Test #3

Paid-In Capital

(also called contributed capital) represents amounts received from the stockholders in exchange for stock. Common stock is the main source of paid-in capital. Paid-in capital is externally generated capital and results from transactions with outsiders

Debt to equity ratio

- A ratio that measures the proportion of total liabilities relative to total equity. - Total liabilities / total equity -Measures financial leverage. -If the debt to equity ratio is greater than 1, the company is financing more assets with debt than with equity. This higher risk can be taking advantage of financial leverage if not too extreme

Legal Capital

- Portion of stockholders' equity that cannot be used for dividends -

Cumulative Preferred Stock

- Shareholders must receive all dividends in arrears + the current year dividends before the common stockholders receive a dividend -Most preferred stock is cumulative (but can also be noncumulative) -What's left over goes to the common stockholders -A corp. reports cumulative preferred dividends in arrears in notes to the financial statements; it's not recorded as a liability b/c a liability for dividends arise only after the board of directors declares the dividend.

Carrying Amount of Bonds

-A bond payable minus the discount account current balance OR PLUS the premium account current balance -The company would report these bonds payable on the balance sheet as follows immediately after issuance. Typical pair: Bonds Payable (debit) & Less: Discount on Bonds Payable (credit) = Carrying amount - The carrying amount refers to the amounts that the company has on its books for an asset or a liability.

Treasury Stock

-A company's own stock that it has previously issued and later reacquired -Corporation holds the stock in its treasury. -Corporation may purchase treasury stock for several reasons: a. Mngmnt wants to increase net assets by buying low & selling high. b. Mgmt wants to support the company's stock price. c. Mgmt wants to avoid a takeover by an outside party by reducing the # of outstanding shares that have voting rights. d. Mgmt wants to reward valued employees w/ stock. -Treasury Stock account has a normal debit balance (which is the opposite of the other stockholders' equity account. Therefore, Treasury Stock is a contra equity account.) -Treas. Stck recorded @ cost - Reported on balance sheet as reduction to tal stockholders' equity -Outstanding stck = Issued stock less treasury stock

Optional Withholding Deductions

-A convenience for employees -Some companies will withhold payroll deductions & then pay designated organizations according to employee instructions. -ex: Insurance premiums, retirement savings, union dues, gifts to charities

Stock Dividend

-A distribution of a corporation's own stock to its stockholders (unlike cash dividends, don't giveany of corp's assets like cash to stockholders) -Corporation distributes stock dividends to stockholders in proportion to the # of shares the stockholders already own. -Stock dividend doesn't afffect assets, liabilities or total stockholders' equity. It merely rearranges the balances in the stockholders' equity accts, leaving the total stockholders' equity unchanged. Why Issue Stock Dividends? 1. To continue dividends but conserve cash: A stock dividend is a way to do so without using corporate cash 2. To reduce the market price per share of its stock. One objective behind a stock dividend might be to make hte stock less expensive & therefore, more available & attractive to investors. 3. To reward investors A stock dividend is a distribution of a corporation's own stock to its stockholders. Unlike cash dividends, stock dividends do not give any of the corporation's assets, like cash, to the stockholders. Stock dividends have the following characteristics: They affect only stockholders' equity accounts (including Retained Earnings, Stock Dividends, Common Stock, and Paid-In Capital in Excess of Par). They have no effect on total stockholders' equity. They have no effect on assets or liabilities.

Dividend In Arrears / Passing the dividend

-A dividend is a "dividend in arrears" when the corporation fails to pay the preferred dividend for reasons (ex. doesn't have enough cash to fund the dividend) and thus "passes the dividend" -Preferred stock dividend is in arrears if the dividend has not been paid for the year.

