Chapter 17 - Financial Statement Analysis
Horizontal Analysis- is the percentage analysis of increasing and deceasing in related items in comparative financial statements.
*the amount of each item on the most recent statement is compared with the related item in one or more earlier statements.
*When comparing two or more statements the earliest of the statements is used as the base.
*A comparative balance sheet compares assets, liabilities and stockholders equity.
it compares the different numbers from year to year then shows the increase or decrease from the years and then finally the percent increase or decrease.
Vertical Analysis- is a percentage analysis to show the relationship of each component to the total within a single statement.
*statements are prepared in either detailed or condensed form.
*vertical analysis is limited to only analyzing one statement, so it may be beneficial to prepare a comparative analysis to better look at the numbers over a longer period of time.
*A comparative balance sheet for vertical analysis also shows assets, liabilities and stockholders equity but only shows the numbers from that one year it doesn't show the increase or decrease from base years and it also doesn't show the percent change from year to year.
Common Size Statements- Are statements used to compare two companies in terms of percents from both vertical and horizontal analysis.
*common size statements are useful to compare the current period with previous periods.
*this information is usually able to be found through trade associations and financial information services.
Solvency Analysis
Solvency- is the ability of a business to meet its financial obligations
Profitability- is the ability of a business to earn income
*Factors associated with solvency and profitability are interrelated
*If a business cannot pay its debts in a timely manor the business may experience difficulty obtaining credit
*If a business cant obtain credit in may in turn affect its profitability
*Solvency Analysis focuses on the ability of a business to pay or otherwise satisfy its current and non current liabilities
*It involves analyzing balance sheet relationship ships and the following analyses
1. Current Position Analysis
2. Accounts Receivable Analysis
3. Inventory Analysis
4. Ratio of fixed assets to long term liability
5. ratio of liabilities to stockholders equity
6. number of times interest charges are earned
Friday, April 4, 2014
Tuesday, March 25, 2014
Chapter 16 - Statement of Cash Flows
Statement of cash flows- it reports a business's major cash inflows and outflows of a period
*it provides useful information about a company's ability to generate cash from operations
Three types of activities are associated with the statement of cash flow reports
1. Cash flows from operating activities- cash flow transactions that affect net income.
Ex. sale and purchase of merchandise by a retailer
2. Cash flows from investing activities- cash flows from transactions that affect the investments and non-current assets.
Ex. sale and purchase of fixed assets, buildings or equipment
3. Cash flows from financing activities- cash flows from transactions that affect the debt and equity of a business.
Ex. transactions such as issuing or retiring equity and debt securities
-Statement of cash flows include cash flows from operating activities, which are usually presented first.
-Then the cash flows from investing activities and financial activities follow.
-Cash balance from the beginning of the period is added to the net or decrease in cash, which results in the cash balance for the end of the period.
Cash Inflow- A source of cash that causes cash flow to increase
Cash Outflow- A use of cash that causes cash flow to decrease
Cash Flows From Operating Activities
There are two alternative methods for reporting cash flows for operating activities which include
1. The Direct Method and 2. The Indirect Method.
The Direct Method- Reports the sources of operating cash and uses of operating cash. Major source of operating cash comes from customers and major uses are from cash paid for supplies and merchandise.
The Indirect Method- Reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash.
Cash Flows From Investing Activities
Cash inflows from investing activities normally come from selling fixed assets, investments and intangible assets. and cash outflows usually come from payments to acquire fixed assets, investments or intangible assets.
If the inflows are greater than the outflows, net cash flow provided by investing activities is reported.
If the inflows are less than the outflows, net cash flow used for investing activities is reported.
Part of the Cash Flow Report Cash flows from Investing Activities
Cash flows from investing activities:
Cash payments for purchase of land ....................$20,000
Cash Flows From Financing Activities
Cash inflows from financing activities normally come from issuing debt or equity securities.
Ex. issuing bonds, notes payable, preferred common stocks
Cash outflows from financing activities usually occur from paying cash dividends, repaying debt, and acquiring treasury stock.
If inflows are greater than outflows, net cash flow provided by financing activities is reported.
If inflows are less than outflows, net cash used fir financing activities is reported.
Part of Cash Flow Report Cash flows from financing Activities
Cash flows from financing activities:
Cash received as owner's investment .....................$25,000
Deduct cash withdrawal by owner ..........................$2,000
Net cash flow provided by financing activities ......$23,000
Noncash Investing and Financing Activities
Since not all transactions involve cash, non cash transactions must still be documented because even though they do not affect cash flows directly affect cash flows they will affect cash flows later on in terms of cash payments of interest and retiring of bonds. Thus transactions should still be reported in the persons financial statements.
