy Employee Stock Ownership Plans: Acquiring shares used in employee stock award and stock option compensation programs

Classification of Cash Flows/Transactions

3 Primary Categories of Cash Flows are: Cash Flows from: 1. Operating Activities (Income Statement Items) 2. Investing Activities (Changes in Investments and Long-term Asset Items) 3. Financing Activities (Changes in Long-term Liabilities and Stockholders' Equity

Equation for Change in Total Cash for the Period

= Sum of Net Cash Flows = Operating Activities Net Cash Flow + Investing Activities Net Cash Flows + Financing Activities Net Cash Flows

2. Accounts Payable

Current Liability; amounts the company owes to suppliers of merchandise or services that it has bought on credit AKA: Trade Accounts Payable Any Accounts Payable in more than 1 year = Long-Term Liability

3. Payroll Liabilities

Current Liability; both employees and employers have Payroll Liabilities/Costs

____________ RECEIVABLE

DEBIT

What is Treasury Stock's Normal Balance?

Debit It is a REDUCTION of Stockholders' Equity

Recording No-Par Value Common Stock

Debit = Cash Credit = Common Stock

Recording the Issue of Common Stock

Debit = Cash Credit = Common Stock

Recording an Advanced Payment (the Selling of a Gift Card)

Debit = Cash Credit = Deferred Revenue

Recording Notes Payable

Debit = Cash Credit = Notes Payable

Recording Issue of Preferred Stock

Debit = Cash Credit = Preferred Stock Credit = Additional Paid-in Capital Similar to Common Stock

Recording Sales Tax Payable (purchasing a product that has Sales Tax on it)

Debit = Cash Credit = Sales Revenue (the $ of the product) Credit = Sales Tax Payable (the Sales Tax)

Recording the Resale of Treasury Stock When stock price is DECREASED

Debit = Cash (# of Shares x MV) DEBIT = Additional Paid-in Capital (^3) (# of Shares x difference between MV and Purchased Price (Positive!)) Credit = Treasury Stock (# of Shares x Purchased Price)

Recording the Resale of Treasury Stock When stock price is INCREASED

Debit = Cash (# of Shares x Market/Resale Value) Credit = Treasury Stock (# of Shares x Price Purchased for by Company) Credit = Additional Paid-in Capital (^2) (# of Shares x difference between MV and Purchased Price (Positive!))

Recording a partially used Advanced Payment (customer uses SOME of their gift card)

Debit = Deferred Revenue Credit = Sales Revenue (of the amount used)

Recording the Declaration of Dividends

Debit = Dividends (# of shares x declared $ on dividends) Credit = Dividends Payable

Recording Payment of a Declared Dividend

Debit = Dividends Payable (# of shares x declared $ on dividends) Credit = Cash

Recording Interest Payable (paying what is due now, but waiting to pay what is due in the next year)

Debit = Interest Expense (interest that is due now) (use interest equation) Credit = Interest Payable (interest that is due in the future)

Recording a Contingent Liability

Debit = Loss Credit = Contingent Liability

Recording a Note (that is due) and its Interest

Debit = Notes Payable Debit = Interest Payable (Interest from previous year) Debit = Interest Expense (Interest from now that hasn't been paid)

Recording EMPLOYER'S Payroll Costs

Debit = Payroll Tax Expense (Total) Credit = FICA Tax Payable Credit = Unemployment Tax Payable

Recording EMPLOYEE'S Payroll Costs

Debit = Salaries Expense Credit = Income Tax Payable Credit = FICA Tax Payable Credit = Salaries Payable

Recording Employer-Provided Fringe Benefits

Debit = Salaries Expense (Fringe Benefits) Credit = Accounts Payable Credits = Accounts Payable

Recording a Large Stock Dividend

Debit = Stock Dividends (# of shares x declared $ on dividends) Credit = Common Stock recorded at the PAR VALUE per share To avoid changing the Par Value per share, most companies report Stock Splits in the same way as Large Stock Dividends

Recording initial Purchase of Treasury Stock

Debit = Treasury Stock Credit = Cash Treasury Stock = Cost to Purchase Shares on the Market Treasury Stock = # of Shares x Market Value IMPORTANT: Par Value has NO EFFECT on the entry to record Treasury Stock --> it is recorded AT ITS COST

Pizza and Stock Dividends and Stock Splits

Declaring Stock Dividends and Stock Splits is like cutting a pizza into more slices. Everyone has more shares, but each share is worth proportionately less than before

Dividends Received vs. Dividends Paid

Dividends Received = included in OPERATING Activities Dividends Paid = Included in FINANCING Activities

What is a Liability that requires paying something other than Cash?