Payroll Register

-A schedule that summarizes the earnings, withholdings, & net pay for each employee. *Don't confuse Corporate Income Tax owed by the corporation (creates Income Tax Payable) vs. Personal Income Tax withheld from employees' paychecks, (which creates Employee Income Taxes Payable) A business's payroll register includes: 1. Employee Name 2. Beginning Cumulative Earnings - the amt the employee has earned through the last pay period 3. Current period earnings - earnings for the current period (includes regular & overtime earnings, commissions, & bonuses). 4. Ending cumulative earnings - beginning cumulative earnings plus current period earnings. 5. OASDI - 6.2% tax on the 1st $118,500 earnings 6. Medicare - 1.45% tax on the first $200,000; 2.35% on earnings over $200,000 7. Income Tax - Includes federal/state/local govt. income tax withheld; varies depending on filing status & # of withholding allowances. 8. Health Insurance - Withholdings made for employee-paid health care coverage 9. Other-employees' voluntary withholdings such as charitable contributions & union dues 10. Total withholdings - total of all withholdings 11. Net Pay-current period earnings less total withholdings 12. Check No. - the check # used to make payment for earnings 13. Salaries & Wages Expense - the amt debited to Salaries and Wages Expense for the current pay period

Noncumulative Preferred Stock

-A type of preferred stock in which the corporation will not have any dividends in arrears b/c the corporation isn't required to pay passed dividends -Corp isn't required to pay any passed dividends -This -left over dividends would be payed to common stockholders

FICA - Federal Insurance Contributions Act

-Aka Social Security Act -Social Security program provides retirement, disability, medical benefits -Law requires employers to withhold Social Security (FICA) tax from employees' paychecks. -FICA has 2 components: 1. OASDI (Old age, survivors, disability insurance) 2. Medicare (medical benefits)

Unearned Revenues

-Aka deferred revenue -Company records the new liability: Typical pair: Cash (debit) & Unearned Revenue (credit); Collected cash for future services; Collected cash for future services -Company has completed some of its obligated deliveries: Typical pair: Unearned Revenue (debit) & Service Revenue (credit); To record service revenue earned that was collected in advance

Payroll

-Aka employee compensation -Liability for a business Way to label employee's pay: -Salary is pay stated at annual/monthly or weekly rate -Wages are pay amts at hourly rates -Commission: Pay stated as a % of a sale amt -Bonus: Pay over & above base salary (or wage or commission); usually paid in a single amt after year-end -Benefits; extra compensation - items not paid directly to employee. ex: health, life, disability insurance.

Earnings Per Share (EPS)

-Amt of a company's net income (or loss) for each share of its outstanding common stock (Net income - Preferred dividends) / Weighted average # of common shares outstanding

Employee Payroll Withholding Deductions

-Amts withheld from paychecks (ex. municipalities/fed/state govt. requires employers to deduct taxes from employee paychecks, or insurance & investment companies) -Payroll withholding deductions: Gross Pay - Take-home pay -Payroll withholding deductions have 2 categories: Required deductions & Optional deductions -Payroll deductions ara liabilities to employer who pays the outside parties -Payroll amts are usually rounded to the nearest cent

Days' Sales In Inventory

-Another key measure is the days' sales in inventory ratio. -This measures the average number of days merchandise inventory is held by the company.

Vertical Analysis

-As you have seen, horizontal analysis and trend analysis percentages highlight changes in an item from year to year, or over time -Vertical analysis of a financial statement shows the relationship of each item to its base amount, which is the 100% figure. -For the income statement, net sales revenue is the base. -For the balance sheet, total assets is the base (Or Total Liabilities & Stockholders' equity doesn't matter!) -Vertical analysis %=(Specific item/Base amount)×100

Payment of Employer Payroll Taxes & Employees' Withholdings

-Info for payment comes from journal entries of employee payroll & employer payroll taxes *FICA-OASDI Taxes Payable & FICA-Medicare Taxes Payable are included b/c they're obligations of both employee & employer Typical Journal entry FICA-OASDI Taxes Payable (debit; X's 2 for employee&employer) & FICA - Medicare Taxes Payable (debit; X's 2 for employee&employer) & Employee Income Taxes (Employee's Payroll Register total 'Income Taxes') & Employee Health Insurance Payable (Employee's Payroll Register Total 'Health Insurance') & Charity Name Payable (Employee's Payroll Register Total 'Other') & Federal Unemployment Taxes Payable (Employer's Payroll Register total 'FUTA') & State Unemployment Taxes Payable (Employer's Payroll REgister total 'SUTA') & Cash (credit; the debit's total); To record payment of payroll liabilities