Noncash transactions that occur during that specific period are reported in a separate schedule usually at the bottom of the cash flows report.
No Cash Flow Per Share
Cash Flow Per Share- sometimes reported in the financial press. The term really means, cash flow from operations per share.
Ex. when people interpret cash flow per share as the amount available for dividends.
Statement of Cash Flows - The Indirect Method
-The indirect method is usually less costly and more efficient than the direct method. It was reported that 99% of companies surveyed in 2005 used the indirect method.
-Collecting data for the statement of cash flows, all the receipts and cash payments for a period can be analyzed, but this process is very costly and time consuming.
- The more effective way to analyze this data is to analyze the changes in the noncash balance sheet accounts.
-The logic behind this is that a change in any balance sheet account (including cash) can be analyzed in terms of changes in the other balance sheet accounts.
Assets = Liabilities + Stockholders Equity
Cash + Noncash Assets = Liabilities + Stockholders Equity
Cash = Liabilities + Stockholders Equity - Noncash Assets
Retained Earnings
The retained earnings account should be looked at carefully because some of the entries to retained earnings may not affect cash.
Ex. a decrease in retained earnings resulting from issuing a stock dividend does not affect cash
Cash Flows From Operating Activities- Indirect Method
-Net income of companies usually doesn't equal the amount of cash generated from operations in a period. This is because net income is determined using the accrual method of accounting. With the accrual method revenues and expenses are recorded at different times from when cash is received or paid.
-With the indirect method these differences are used to reconcile the net income to cash flows from operating activities. And the roper adjustments to net income under the indirect method are reported in the statement.
-The next adjustments to net income come are gains and losses from disposal of assets. These adjustments happen because cash flows from operating activities should not include investing or financial transactions.
*also adjustments must be made so that there is no double counting taking place as well
Depreciation- Comparative Balance Sheet indicates accumulated depreciation increases or decreases. So if building depreciation increased by $7000, the 7k of depreciation reduced net income but didn't require an outflow of cash. So the 7k is added to net income in determining cash flows from operating activities.
Cash flows from operating activities:
Net Income $108,000
Add Depreciation $7,000 $115,000
Gain on Land- On a land gain, since it is a sale proceed, which include the gain and the carrying value of land, are included in cash flows from investing activities. The gain is also included in net income, so to avoid double counting the gain is deducted from net income
cash flows from operating activities:
Net income $108,000
Deduct gain on sale of land $12,000
Changes in current operating Assets and Liabilities- decreases in noncash current assets and increases in current liabilities are added to net income. In contrast, increases in noncash current assets and decreases to current liabilities are deducted from net income.
Statement of cash flows- it reports a business's major cash inflows and outflows of a period
*it provides useful information about a company's ability to generate cash from operations
Three types of activities are associated with the statement of cash flow reports
1. Cash flows from operating activities- cash flow transactions that affect net income.
Ex. sale and purchase of merchandise by a retailer
2. Cash flows from investing activities- cash flows from transactions that affect the investments and non-current assets.
Ex. sale and purchase of fixed assets, buildings or equipment
3. Cash flows from financing activities- cash flows from transactions that affect the debt and equity of a business.
Ex. transactions such as issuing or retiring equity and debt securities
-Statement of cash flows include cash flows from operating activities, which are usually presented first.
-Then the cash flows from investing activities and financial activities follow.
-Cash balance from the beginning of the period is added to the net or decrease in cash, which results in the cash balance for the end of the period.
Cash Inflow- A source of cash that causes cash flow to increase
Cash Outflow- A use of cash that causes cash flow to decrease
Cash Flows From Operating Activities
There are two alternative methods for reporting cash flows for operating activities which include
1. The Direct Method and 2. The Indirect Method.
The Direct Method- Reports the sources of operating cash and uses of operating cash. Major source of operating cash comes from customers and major uses are from cash paid for supplies and merchandise.
The Indirect Method- Reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash.
Cash Flows From Investing Activities
Cash inflows from investing activities normally come from selling fixed assets, investments and intangible assets. and cash outflows usually come from payments to acquire fixed assets, investments or intangible assets.
If the inflows are greater than the outflows, net cash flow provided by investing activities is reported.