EX: Deferred Revenue (when a company receives payment in advance for providing the product/service it's selling; giving up product/service, not Cash, to satisfy the liability)

Comparison of Financing Alternatives (Common Stock, Preferred Stock, Bonds)

Factor: ---- Common Stock ---- Preferred Stock ---- Bonds Voting Rights: Yes, Usually No, No Risk to the Investor: Highest, Middle, Lowest Expected to Return to the Investor: Highest, Middle, Lowest Preference for Dividends/Interest: Lowest, Middle, Highest Preference in Distribution of Assets: Lowest, Middle, Highest Tax Deductibility of Payments: No, Usually No, Yes

3. Change in Current Assets and Current Liabilities (Indirect Method)

For components of Net Income that Increase or Decrease Cash, but by an amount DIFFERENT from that reported in the Income Statement, we Adjust Net Income for Changes in the Balances of Related Balance Sheet Accounts to Convert the Effects of those Items into a Cash Basis -- Predominantly Includes: 1. Current Assets OTHER THAN Investments and Notes Receivable 2. Current Liabilities OTHER THAN various forms of Borrowing a. Increase In Accounts Receivable b. Decrease in Inventory c. Increase in Prepaid Rent d. Decrease in Accounts Payable e. Increase in Interest Payable f. Decrease in Income Tax Payable

Reporting Using Indirect Method (Operating Activities)

Goal: Calculate Net Cash Flows from Operating Activities Step 1: Start with Net Income from the Income Statement Net Cash Flows from Operating Activities include all Revenue and Expense Activities reported on a CASH BASIS - Need to take the Revenue and Expense activities from the IS and remove and Accrual Accounts from the Net Income (accrual basis) so that ONLY the CASH PORTION REMAINS--> NEED TO ADJUST NET INCOME

Recording e. Cash Paid for Income Tax Expense = (Direct Method)

INCOME TAX EXPENSE - INCREASE in Income Tax Payable + DECREASE in Income Tax Payable = Cash Paid for Income Taxes *** Because PAID, = NEGATIVE FINAL NUMBER

Recording c. Increase in Equipment (Investing Activities)

If paid for with Cash, would be a decrease in Cash for the amount spend = - NEGATIVE number in the Statement of Cash Flows If paid for with a Note Payable, it becomes a Noncash Activity, which would then be disclosed either directly after the Cash Flow Statement or in a Note to the Financial Statements

REPORTING FINANCING ACTIVITIES

In the Financing Activities Section of the Statement of Cash Flows, companies list Cash Inflows (EX: Borrowing Money and Issuing Stock) and Cash Outflows (EX: Repaying Amounts Borrowed and Paying Dividends to Shareholders) SEPARATLY WHERE TO FIND: by examining changes in Long-Term Liabilities and Stockholders' Equity Accounts from the Balance Sheet a. Increase in Notes Payable b. Increase in Common Stock

REPORTING INVESTING ACTIVITIES

In the Investing Activities Section of the Statement of Cash Flows, Companies List Cash Inflows and Cash Outflows SEPARATELY from transactions such as Buying and Selling Property, Plant, and Equipment, Making and Collecting Loans, and Buying and Selling Investments in other Companies Reports the ACTUAL Cash Received or Paid for an Asset, which is usually NOT the same as the change in the Asset account reported in the Balance Sheet WHERE TO FIND: by analyzing changes in Long-Term Asset accounts from the Balance Sheet a. Increase in Investments b. Decrease in Land c. Increase in Equipment

When is Interest Expense recorded?