P. 591 Estimated liabilities

-Business doesn't know the exact amt but must estimate amt to report on balance sheet -Common examples: bonus plans Typical pair: (Employee Bonus Expense debit & Employee Bonus Payable credit); To record employee bonus expense -vacation pay, health & pension benefits a. Pension plan = A plan that provides benefits to retired employees Typical pair: Vacation Benefits Expense (debit) & Vacation Benefits Payable (credit); To record employee vacation benefits expense [When employee takes paid vacation, company will reduce the liability -warranties a. Warranty = an agreement that guarantees a company's product against defects. b. Time period of warranty agreements varies. c. Matching principle requires businesses to record Warranty Expense in the same period that the company records the revenue related to that warranty. Thus, expense is incurred when company makes a sale. Warranties are estimated. Typical pairing (In addition to recording the sale on account, the cost of goods sold) Warranty Expense (debit) & Estimated Warranty Payable (credit); To accrue warranty payable D. When company honors warranty & replaces the defective goods: Estimated Warranty Payable (debit) & Merchandise Inventory (credit); To replace merchandise inventory under warranty -On the income statement, the warranty expense is the estimated amount not the actual amount honored. The leftover warranties after the company's liability aamount actually honored represents the future estimats and remains as a liability under the Estimated Warranty Payable account.

Retirement (payment) of Bonds at Maturity

-Can be retired at the maturity date or before -Retirement of bonds payable involves paying the face value of the bond

p. 578 Liabilities

-Can be split into 2 main categories: Current & Long-term

Issuing Bonds VS Issuing Stock

-Companies may borrow instead of issuing stock b/c debt is a less expensive source of capital than stock, and bonds do not affect the % of ownership of the corporation. -Companies must think about these things when deciding how to finance a new project -WIth bonds, the earnings per share is greater which is important to know for investors

Sales Tax Payable

-Current liability b/c retailer must pay the state in < than 1 year. -Companies usually forward sales tax to state @ regular intervals (can be monthly) -Company receives the sale: Typical Pair: Cash (debit) & Sales Rev (credit) & Sales Tax payable (Credit); To record cash sales & the related sales Tax -Company pays tax to state: Typical Pair: Sales Tax Payable (debit), & Cash (credit); To record cash payment for sales tax payable

Days' Sales in Receivables

-Days' sales in receivables, also called the collection period, indicates how many days it takes to collect the average level of receivables -The number of days in average accounts receivable should be close to the number of days customers are allowed to make payment.

EPS - Earnings Per Share

-EPS is the only ratio that must appear on the financial statements. -Earnings per share reports the amount of net income (loss) for each share of the company's outstanding common stock. -

1/3 Ratios to use for comparison of companies of different sizes: Earnings Per Share

-EPS reports the amount of net income (loss) for each share of the company's outstanding common stock. -Calculated as: net income - Preferred dividends / weighted average # of common shares outstanding.

(1/3 of Employer Payroll Taxes): Employer FICA tax (OASDI and Medicare)

-Employer portion of OASDI is 6.2% on the first $118,500 of each employee's annual earnings -Employer's tax rate for Medicare is 1.45% on all earnings (Employer doesn't pay the additional 0.9% Medicare tax on earnings above $200,000). ; Social Security system is funded by contributions from both employer & employee

(1/3 of Employer Payroll Taxes): State & Federal Unemployment Compensation Taxes

-FUTA & SUTA finance workers' compensation for ppl laid off from work. -Unemployment Compensation Taxes are paid by the employer; not deducted from employees' gross pay. -Currently: Employers pay a combined tax of 6.0% on the first $7,000 ( maximum) f each employee's annual earnings for unemployment tax. a. The portion paid to the state depends on the individual state, but for many itis 5.4$ to the state plus 0.6% to the federal govt. -For the payroll tax, employer uses 2 liability accounts: (1) Federal Unemployment Taxes Payable (FUTA Payable) (2) State Unemployment Taxes payable (SUTA Payable)

(2/2) GAAP categorization of stock dividend sizes - Large Stock Dividend

-Greater than 20% - 25% -rare category -Accted for at stock's par value instead of stock market value b/c the larger # of issued & oustanding shares will reduce market price per share, making market price per share an invalid measurement of the stock dividend value.