If the inflows are less than the outflows, net cash flow used for investing activities is reported.
Part of the Cash Flow Report Cash flows from Investing Activities
Cash flows from investing activities:
Cash payments for purchase of land ....................$20,000
Cash Flows From Financing Activities
Cash inflows from financing activities normally come from issuing debt or equity securities.
Ex. issuing bonds, notes payable, preferred common stocks
Cash outflows from financing activities usually occur from paying cash dividends, repaying debt, and acquiring treasury stock.
If inflows are greater than outflows, net cash flow provided by financing activities is reported.
If inflows are less than outflows, net cash used fir financing activities is reported.
Part of Cash Flow Report Cash flows from financing Activities
Cash flows from financing activities:
Cash received as owner's investment .....................$25,000
Deduct cash withdrawal by owner ..........................$2,000
Net cash flow provided by financing activities ......$23,000
Noncash Investing and Financing Activities
Since not all transactions involve cash, non cash transactions must still be documented because even though they do not affect cash flows directly affect cash flows they will affect cash flows later on in terms of cash payments of interest and retiring of bonds. Thus transactions should still be reported in the persons financial statements.
Noncash transactions that occur during that specific period are reported in a separate schedule usually at the bottom of the cash flows report.
No Cash Flow Per Share
Cash Flow Per Share- sometimes reported in the financial press. The term really means, cash flow from operations per share.
Ex. when people interpret cash flow per share as the amount available for dividends.
Statement of Cash Flows - The Indirect Method
-The indirect method is usually less costly and more efficient than the direct method. It was reported that 99% of companies surveyed in 2005 used the indirect method.
-Collecting data for the statement of cash flows, all the receipts and cash payments for a period can be analyzed, but this process is very costly and time consuming.
- The more effective way to analyze this data is to analyze the changes in the noncash balance sheet accounts.
-The logic behind this is that a change in any balance sheet account (including cash) can be analyzed in terms of changes in the other balance sheet accounts.
Assets = Liabilities + Stockholders Equity
Cash + Noncash Assets = Liabilities + Stockholders Equity
Cash = Liabilities + Stockholders Equity - Noncash Assets
Retained Earnings
The retained earnings account should be looked at carefully because some of the entries to retained earnings may not affect cash.
Ex. a decrease in retained earnings resulting from issuing a stock dividend does not affect cash
Cash Flows From Operating Activities- Indirect Method
-Net income of companies usually doesn't equal the amount of cash generated from operations in a period. This is because net income is determined using the accrual method of accounting. With the accrual method revenues and expenses are recorded at different times from when cash is received or paid.
-With the indirect method these differences are used to reconcile the net income to cash flows from operating activities. And the roper adjustments to net income under the indirect method are reported in the statement.
-The next adjustments to net income come are gains and losses from disposal of assets. These adjustments happen because cash flows from operating activities should not include investing or financial transactions.
*also adjustments must be made so that there is no double counting taking place as well
Depreciation- Comparative Balance Sheet indicates accumulated depreciation increases or decreases. So if building depreciation increased by $7000, the 7k of depreciation reduced net income but didn't require an outflow of cash. So the 7k is added to net income in determining cash flows from operating activities.
Cash flows from operating activities:
Net Income $108,000
Add Depreciation $7,000 $115,000
Gain on Land- On a land gain, since it is a sale proceed, which include the gain and the carrying value of land, are included in cash flows from investing activities. The gain is also included in net income, so to avoid double counting the gain is deducted from net income
cash flows from operating activities:
Net income $108,000
Deduct gain on sale of land $12,000
Changes in current operating Assets and Liabilities- decreases in noncash current assets and increases in current liabilities are added to net income. In contrast, increases in noncash current assets and decreases to current liabilities are deducted from net income.
Tuesday, March 4, 2014
Chapter 15 - Bonds Payable and Investment in Bonds
Chapter 15- Bonds Payable and Investment in Bonds
Bond- is a form an interest bearing note, require periodic interest payments and face amount must be paid by maturity date.
Characteristics, Terminology and Pricing of Bonds Payable
Bond Indenture- also known as a trust indenture, is when a corporation issues bonds into a contract with bondholders.
Principal- is another term for the face value of abond, usually is in multiples of $1,000
*Bonds interest can be paid annually, semiannually or quaterly but most commonly paid semiannually.