In the period in which we INCUR it, rather than the period in which we pay it If Interest/Note starts at the end of one year and the Note is not due until into the next year, record the amount of Interest due from the first year at the end of the Operating Cycle, and then record the remaining amount/other amount due when the Note is due/at the end of the Note

Adjustments that need to be made to Net Income in Calculating Operating Cash Flows...

Includes Removing the Following Items: 1. Noncash Items: Revenues and Expenses that never affect Cash - EX: Depreciation Expense, Amortization Expense 2. Nonoperating Items: Gains and Losses on the Sale of Long-Term Assets that do not affect Operating Cash Flows - EX: Gains and Losses on the Sale of Land, Buildings, and Equipment 3. Changes in Current Assets and Current Liabilities: these changes represent the Noncash portion of some Revenues and Expenses. They occur when the Cash Flow for the Year does not = the related amount reported in the Income Statement - EX: All Sales to Customers are Reported as Revenues in the IS, but only Cash collected from customers represents an Operating Cash Inflow -- The amount of Revenue NOT Collected on Cash will = the Increase in Accounts Receivable

Annual Interest Equation

Interest Expense = Face Value x Annual Interest Rate x Fraction of the Year

What happens when a company purchases inventory on account? What happens later when the company pays the amount owed?

Inventory Increases Accounts Payable Increases Cash Decreases Accounts Payable Decreases

What Activities can be Noncash Activities?

Investing and Financing NOT Operating

Recording b. Decrease in Land (Investing Activities)

Just recording the proceeds from selling the Land = + POSITIVE number in the Statement of Cash Flows (the Loss/Gain is recorded in the Operating Activities Section)

Summary of Accounting Treatment of Contingent Liabilities To Record or Not to Record

Likelihood of Payment Is + Amount of Payment Is = ______________________ Probable + Reasonably Estimable = Liability Recorded Probable + NOT Reasonably Estimable = Disclosure Required Reasonably Probable + Reason. Estimable = Disclosure Required Reasonably Probable + NOT Reason. Estimable = Disclosure Req. Remote + Reasonably Estimable = Disclosure NOT Required Remote + NOT Reasonably Estimable = Disclosure NOT Required

Two ways to arrange Short-term Loans (becoming more popular)

Line of Credit, Commercial Paper

Recording a. Loss/Gain on Sale of Land (Nonoperating Item)

Losses on the Sale of Land DECREASE Net Income + TO NET INCOME IN RECORDING STATEMENT OF CASH FLOWS Gains on the Sale of Land INCREASE Net Income - TO NET INCOME IN RECORDING STATEMENT OF CASH FLOWS

Why doesn't Stockholders' Equity = Market Value of Equity?

Market Value of Equity: the price investors are willing to pay for a company's stock Market Value of Equity = the Stock Price x # of Shares Outstanding Stockholders' Equity = Assets - Liabilities

Recording a. Cash Received from Customers = (Direct Method)

NET SALES - INCREASE in Accounts Receivable + DECREASE in Accounts Receivable = Cash Received from Customers *** Because RECEIVED, = POSITIVE FINAL NUMBER

Do Total Assets, Total Liabilities, or Total SHE change as a result of a Stock Dividend?

NO

Is the Total Net Cash Flow from Operating Activities different under the Direct vs. Indirect Method

NO They are the same

Recording a Stock Split

NO TRANSACTION

Recording d. Depreciation Expense = (Direct Method)

NOT RECORDED UNDER THE DIRECT METHOD

Summary of Adjustments Made to Convert Net Income to Net Cash Flows from Operating Activities

Net Income + Depreciation Expense + Amortization Expense + Loss on Sale of Assets - Gain on Sale of Assets - Increase in a Current Asset + Decrease in a Current Asset + Increase in a Current Liability - Decrease in a Current Liability = Net Cash Flows from Operating Activities

Recording d. Decrease in Accounts Payable (Change in Current Assets and Current Liabilities)

Net Income + INCREASE in Accounts Payable - DECREASE in Accounts Payable = Operating Cash Flows

Recording e. Increase in Interest Payable (Change in Current Assets and Current Liabilities)

Net Income + INCREASE in Interest Payable - DECREASE in Interest Payable = Operating Cash Flows