Gross Profit Percentage

-Gross Profit = net sales revenue - cost of goods sold

Trend Analysis

-Horizontal analysis allows a company to see the percentage change from one year to the next. Trend analysis shows the percentage change from a base year forward to determine whether the trend in net sales revenue, for example, is positive or negative over a longer period of time

(1/2) GAAP categorization of stock dividend sizes - Small Stock Dividend

-Less than 20% - 25% of issued & outstanding stock -Small stock dividends are accted for at the stock's market value Typical Pair: Stock Dividends (debited; at the market value) & Common Stock Dividend Distributable

Long-term liabilities

-Liabilities that don't need to be paid within 1 year or within the entity's operating cycle (whichever is longer) -Many N/P are long-term (ex mortgage on a building)

Income Tax Payable

-Many feds require corps to pay income tax on their net income (corporate tax return, aka Form 1120) -Company incurs income tax expense: Typical pair: Income Tax Expense (debit) & Income Tax Payable (credit); To record income tax expense incurred -Company pays the feds Typical pair: Income Tax Payable (debit) & Cash(credit); TO record cash payment for income tax payable

Current Liabilities (1/2 Liability categories)

-Must be paid either w/ cash or w/ goods & services within 1 year or within the entity's operating cycle if the cycle is longer than a year -Ex of current liabilities: A/P, N?P (due within 1 year), Salaries Payable, Interest Payable, Unearned Revenue, Income Tax Payable, portion of a long-tern liability thtat's due within the next year -Current liabilities are listed on the balance sheet in the order that they're due

Employer Payroll Taxes

-Payroll taxes employers must pay -These taxes aren't withheld from employees' gross earnings 1. Employer FICA tax (OASDI & Medicare) 2. State unemployment compensation tax (SUTA) 3. Federal unemployment compensation tax (FUTA)

(2/2 components of FICA): Medicare

-Provides health insurance to individuals based on age or disability -Medicare applies to all employee earnings - that means there is no maximum tax. -Earnings = salary (for the month/year/week - whatever is relevant) -Currently, tax rate is 1.45% for earnings up to $200,000. -Earnings over $200,000 are taxes an additional 0.9% for a total of 2.35%.

(1/2 components of FICA): OASDI

-Provides retirement benefits to individuals based upon age, benefits to survivors of qualified individuals, & disability insurance to individuals who cannot work b/c of medical condition -Amt of tax withheld annually b/c wage base is subject to OASDI tax changes each yr. -As of 2016: OASDI tax applies to the first $118,500 of employee earnings in a year. The OASDI (maximum) tax rate currently for employees is 6.2%. For employees that make less than $118,500: $118,500 - Employee earnings prior to the current month. Use this amt x OASDI tax rate = Tax to be withheld from paycheck -Once employee earns $118,5000 there are no further earnings taxed for OASDI in that year

Appropriations of retained earnings

-Retained earnings restrictions recorded by journal entries. -A corporation may "appropriate" -- segregate in a separate account -- a portion of retained earnings for a specific use (ex. B.O.D may appropriate part of retained earnings for expansion or contingencies like a possible lawsuit liability)

Rate of return on common stockholders' equity - AKA Return On Equity

-Shows the relationship btwn net income available to common stockholders & their average common equity invested in the company. -Return On Equity = (Net Income - Preferred dividends) / Average common stock holders' equity -ex: Kohl's has returned $0.12 for each $1 of the avg amt invested by common stockholders. (Rate of return on common stockholders' equity of 15% - 20% is considered good in most industries).

MD&A

-The MD&A section is of interest to investors, though, because it often contains information that is not found in the financial data. Such information might include how a company is planning to spend its cash during the next year for property, plant, and equipment or whether significant changes are expected to occur that would cause revenue or expenses to increase or decrease in the future. -It is important to realize that this section is written by the company and could present a biased view of the company's financial condition and results. This section of the report is the company's attempt to explain its financial statements and to discuss its performance.