Term Bonds- When all bonds of an issue mature at the same time
Serial Bonds- When bonds maturities are spread over several dates
Convertable Bonds- Bonds that can be exchanged for other securities, such as common stock
Callable Bonds- Bonds that a corporation reserves the right to redeem before their maturity date
Debenture Bonds- Bonds issued on the basis of the general credit of the corporation
Pricing of Bonds Payable
*When a corporation issues bonds, the price that buyers are willing to pay for the bonds depends upon the following three factors:
1. The face value of the bond after the maturity date
2. Period interest paid on the bond
3. Market rate interest of the bond
Contract Rate- Also known as coupon rate, is the rate of interest on a bond which is usually expressed as a percentage
Effective Rate of Interest- also known as the market rate of interest, this is determined by the transactions between buyers and sellers of similar bonds and also investors assessment of current and future economic conditions and expectations
Discount- When a bond is sold less than its face value, this results when a bond's market rate is higher than the contract rate.
*If the contract rate is equal to the market rate of interest then the bond will sell for it face value
Premium- If the contract rate is higher than the market rate of interest the bond will sell for higher than its face value
Present Value- Is the current value with accumulated interest. Original value plus interest
Future Value- The value of the bond in the future. The original value plus future interest
Present Value of the Periodic Bond Interest Payments
Annuity- The periodic value of a bond after interest periods. Series of equal cash payments at fixed intervals to bond.
Present Value of An Annuity- is the sum of the present values of each cash flow
Accounting for Bonds Payable
Bonds issued at face value in journal
-debit cash
-credit bonds payable also stating value of bond issued at face value
Calculating Interest in the journal
-debit Interest Expense
-credit Cash and state period of time interest was paid
Payment on a bond
-debit Bonds Payable
-credit Cash
Bonds Issued At a Discount
discount on bond in journal
-debit cash
-debit discount on bonds payable
-credit bonds payable
Amortizing a Bond Discount
*There are two methods if amortizing a bond discount, both amoortize the same total discount amount over the life of the bond
1. Straight Line Method
2. Effectivee Interest Rate Method, also called interest method
in journal
-debit Interest expense
-credit discount on bonds payable
-credit cash
Bonds issued at a premium
in journal
-debit cash
-cedit bonds payable
-credit premium on bonds payable
Amortizing a bond premium
in journal
-debit interest payable
-debit premium bonds payable
-credit cash
Zero Coupon Bonds
corporations issue bonds that provide for only the payments ofvthe face value at maturity date.
in journal
-debit cash
-decit discount on bonds payable
-credit bonds payable with note that was issued as zero coupon
Bond- is a form an interest bearing note, require periodic interest payments and face amount must be paid by maturity date.
Characteristics, Terminology and Pricing of Bonds Payable
Bond Indenture- also known as a trust indenture, is when a corporation issues bonds into a contract with bondholders.
Principal- is another term for the face value of abond, usually is in multiples of $1,000
*Bonds interest can be paid annually, semiannually or quaterly but most commonly paid semiannually.
Term Bonds- When all bonds of an issue mature at the same time
Serial Bonds- When bonds maturities are spread over several dates
Convertable Bonds- Bonds that can be exchanged for other securities, such as common stock
Callable Bonds- Bonds that a corporation reserves the right to redeem before their maturity date
Debenture Bonds- Bonds issued on the basis of the general credit of the corporation
Pricing of Bonds Payable
*When a corporation issues bonds, the price that buyers are willing to pay for the bonds depends upon the following three factors:
1. The face value of the bond after the maturity date
2. Period interest paid on the bond
3. Market rate interest of the bond
Contract Rate- Also known as coupon rate, is the rate of interest on a bond which is usually expressed as a percentage
Effective Rate of Interest- also known as the market rate of interest, this is determined by the transactions between buyers and sellers of similar bonds and also investors assessment of current and future economic conditions and expectations
Discount- When a bond is sold less than its face value, this results when a bond's market rate is higher than the contract rate.
*If the contract rate is equal to the market rate of interest then the bond will sell for it face value
Premium- If the contract rate is higher than the market rate of interest the bond will sell for higher than its face value
Present Value- Is the current value with accumulated interest. Original value plus interest
Future Value- The value of the bond in the future. The original value plus future interest
Present Value of the Periodic Bond Interest Payments
Annuity- The periodic value of a bond after interest periods. Series of equal cash payments at fixed intervals to bond.