Recording f. Decrease in Income Tax Payable (Change in Current Assets and Current Liabilities)

Net Income + INCREASE in Tax Payable - DECREASE in Tax Payable = Operating Cash Flows

Recording b. Decrease in Inventory (Change in Current Assets and Current Liabilities)

Net Income - INCREASE in Inventory + DECREASE in Inventory = Operating Cash Flows

Recording c. Increase in Prepaid Rent (Change in Current Assets and Current Liabilities)

Net Income - INCREASE in Prepaid Rent + DECREASE in Prepaid Rent = Operating Cash Flows

Recording a. Increase in Accounts Receivable (Change in Current Assets and Current Liabilities)

Net Income - INCREASE in Accounts Receivable + DECREASE in Accounts Receivable = Operating Cash Flows

What does Net Loss do to Retained Earnings

Net Loss REDUCES Retained Earnings

Recording the Allocation of Dividends between Preferred and Common Stock: IF THE PREFERRED STOCK IS NONCUMULATIVE

No Preferred Dividends in Arrears in for 2019 and 2020 Preferred Dividends for 2021 (shares x % x Par Value) Remaining Dividends to Common Stockholders

Recording c. Cash Paid for Operating Expenses = (Direct Method)

OPERATING EXPENSES + INCREASE in Prepaid Rent - DECREASE in Prepaid Rent = Cash Paid for Operating Expenses *** Because PAID, = NEGATIVE FINAL NUMBER

When are Dividends legally payable?

Once Declared by the Board of Directors

Relationship of the Balance Sheet to the Statement of Cash Flows

Operating Activities: - Changes in Other Current Assets (Assets Section) - Changes in Current Liabilities (Liabilities S.) Investing Activities: - Changes in Long-Term Assets (Assets S.) Financing Activities: - Changes in Long-Term Liabilities (Liabilities S.) - Changes in Common Stock (SHE S.) - Changes in Retained Earnings (Dividends Paid) (SHE S.)

Relationship of the Income Statement to the Statement of Cash Flows

Operating Activities: - Revenues - Expenses

Stated Value is recorded/treated the same way as

Par Value

Recording a. Increase in Investments (Investing Activities)

Paying Cash so would be reported as a - NEGATIVE number in the Statement of Cash Flows

Recording the Allocation of Dividends between Preferred and Common Stock: IF THE PREFERRED STOCK IS CUMULATIVE

Preferred Dividends in Arrears for 2019 and 2020 Preferred Dividends for 2021 (shares in 2021 x % x Par Value) Remaining Dividends to Common Stockholders ----- Total Dividends Paid in 2021

Features of Preferred Stock

Preferred Stock can be... 1. Convertible: shared can be converted into Common Stock 2. Redeemable: shares can be returned to (or redeemed by) the the corporation at a fixed price or stockholders 3. Cumulative: shares receive priority for future dividends, if Dividends are not declared in a given year 4. Dividends in Arrears: unpaid Dividends on Cumulative Preferred Stock

Dividends for Preferred Stock

Preferred Stock is usually cumulative (means that if Dividends are not declared in a given year, they Accumulate until the company declares Dividends) Common Stockholders are not entitled to Dividends in any year until Stockholders of Cumulative Preferred Stock are attributed all Dividends to which they are entitled

Statement of Cash Flows: Primary Purpose and Secondary Objective

Primary Purpose: to provide information about a company's cash receipts and cash payments during a period Secondary Objective: to provide Cash-basis information about the Company's Operating, Investing, and Financing Activities Reporting: Reports the Net Cash Flows from Operating, Investing, and Financing Activities SEPERATELY

Why declare a Stock Split?