Present Value

-The amount that a person would invest at the present time -The present value is the bond's market price; The present value of the interest payments the bondholder will receive while holding the bond + the present value of the bond principal paid at the end of the bond's life

Debt To Equity Ratio

-shows the proportion of total liabilities relative to total equity -this ratio measures financial leverage

Mortgages Payable

-The borrower's promise to transfer the legal title to specific assets if the mortgage isn't paid on schedule. -Mortgages payable are a type of long-term notes payable that are secured w/ specific assets. -Long-term debts that are backed with a security interest in specific property -Most common type of mortgage is on property - ex: mortgage on your home -Recording the first mortgage payment: Typical Pair: Mortgages Payable (debit - Total monthly (or whatever agreed upon) payment minus Interest expense) & Interest Expense (debit - current beginning balance x interest rate x time range of interest) & Cash (credit - whatever agreed upon consistent payment); Paid principal & interest payment

Income Tax Withholding

-The income tax deducted from gross pay -U.S law & some states/cities/counties require companies to withhold income tax from employee paychecks. -Amt withheld depends on emplyee's gross pay & on the # of withholding allowances they claim a. For federal tax withholdings, employee files Form W-4 w/ their employer to indicate the # of allowances claimed for income tax withholding (each allowance lowers the amt of tax withheld: ex: Unmarried taxpayer usually claims one allowance ex: Childless married couple usually claims 2 allowances ex: A married couple w/ 1 child usually claims 3 allowances

Benchmarking

-The practice of comparing a company's performance with best practices from other companies. -There are two main types of benchmarks in financial statement analysis: benchmarking against a key competitor and benchmarking against the industry average. -Annual Statement Studies, published by the Risk Management Association, provides common-size statements for most industries.

2/3 Ratios to use for comparison of companies of different sizes: Price/Earnings Ratio

-The ratio of the market price of a share of common stock to the company's earnings per share. -ex Kohl's price/earnings ratio is 10.63. This implies that Kohl's stock is selling at 10.63 times one year's earnings per share. -This ratio is used by investors to evaluate their ability to earn a return on their investment. -It tells investors how much they should be willing to pay for 41 of a company's earnings. -A higher price/earnings ratio signifies a higher return on investment.

Common-Size Statement

-To compare Smart Touch Learning to another company, we can use a common-size statement. -A common-size statement reports only percentages—the same percentages that appear in a vertical analysis. -By only reporting percentages, it removes dollar value bias when comparing one company to another company

A/P

-Typically due in 30 days

Journalizing Employer Payroll Taxes

-Use info from Employer's Payroll Register Typical Pair: Tax Expense (debit; Payroll Register's Total 'Total Taxes') & FICA-OASDI Taxes Payable (credit; Payroll Register's Total 'OASDI') & FICA-Medicare Taxes Payable (credit; Payroll Register's Total 'Medicare') & Federal Unemployment Taxes Payable (credit; Payroll Register's Total 'FUTA') & State Unemployment Taxes Payable (credit; Payroll Register's Total 'SUTA'); To record employer's payroll tax expense

Journalizing Employee Payroll

-Use info from the payroll register Typical pair: Salaries and Wages Expense (debit; Payroll Register's Total 'Current Period Earnings'); Represents the gross pay for all employees; [[Gross pay includes both the amount owed for salaries and wages]] & payroll withholdings & FICA-OASDI Taxes Payable (credit; Payroll Register's Total 'OASDI') & FICA-Medicare Taxes Payable(credit; Payroll Register's Total 'Medicare') & Employee Income Taxes Payable (credit; Payroll Register's 'Income Tax' total) & Employee Health Insurance Payable (credit; Payroll Register's 'Health Insurance' total) & Charitable Name (credit; Payroll Register's 'Other' total) & Salaries and Wages Payable (credit; Payroll Register's 'Net Pay' total); To record salaries and wages expense and payroll withholdings -Comp pays on payday Typical pair: Salaries & Wages Payable (debit) & Cash (credit); To record payment of salaries

Short-term N/P

-Usually involves interest within 1 year or less Comp purchases merch. inventory w/ N/P: Typical pair: Merchandise Inventory (debit) & N/P (credit); Purchased merchandise inventory in exchange for 90-day, 10% note -Comp pays the note Typical Pair: N/P (debit) & Interest Expense (principal x interest rate x time out of 365 days) & Cash (credit); Paid note & interst at maturity -Promissory note: Business pays bank principal plus interest at a specified maturity date. -Comp. borrows from bank: Typical pair: Cash(debit) & N/P (credit); Received cash in exchange for 5-month, 6% note. -Comp records accrued interest expense for relevant months: Typical pair: Interst Expense (principal x interest x time out of 12 months or days whatever relevant) & Interest Payable (credit); Accrued interest expense at year-end -Comp pays all the interest Typical pair: N/P (debit) & Interest Expense (debit; principal x interest rate x remaining months of interest deal) & Interest Payable (debit) & Interest Payable (debit; the first set of interest expense) & Cash (credit); Paid note & interest at maturity