Present Value of An Annuity- is the sum of the present values of each cash flow
Accounting for Bonds Payable
Bonds issued at face value in journal
-debit cash
-credit bonds payable also stating value of bond issued at face value
Calculating Interest in the journal
-debit Interest Expense
-credit Cash and state period of time interest was paid
Payment on a bond
-debit Bonds Payable
-credit Cash
Bonds Issued At a Discount
discount on bond in journal
-debit cash
-debit discount on bonds payable
-credit bonds payable
Amortizing a Bond Discount
*There are two methods if amortizing a bond discount, both amoortize the same total discount amount over the life of the bond
1. Straight Line Method
2. Effectivee Interest Rate Method, also called interest method
in journal
-debit Interest expense
-credit discount on bonds payable
-credit cash
Bonds issued at a premium
in journal
-debit cash
-cedit bonds payable
-credit premium on bonds payable
Amortizing a bond premium
in journal
-debit interest payable
-debit premium bonds payable
-credit cash
Zero Coupon Bonds
corporations issue bonds that provide for only the payments ofvthe face value at maturity date.
in journal
-debit cash
-decit discount on bonds payable
-credit bonds payable with note that was issued as zero coupon
Monday, January 13, 2014
Chapter 14 Notes - Income Taxes, Unusual Income Items, and Investments in Stocks
Taxes are a large part of businesses expenses, all corporations are required to pay a federal tax and also a list of other taxes such as local and state tax. Taxes are approximately 30 to 40 % of the earnings of the year and are labeled on the income statement as Income Tax Expense. Taxes are tallied at the bottom of the income statement to calculate net income.
Taxable income- is determined according to the tax laws and is reported to taxing authorites on the corporations tax return. It is often different from the income before income taxes reported in the income statement according generally accepted accounting principles.
*income tax based on taxable income usually differs from income tax based on income before taxes.
temporary differences- are differences that reverse or turn around in later years.
differences in taxable income and income before taxes are taxable income is recognized in one period for tax purposes and income before taxes are recognized for income statement purposes.
*Revenues or gains are taxed after hey are reported in the income statement.
*Expenses or losses are deducted in determining taxable income after they are reported in the income statement.
*Revenues or gains are taxed before they are reported in the income statement
*Expenses or losses are deducted in determining taxable income before they are reported in the income statement.
Since temporary differences change or reverse in later years, they do not change or reduce the total amount of taxable income over the life of the business. It only effects the timing in which the revenues and expenses are recognized fro tax purposes.
*Deferred income tax payable is reported as a liablility at the end of the year.
Permanent Differences- Are differences which will not reverse with the passage of time.
examples include interest income and municipal bonds which are not exempt from taxation
Reporting Unusual Items on the Income Statement
Unusal items are required to be reported seperately on the current year or pervious periods income statement depending on when they occured.
Unusual Items that affect the current period income statement include...
-Fixed asset impairments
-Restructured charges
-Discounted operations
-Extraordinary items
Unsusual Items that affect the previous periods income statement include...
-Errors
-Change in Accounting principles
Fixed asset impairments and restructured charges are sutracted from gross profit on the income statement from continuing operations
Discounted operations and extraordinary items are listed below continuing operations on the income statement to help determine net income for the period.
Fixed Asset Impairments- occur when the fair value of a fixed asset falls below its book value and is not expected to recover.
Examples for this occuring include
-decreases in the market price of fixed assets
-significant changes in the business or regulations related to fixed assets
-adverse conditions affecting the use of fixed assets
-expected chas flow losses from using fixed assets
the loss on fixed asset impairment is reported as a seperate entry to expenses in the journal. Loss on fixed asset impairment is debited and equipment is credited.
Restructuring Charges- are costs incurred with actions such as canceling contracts, laying off or relocating employees and combining operations.
Restructuring charges are reported as a seperate expense which is deducted from gross profit to determine income for continuing operations. In the journal restructuring charges is debited and employee termination obligation is credited.
Discounted Operations- is a gain or loss from disposing of a business segment or component of an entity. The term business entity refers to a major line of business for a company, such as division department, or certain class of customer.
Extraordinary Items- result from events and transactions that
-are significantly different from normal operating activities
-occur infequently
Natual Disasters, condemning land or buildings, and other disposing of a business segment should be reported as an extraordinary item.
Unusual items affecting the prior periods income statement
- errors in the recognition, measurement, presentation or disclosure of financial statements
- changes from one generally accepted accounting principle to another generally accepted accounting principle
in addition to these two unusual items affecting the income statement they also require a retroactive restatement of prior period earnings.