Primary Reason: to lower the trading price of the stock to a more acceptable trading range, making it attractive to a larger number of potential investors

Usefulness of the Statement of Cash Flows

Provides Information to Help Assess: 1. Entity's ability to generate future Cash Flows 2. Entity's Ability to pay Dividends and meet obligations 3. Reasons for difference between Net Income and Net Cash Flow from Operating Activities 4. Cash and NonCash Investing and Financing Transactions

Retained Earnings Equation

Retained Earnings = All Net Income Since the Company Began - All Dividends Since the Company Began

*** Reporting Increase in Retained Earnings

Retained Earnings, beginning balance + Net Income - Dividends = Retained Earnings, ending balance REPORT: Retained Earnings, ending balance

Stockholders' Equity SECTION of the Balance Sheet vs. STATEMENT of Stockholders' Equity

SHE Section = shows the balance in each equity account AT A POINT IN TIME Statement of SHE = Summarizes the CHANGES in the Balance in each SHE account OVERTIME

Sales Tax Formula

Sales Tax = Total Cash Paid - (Total Cash Paid / 1 + Sales Tax Rate)

Sales Tax Payable

Sales Tax collected from customers by the seller, representing Current Liabilities payable to the government the selling company records Sales Revenue in one account and Sales Tax Payable in the other

Cash Dividends

See Dividends

Reporting a. Increase in Notes Payable (Financing Activities)

Since it is a note, it represents a Noncash Activity disclosed in a Note to the Financial Statement Also just reports Cash gained or lost (+ if Got Cash, - if Paid Cash)

Authorized Stock

TOTAL number of shares available to sell, slated in the company's articles of incorporation

Recording Issue of Par Value Stock

TWO CREDITS Debit = Cash Credit = Common Stock Credit = Additional Paid-in Capital

Reporting Using Direct Method (Operating Activities)

Take each Item from the Income Statement and Convert it from Accrual Basis to a Cash Basis Amount, using the Counter-Items given in the Balance Sheet -- ALL ABOUT CASH a. Cash Received from Customers b. Cash Paid to Suppliers c. Cash Paid for Operating Expenses d. Depreciation Expense e. Cash Paid for Income Taxes

Ending Balance of Cash =

The Balance of Cash at the Beginning of the Year +/- Net Cash Flows

What is this entire Unit about?

The Right Side of the Balance Sheet

Increase (Decrease) in Total Cash Flow for the Year =

Total Net Cash Flows from Operating, Investing, and Financing Activities

Recording b. Amortization Expense

Treated the same way as Depreciation Expense + TO NET INCOME IN RECORDING STATEMENT OF CASH FLOWS

a. Deferred Revenues

an additional Current Liability; Cash received in advance from a customer for products or services to be provided in the future EX: United Airlines sells tickets and collects the Cash Price before the actual flight. Do they record the revenue when they SELL the ticket or when the flight actually takes place? -They wait until the flight actually takes place to record the revenues

b. Sales Tax Payable

an additional Current Liability; most states impose a sales tax, and many areas a local sales tax as well (some states don't have sales tax; even in states that don't have sales tax, cities within them might have their own) Each company selling products is subject to Sales Tax and is responsible for collecting the sales tax directly from customers and periodically sending the sales tax collected to the state and local govts.

c. Current Portion of Long-Term Debt

an additional Current Liability; the amount that will be paid within one year from the balance sheet date - Long-term Obligations (Notes, Mortgages, Bonds) are usually reclassified and reported as Current Liabilities when they become payable within the upcoming year (or Operating Cycle) *The Portion due within 1 year from the BS Date = CURRENT LIABILITY = Current Maturing Portion *All of the Portion due in more than that 1 year = LONG-TERM LIABILITY

Corporation

an entity that is legally separate from its owners and even pays its own income taxes - Most owned by many stockholders, although some corporations are owned entirely by one person - dominate in terms of total sales, assets, earnings, and employees

1. Contingent Liability

an existing uncertain situation that MIGHT result in a LOSS (depending on the outcome of a future event) EX: lawsuits, product warranties, environmental problems, premium offers

2. Contingent Gains

an existing uncertain situation that might result in a GAIN - in a pending lawsuit, one side - the defendant - daces a Contingent Liability, while the other side - the plaintiff - has a Contingent Gain We usually do not record Contingent Gains until the gain is known with certainty and is no longer a contingency (unlike Contingent Liabilities)