(1/2 category of Payroll Withholding Deductions): Required deductions

-ex: Employee federal & state income tax, social security tax, other deductions required by federal/state/local laws

(1/2 category of Payroll Withholding Deductions): Optional deductions

-ex: insurance premiums, retirement plan contributions, charitable contributions, other amts that are withheld at the employee's request

Bond Interest Rates

2 interest rates work together to set the price of a bond: (1) The stated interest rate - determines the amt of cash interest the borrower pays each year. It's printed on the bond & doesn't change from year to year. The dollar amt of interest paid is not affected by the issue price of the bond. (2) The market Interest Rate (also known as effective interest rate): The rate the investors demand to earn for loaning their $. The market interest rate varies constantly.

Internal Control Over Payroll

2 main controls for payroll: (1) Controls for efficiency -Direct deposits (reduces the amt. of reconciling needed on outstanding checks) (2) Controls to safeguard payroll disbursements -Separation of duties ex: (1) HR deparmt (2) Payroll Dpt (3) Acct department - records all transactions (4) - Treasurer distributes paychecks to employees

Recording Stock Dividends

3 dates for a stock dividend: 1. Declaration date -Board of directors announces the stock dividend on the declaration date. Declaration of a stock dividend does NOT create a liability b/c the corporation to pay assets. (Recall liability is a claim on assets) 2. Record date 3. Distribution date -There is no payment of cash -- only a distribution of shares of stock

Stockholders' equity

A corporation's equity is called stockholders' equity The two basic sources of stockholders' equity are as follows: Paid-in capital (also called contributed capital) represents amounts received from the stockholders in exchange for stock. Common stock is the main source of paid-in capital. Paid-in capital is externally generated capital and results from transactions with outsiders. Retained earnings is equity earned by profitable operations that is not distributed to stockholders. Retained earnings is internally generated equity because it results from corporate decisions to retain net income to use in future operations or for expansion.

Prior-period adjustments

A correction to Retained Earnings for an error of an earlier period. -When there's an error, correct it by adjusting the beginning balance in the Retained Earnings acct in the period the error is discovered. -Prior-period adjustment either increases or decreases the beginning balance of the Retained Earnings acct and appears on the statement of retained earnings.

Deficit

A debit balance in the Retained Earnings acct -When companies report negative amt in retained earnings -Most states prohibit corps from paying a dividend if a deficit will occur -FYI retained earnings is the equity earned by profitable operations that isn't distributed to stockholders.

Bonds Payable

A long-term debt issued to multiple lenders called bondholders, usually in increments of $1,000 per bond. -Each bondholder gets a bond certificate that shows the name of the company that borrowed the $, exactly like a note payable. -The certificate states the face value, the amount of he bond issue. -Bond's face value is also called maturity value, principal, or par value. -Company must then pay each bondholder the face value amt at a specific future date, called the maturity date. -People buy (invest in) bonds to earn interest. The bond certiicate states the interest rate that the company will pay & the dates the interest is due, generally semiannually. i. The stated interest rate is also known as face rate, coupon rate, or nominal rate. -The issue price of a bond doesn't affect the required payment at maturity. The company must pay the face value of the bonds at the maturity date stated on the face of the bond. -After a bond is issued, investors may buy & sell it through the bond market just as they buy & sell stocks through the stock market. THe most well-known bond market is the NYSE Bonds, which lists several thousand bonds. -Bond prices are quoted as a percentage of face value. EX: A $1,000 bond quoted at 88.375 is bought or sold for 88.375% of face value

Cash Ratio

A measure of a company's ability to pay current liabilities from cash and cash equivalents:

Contingent Liability

A potential liability that depends on some future event (ex. being sued for patent infringement OR co-signing a note payable) -Co-signing a note payable: Company co-signing has a contingent liability until the note comes due and is paid by the other entity, or else the company must the debt for the other entity). -Contingent Liabilities likelihood are based on: A: Remote -A contingency that's remote has little chance of the evnt occurring in the future. In this case, the company doesn't need to record the liability & doesn't need to disclose it in the notes to the financial statements. Ex: A frivolous lawsuit B: Reasonably possible Contingent Liability -Are still not likely possible. -Should be described in the notes to the financial statements. C: Probable Contingent Liability. IFRS defines "probably" as more than a 50% chance. -Future event is likely to occur. -Must be probably & estimate-able to be recorded as a liability & an expense is accrued. Record the estimated amounts. Ex: a warranty a. Contingencies that are probably but cannot be estimated are disclosed in the notes to the financial statements.