Theses errors or changes in accounting principles found must be corrected in the previous statements and should be applied to future statements. So both these unusual items do not affect the current periods statements only pervious ones.
Earnings per common share
It is hard to determine how profitable different size companies are based soley on net income so to easily compare comanies, businesses use what is called earnings per common share.
Taxes are a large part of businesses expenses, all corporations are required to pay a federal tax and also a list of other taxes such as local and state tax. Taxes are approximately 30 to 40 % of the earnings of the year and are labeled on the income statement as Income Tax Expense. Taxes are tallied at the bottom of the income statement to calculate net income.
Taxable income- is determined according to the tax laws and is reported to taxing authorites on the corporations tax return. It is often different from the income before income taxes reported in the income statement according generally accepted accounting principles.
*income tax based on taxable income usually differs from income tax based on income before taxes.
temporary differences- are differences that reverse or turn around in later years.
differences in taxable income and income before taxes are taxable income is recognized in one period for tax purposes and income before taxes are recognized for income statement purposes.
*Revenues or gains are taxed after hey are reported in the income statement.
*Expenses or losses are deducted in determining taxable income after they are reported in the income statement.
*Revenues or gains are taxed before they are reported in the income statement
*Expenses or losses are deducted in determining taxable income before they are reported in the income statement.
Since temporary differences change or reverse in later years, they do not change or reduce the total amount of taxable income over the life of the business. It only effects the timing in which the revenues and expenses are recognized fro tax purposes.
*Deferred income tax payable is reported as a liablility at the end of the year.
Permanent Differences- Are differences which will not reverse with the passage of time.
examples include interest income and municipal bonds which are not exempt from taxation
Reporting Unusual Items on the Income Statement
Unusal items are required to be reported seperately on the current year or pervious periods income statement depending on when they occured.
Unusual Items that affect the current period income statement include...
-Fixed asset impairments
-Restructured charges
-Discounted operations
-Extraordinary items
Unsusual Items that affect the previous periods income statement include...
-Errors
-Change in Accounting principles
Fixed asset impairments and restructured charges are sutracted from gross profit on the income statement from continuing operations
Discounted operations and extraordinary items are listed below continuing operations on the income statement to help determine net income for the period.
Fixed Asset Impairments- occur when the fair value of a fixed asset falls below its book value and is not expected to recover.
Examples for this occuring include
-decreases in the market price of fixed assets
-significant changes in the business or regulations related to fixed assets
-adverse conditions affecting the use of fixed assets
-expected chas flow losses from using fixed assets
the loss on fixed asset impairment is reported as a seperate entry to expenses in the journal. Loss on fixed asset impairment is debited and equipment is credited.
Restructuring Charges- are costs incurred with actions such as canceling contracts, laying off or relocating employees and combining operations.
Restructuring charges are reported as a seperate expense which is deducted from gross profit to determine income for continuing operations. In the journal restructuring charges is debited and employee termination obligation is credited.
Discounted Operations- is a gain or loss from disposing of a business segment or component of an entity. The term business entity refers to a major line of business for a company, such as division department, or certain class of customer.
Extraordinary Items- result from events and transactions that
-are significantly different from normal operating activities
-occur infequently
Natual Disasters, condemning land or buildings, and other disposing of a business segment should be reported as an extraordinary item.
Unusual items affecting the prior periods income statement
- errors in the recognition, measurement, presentation or disclosure of financial statements
- changes from one generally accepted accounting principle to another generally accepted accounting principle
in addition to these two unusual items affecting the income statement they also require a retroactive restatement of prior period earnings.
Theses errors or changes in accounting principles found must be corrected in the previous statements and should be applied to future statements. So both these unusual items do not affect the current periods statements only pervious ones.
Earnings per common share
It is hard to determine how profitable different size companies are based soley on net income so to easily compare comanies, businesses use what is called earnings per common share.
Monday, November 11, 2013
Chapter 13 Notes
Corporations: Organization, Stock, Transactions, and Dividends
Corporations make up 20 percent of the businesses in the economy but 90 percent of total business dollars made in the US
Corporation-is a legal entity distinct and separate from the individuals who create and operate it. corporations can acquire, own and dispose of property in its own name.
Stocks- This is a characteristic of large corporations. It is when corporations sell a portion of its ownership. This allows corporations to generate large amounts of capital. The buying and selling of a corporations stock does not affect the operations and existence of the company.