Line of Credit

an informal agreement that permits a company to borrow up to a pre-arranged limit without having to follow formal loan procedures and prepare paperwork many companies prearrange the terms of a Note Payable by establishing a Line of Credit with a bank *Notes Payable is recorded EACH TIME the company borrows money under the Line of Credit, however, no entry is made up front when the line of credit is first negotiated, since no money has yet been borrowed

FICA Taxes

based on the Federal Insurance Contributions Act; tax withheld from employee's paycheck and matched by employers for Social Security and Medicare Total FICA Tax = 7.65% on income up to base amount, and 1.45% on any additional amounts The employer pays matching FICA tax on behalf of the employee - Same limit - Govt. collects a total of 15.3%on each employees salary (7.65% x 2)

Why might companies rather report Liabilities as long-term?

because it may cause the firm to appear less risky - less risky firms may enjoy lower interest rates on borrowing and command higher stock prices for new stock listings

Indirect Method

begins with Net Income and then lists adjustments to Net Income in order to arrive at Operating Cash Flows

Commercial Paper

borrowing from another company rather than from a bank *the recording is exactly the same as the recording for Notes Payable - Sold with maturities normally ranging from 30 -270 days - Interest Rate here is usually lower

No-Par Value Stock

common stock that as not been assigned a Par Value Permitted by laws in many states

4. Other Current Liabilities

could include: a. Deferred Revenue b. Sales Tax Payable c. The Current Portion of Long-Term Debt

Current Liabilities

debts that, in most cases, are due within one year when a company has an operating system cycle of longer than a year, its Current Liabilities are defined by the length of the Operating Cycle instead AKA: Short-term Liabilities; Short-term Debts

Articles of Incorporation

describes: a. The nature of the firms business activities b. the shares of stock to be issued c. the initial Board of Directors

Dividends

distributions to Stockholders, typically in the form of Cash Dividends tend to increase when a company is doing well

Privately Held Corportation

does not allow investment by the general public and normally has fewer stockholders (EX: can still be big companies: Cargill, Koch Industries, Mars) generally do not need to file financial statements with the SEC

Retained Earnings

earnings NOT distributed as Dividends to Stockholders over the life of the company; the earnings Retained in the company

The Board of Directors

established corporate policies and appoints officers who manage the corporation

State Unemployment Tax Act (SUTA)

in many states, the maximum state unemployment tax rate is 5.4%, but many companies pay a lower rate based on past unemployment history

Buying Back Stock's effect on SHE

just as issuing shares INCREASES SHE, buying back those salaries DECREASES SHE

3. Treasury Stock (summary)

part of SHE; a company's own issued stock that it has repurchased

2. Retained Earnings (summary)

part of SHE; earnings not distributed as Dividends to Stockholders over the life of the company; the amount of earning the company had kept or retained

1. Paid-in Capital (summary)

part of SHE; the amount Stockholders have invested in the company

Venture Capital Firms

provide additional financing, often in the millions, for a percentage ownership n the company many look to invest in promising companies to which they can add value through business contacts, financial expertise, or marketing channels

Earned Capital

represents the Net Assets of the company that have been EARNED FOR the Stockholders rather than INVESTED BY the Stockholders Some of this Earned Capital is distributed back to stockholders in the form of Dividends

Federal Unemployment Tax Act (FUTA)

requires a tax of 6.2% on the first $7,000 earned by each employee because of contributions to state unemployment programs, the net federal rate is often 0.8%

Deciding whether or not to record a Warranty

see which Criteria it meets in the chart

Advanced Payments

some companies require Advanced Payments from customers that will be applied to the purchase price when they deliver goods or provide services EX: - gift cards from clothing stores/restaurants - movie tickets from Fandango - room deposits on hotels subscriptions for magazines THESE ARE DEFERRED REVENUES

Stock Dividends and Stock Splits

sometimes corporations distribute additional Shares of their Own Stock to Shareholders rather than Cash

2. Preferred Stock

stock with preference over Common Stock in the Payment of Dividends and the Distribution of Assets "Preferred" in 2 Ways: 1. Preferred Stockholders usually have first rights to a specified amount of Dividends (a stated dollar amount per share or a percentage of par value per share) - If the Board of Directors declares dividends, Preferred Shareholders will receive the designated dividend before Common Stock Shareholders 2. Preferred Stockholders receive preference over Common Stockholders in the Distribution of Assets in the event that that corporation is dissolved - Some corporations issue in order to attract wider investment