Accounts Receivable Turnover Ratio

A ratio that measures the number of times the company collects the average accounts receivable balance in a year. -Net credit sales / Average net accounts receivable.

Amortization Schedule

A schedule that details each loan payment's allocation btwn principal and interest and the beginning & ending loan balances. -Interest expense = beginning balance x interest rate x time range of interest -Long-term liabilities can be structured either way - with an equal principal payment or equal total payment.

Over time

Additional time -Employee may get higher pay rate, depending on the job classification & wage & hour laws

Adjunct Account

An account that is directly related to another account. Adjunct accounts have the same normal balance as the related account and are added to the related account on the balance sheet. ex: Bonds Payable & Premium on Bonds Payable

Annuity

An annuity is a stream of equal cash payments made at equal time intervals. For example, $100 cash received per month for 12 months is an annuity

Memorandum entry

An entry in the journal that notes a significant event, but has no debit or credit amt

Stock Split

An increase in the # of issued & outstanding shares of stock coupled with a proportionate reduction in the par value of the stock (stock dividends don't affect par value per share) -A stock split, just like any other stock issuance, cannot involve issuing more shares of stock than authorized in the corporate charter -ex: a 2-for-1 split stock means that the company will have twice as many shares of stock issued and oustanding after the split as it did before, & each share's par value is cut in half. -The stock split doesn't affect any act balances; nor formal journal entry is needed.

1/3 Types of Bond Prices Issuing: Face Value

Bond is issued at face value.

Callable

Bonds that the company may call, or pay off at a specified price. -Call price is usually 100 or a few percentage points above face value, maybe 101 or 102 to provide an incentive to the bondholder. -Callable bonds give issuer the flexibility to pay off the bonds when it benefits the company. Lower interest rates can convince management to pay off these bonds earlier. -Bonds are callable at 100.

Dollar Value Bias

Dollar value bias is the bias one sees from comparing numbers in absolute (dollars) rather than relative (percentage) terms

Trading on the equity - using leverage

Earning more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the business

Times-interest-earned ratio

Investors use this to evaluate a business's ability to pay interest expense -This ratio measures the # of times earnings before interest & taxes (EBIT) can cover (pay) interest expense. -AKA Interest-coverage ratio -Equation: (Net income + Income tax expense + Interest expense) / Interest expense

Underwriter

Large corporations such as Intel Corporation and Nike, Inc. need huge quantities of money. They cannot finance all their operations through borrowing, so they raise capital by issuing stock. A company can sell its stock directly to stockholders, or it can use the services of an underwriter, such as the brokerage firms of Merrill Lynch & Co., Inc., Morgan Stanley, and JPMorgan Chase & Co. An underwriter usually assumes some of the risk of issuing stock by agreeing to buy all the stock the firm cannot sell to its clients. Stocks of public companies are bought and sold on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ Stock Market.

3/3 Types of Bond Prices Issuing: Premium - A premium on bonds payable

Occurs when the issue price is above face value. EX: A $1,000 bond issued for $1,015. THe premium is $15 ($1,015 - $1,000)

2/3 Types of Bond Prices Issuing: Discount - A Discount on bonds payable

Occurs when the issue price is less than face value. EX: A 1,000 bond issued for $980. THe discount is $20 ($1,000 - $980) -A debit

APIC AKA Paid-In Capital in Excess of Par

Paid-in capital is the amount of capital "paid in" by investors during common or preferred stock issuances, including the par value of the shares themselves. Paid-in capital represents the funds raised by the business from selling its equity, and not from ongoing operations. So, the premium is another type of paid-in capital account known as Paid-In Capital in Excess of Par. - It is also called additional paid-in capital. The Paid-In Capital in Excess of Par account is an equity account that is reported on the balance sheet

Par Value

Par value is an amount assigned by a company to a share of its stock. Most companies set par value low to avoid issuing their stock below par. The par value of a stock has no relation to the market value, which is the price at which the stock is bought and sold.