Stockholders- Also called shareholders are the people who own stock in the corporation. Stockholders have limited liability. Stockholders also control the corporation by electing the board of directors.
There are two different types of corporations there are public corporations or there are private corporations
Public Corporations- Corporations whose shares of stock are traded in public markets
Private Corporations- Corporations whose shares of stock are not traded publicly. They are usually bought by a small group of investors in a nonpublic or private market.
Board of Directors- It is a board of elected officers in a corporation that meet periodically to establish corporate policies and also manage day to day affairs with in the business.
Organizational Structure of a Corporation
*Stockholders
*Board of Directors
*Officers
*Officers
*Employees
Forming a corporation
First step is filing for an application of incorporation
laws of incorporation differ from state to state and corporations usually organize in the states with more favorable laws. For example Delaware is a popular for corporations to form.
Secondly after the application of incorporation has been approved the state must grant a charter or articles of incorporation. These articles is what formally makes the business a formal corporation.
Bylaws- are rules and procedures for conducting the corporations affairs.
Many costs go into the creation of a corporation called Organizational Expenses these costs include things such as legal fees, taxes, state incorporation fees, license fees, and promotional costs.
* the journal entry for organizational expenses is organizational expenses is debited and cash is credited
Stockholders Equity
There are many names for owners equity in a corporation for example is is commonly referred to as stockholders equity, shareholders equity, shareholders investment, or capital.
There are two main sources of stockholders equity paid in capital and retained earnings
Paid in Capital- Capital contributed to the corporation by the stockholders
Retained Earnings- Net income retained in the business
*Stockholders Equity Journal entry is common stock and retained earnings debited added together to get total stockholders equity which is then creditedDeficit- A debit in Retained earnings, this balance results from accumulated net losses.
Characteristics of Stock
Outstanding Stock- Stock remaining in the hands of stockholders
Par- Shares of stock that are often assigned a monetary amount
Stated Value- requirement of some statees that says board of directors have to assign a value to no- par stock
Stock Certificates are given to stockholders that indicate a ownership of the stock and the value and amount of stock owned.
Stockholders also have major rights, are parrtical owners of a company or corporation
- right to vote in matters concerning the company
- right to share in distribution of earnings
- right to share in assets on liquidation
Common Stock- When only one class of sotck is issued, each share of common stock has equal rights
Perferred Stock- Common example of perferred rights when owning stock is the prreference to dividends
Issuing Stock
The journal entry for issuing stock to investors is done by using a seperate account . Cash is debited and perferred stock and common stock are credited.
The price at which stock can be sold by a corporation depends on a variety of factors
- Financial conditions, earnings records, and dividend record of the corp.
- Investor expectations of the corp potential earning power
- General business and economic conditions and prospects
Friday, October 4, 2013
Chapter 12 Notes
Chapter 12
Accounting for Partnerships and Limited Liability Companies
There are four major forms of businesses
-Proprietorship
-Partnerships
-Limited Liability Company
-Corporation
For theses types of businesses and all businesses in general the owner should keep personal finances completely separate from business finances. This is so the business will run in a more smooth manner and taxation and profit can be accurately calculated either monthly or annually. As many people say you must not mix business and pleasure. In other words keep you social and personal life completely seperate from your business life.
*Proprietorships- also know as Sole Proprietors are typically small businesses owned and operated by one person. These types of businesses are the most common making up 70% of the market, but on the flip side proprietorships only make up 5% of the total revenue brought in by businesses across the board. And to add to this there are many positive and negative factors to having a proprietorship. The positives include that as the sole owner of the business you can make decisions on how you want to run your business yourself without any interference from other people. Also as the owner you keep all the profits for yourself and do not have to share any of the earnings with other people. However the negatives are, since you are the only owner you have a limited amount of capital to invest in your business and you are responsible for all expenses. You can however borrow money from a family or friend or take a loan from a bank but your resources are still very limited alone to create a large business right off the bat. There are many risks as far as liabilities go as well being the sole owner of a company as well.
*Partnerships- are another route to go when starting up your own business, a partnership is a business owned and managed by two or more people. All the expenses and operation costs are split in this case between all the members of the partnership, therefore lessening the financial burden of owning a business on your own. However partnerships are sometimes short lived and dissolve easily. This is because if one person decides to leave the partnership whether it is for a number of reasons, the partnership must be terminated and the assets of the business are properly distributed to all members of the business. Also if the other people of the business want to continue to do business they must for a new partnership between them. One positive to having a partnership is more capital to invest in the business. Since there are more people that in turn means more money to put into the creation of your business.