How to get Total Stockholders' Equity using Accumulated Deficit

subtract an Accumulated Deficit from Total Paid-in Capital in the Balance Sheet

Net Cash Flows

the Difference between Cash Inflows and Cash Outflows

What activites are used to find Operating Activities

the SAME ACTIVITIES that are reported in the Income Statement

How does recording Warranty Liabilities Change?

the Warranty Liability account is INCREASED when the estimated Warranty Liability is recorded, but then is REDUCED over time by actual Warranty Expenditures

Invested Capital

the amount of money paid into a company by its owners

Additional Paid-in Capital

the amount paid for stock above/over Par Value (the amount on top of the the stock at Par Value) AKA: Paid-in Capital; Excess of Par

Common Examples of Operating Activites

the collection of cash from customers; the payment of cash for inventory, salaries and/or rent

Payment Date

the date of actual distribution of Dividends Dividends are paid Only on Shares Outstanding Dividends are NOT paid on Treasury Shares

Record Date

the date on which a company looks at its records to determine who the Stockholders of the Company are An Investor must be a Stockholder on the Record Date to have the right to receive the Dividend

Declaration Date

the date the Board of Directors announces the next Dividend to be paid The Declaration of Dividends creates a binding legal obligation for the company declaring the Dividend

Property Dividend

the distribution of a noncash asset to stockholders Securities Held as Investments are the assets most often distributed in a Property Dividend

Initial Public Offering (IPO)

the first time a corporation issues stock to the public

Corporations are formed in accordance with what?

the laws of individual states

Par Value

the legal capital assigned per share of stock when the corporation is first established (the original cost of the stock) NOT THE MARKET VALUE

Stated Value

the legal capital assigned per share to No-Par Stock - treated and recorded in the same manner as Par-Value Shares assigned by a corporation in some cases

Operating Cycle

the length of time from spending cash in order to provide goods/services to a customer until the collection of cash from that customer

Treasury Stock

the number of Issued Shares REPURCHASED by THE COMPANY

Outstanding Stock

the number of Issued Shares held by INVESTORS; only these shares receive Dividends

Issued Stock

the number of shares that have been sold to investors a company usually does not issue all of its Authorized Stock

Gift Card Breakage

the point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote When this happens, companies Reduce Deferred Revenue and Recognize Sales Revenue

Stages of Equity Financing

the progression leading to a Public Offering might include some or all of these steps: 1. Investment by the founders of the business 2. Investment by friends and family of the founders (how to first raise money) 3. Outside investment by "Angel" Investors and Venture Capital Firms 4. Initial Public Offering (IPO)

Common Examples of Investing Activities

the purchase and sale of long-term assets and investments

Who ultimately controls a Corporation?

the stockholders

What is the main difference in the Direct and Indirect Methods?

the two methods differ only in the Presentation Format for Operating Activities

Organization Chart

traces the line of authority within a typical corporation TOP: - Stockholders - Board of Directors - Chief Executive Officer - VP Management, VP Marketing, CFO, Legal Counsel, VP Human Resources

1. Operating Activities

transactions involving REVENUE and EXPENSE Activities, including Cash Receipts and Cash Payments, during the period Include Cash Effects of the SAME ACTIVITES that are reported in the Income Statement to Calculate Net Income

2. Investing Activities

transactions involving the Purchase and Sale of Long-Term Assets and Current Investments

3. Financing Activities

transactions with Lenders: such as Borrowing Money and Paying Debt and with Stockholders: such as Issuing Stock, Paying Dividends, and Purchasing Treasury Stock *It's the Lenders and Stockholders that provide external financing to the company

Contingencies

uncertain situations (wondering how to report; EX: a litigation dispute with an uncertain outcome) that can result in a gain or a loss for a company

Small Stock Dividends

we record Small Stock Dividends at the Market Value Per Share

Angel Investors

wealthy individuals in the business community willing to risk investment funds on a promising business venture EX: the people in Shark Tank