Preemptive Right

Preemptive right. Stockholders have a preemptive right to maintain their proportionate ownership in the corporation. For example, suppose a stockholder owns 5% of a corporation's stock. If the corporation issues 100,000 new shares of stock, it must offer the stockholder the opportunity to buy 5% (5,000) of the new shares. This right, however, is usually withheld by contract for most corporations.

Declaring & Paying Dividends - Preferred Stock

Preferred dividend = Outstanding shares x Par Value x Preferred dividend rate -Journal entry to acct for declaration & pymt of cash dividend on preferred stock are similar to those of common stock (use Dividends Payable - Preferred vs. Dividends Payable-Common)

Premium

Price above face value

Discount

Price below face value

Time Value of Money

Recognition that money earns interest over time

Common Stock

Represents the basic ownership of a corporation.

Capital Stock

Represents the individual's ownership of the corporation's capital.

Issued Stock

Stock that has been issued but may or may not be held by stockholders.

3 Categories of Stock

Stock that is held by the stockholders is said to be outstanding stock. The outstanding stock of a corporation represents 100% of its ownership. The numbers of shares of authorized stock, issued stock, and outstanding stock are most likely going to be different amounts

5/5 Types of Bonds: Debentures

Such bonds are unsecured bonds that are not backed by assets. hey're only backed by the credit worthiness of the bond issuer.

4/5 Types of Bonds: Secured Bonds

THese bonds give the bondholder the right to take specified assets of the issuer if the issuer fails to pay principal or interest

Current Portion of N/P

The amount of the principal that is payable within one year of the balance sheet date -Typically deals with long-term notes payable; These N/P are called current maturity

Issue Price

The amount that the corporation receives from issuing stock.

Net Pay

The amt employee gets to keep -aka take-home pay -Net Pay = Gross Pay - all deductions (such as income tax withheld) -Employer either writes a paycheck to each employee for his/her take-home pay or directly deposits the employee's take-home pay into the employee's bank acct

Effective Interest Rate

The effective interest rate is the usage rate that a borrower actually pays on a loan

Amortization

The gradual reduction of an item over time

Market Interest Rate

The market interest rate (also known as the effective interest rate) is the rate that investors demand to earn for loaning their money. The market interest rate varies constantly. A company may issue bonds with a stated interest rate that differs from the market interest rate, due to the time gap between the time the bonds were printed (engraved) showing the stated rate and the actual issuance of the bonds.

Authorized Stock

The maximum number of shares of stock that the corporate charter allows the corporation to issue.

Debt Ratio

The proportion of assets financed with debt -dividing total liabilities by total assets -The higher the debt ratio, the higher the company's financial risk. -The debt ratio can be used to evaluate a business's ability to pay its debts.

Future Value

The value of the investment at a specific date in the future ex: The face value to be received in the future

1/5 Types of Bonds: Term Bonds

These bonds all mature at the same specified time.

2/5 Types of Bonds: Serial bonds

These bonds mature in installments at regular intervals.

Gross Pay

Total amt of salary, bonuses, wages, commissions & its associations (ex overtime pay) employee earns during a pay period before taxes or any other deductions -Expense to employer

3 dividend dates

Typical pairing example is for declaring & paying dividends - Common Stock 1. Declaration date: Intention to pay the dividend (liability is created) Typical pair: Cash Dividends (debit;) & Dividends Payable - Common (credit); Declared a cash dividend 2. Date of record: Date the corporation records the stockholders that receive dividend checks Typical pair: No journal entry is recorded; This is a cutoff point to determine who owns the stock and will therefore receive the cash payment No journal entry is recorded. 3. Payment date: Typically follows the record date by a week or 2. Typical pair: Dividends Payable - Common (credit) & Cash (credit); Payment of Cash dividend -At the end of the accting period, company will close the cash dividends acct to Retained Earnings: Retained Earnings (debit) & Cash Dividends (credit); To close Cash Dividends

Straight Time

When businesses pay employees at a base rate for a set period

Retained Earnings

is equity earned by profitable operations that is not distributed to stockholders. Retained earnings is internally generated equity because it results from corporate decisions to retain net income to use in future operations or for expansion.