*Limited Liability Company- An LLC is very similar to a partnership but is different in ways that benefit the owners. Instead of the business ending when someone leaves a partnership, LLC allow businesses be members and not be partners. So the business will continue instead of ending like in a traditional partnership.
Dividing Income for Partnerships-
when partnerships merge their businesses and create a partnership there are two different transactions to calculate the salaries of the partners and also the division of the sales. The salaries of the partners should be determined at the beginning of the partnership in the partnership agreement. It is mainly determined based on which person contributed more to the business and who invested more money and assets. Secondly the other division of net income is the division of revenue or sales income. Most traditionaly this money is split 50/50 between the two partners. The major reason that partnerships fail is because of disagreements over money and the failure to come to an agreement over income distribution.
Accounting for Partnerships and Limited Liability Companies
There are four major forms of businesses
-Proprietorship
-Partnerships
-Limited Liability Company
-Corporation
For theses types of businesses and all businesses in general the owner should keep personal finances completely separate from business finances. This is so the business will run in a more smooth manner and taxation and profit can be accurately calculated either monthly or annually. As many people say you must not mix business and pleasure. In other words keep you social and personal life completely seperate from your business life.
*Proprietorships- also know as Sole Proprietors are typically small businesses owned and operated by one person. These types of businesses are the most common making up 70% of the market, but on the flip side proprietorships only make up 5% of the total revenue brought in by businesses across the board. And to add to this there are many positive and negative factors to having a proprietorship. The positives include that as the sole owner of the business you can make decisions on how you want to run your business yourself without any interference from other people. Also as the owner you keep all the profits for yourself and do not have to share any of the earnings with other people. However the negatives are, since you are the only owner you have a limited amount of capital to invest in your business and you are responsible for all expenses. You can however borrow money from a family or friend or take a loan from a bank but your resources are still very limited alone to create a large business right off the bat. There are many risks as far as liabilities go as well being the sole owner of a company as well.
*Partnerships- are another route to go when starting up your own business, a partnership is a business owned and managed by two or more people. All the expenses and operation costs are split in this case between all the members of the partnership, therefore lessening the financial burden of owning a business on your own. However partnerships are sometimes short lived and dissolve easily. This is because if one person decides to leave the partnership whether it is for a number of reasons, the partnership must be terminated and the assets of the business are properly distributed to all members of the business. Also if the other people of the business want to continue to do business they must for a new partnership between them. One positive to having a partnership is more capital to invest in the business. Since there are more people that in turn means more money to put into the creation of your business.
*Limited Liability Company- An LLC is very similar to a partnership but is different in ways that benefit the owners. Instead of the business ending when someone leaves a partnership, LLC allow businesses be members and not be partners. So the business will continue instead of ending like in a traditional partnership.
Dividing Income for Partnerships-
when partnerships merge their businesses and create a partnership there are two different transactions to calculate the salaries of the partners and also the division of the sales. The salaries of the partners should be determined at the beginning of the partnership in the partnership agreement. It is mainly determined based on which person contributed more to the business and who invested more money and assets. Secondly the other division of net income is the division of revenue or sales income. Most traditionaly this money is split 50/50 between the two partners. The major reason that partnerships fail is because of disagreements over money and the failure to come to an agreement over income distribution.
*The partners equally share either a net gain or a net loss depending on the net income for the period. A net gain is achieved by allowances, and expenses being less than the net income, and a net loss is the opposite where allowances and expenses exceed the net income.
*When new partners join the partnership, there are two possible scenarios which a new partner can be admitted. First a person can buy there way into the busy or pay interest into the business and this makes the person a new partner in the business and gives him rights to a percentage of the profits. This way doesn't directly have an effect on the business itself it is a transaction between solely between the partners of the business. However the other way does have an effect on the business. This way is a person would put money or assets directly into the business itself and therefore having an affect on the business's asset and owners equity accounts.
*Pretty much the same scenarios occur when withdrawing a partner from the business except the opposite transactions occur to the business'a accounts. So instead of crediting the owners equity and debuting the asset accounts when admitting a partner if someone wants to leave the business you would debit owners equity and credit asset. The money which that partner specifically contributed to the business will be returned to him or a
Her, and if the business doesn't have the assets to give the partner which is leaving the business will set up a liability account to pay off the partner the amount of money which they deserve.
Tuesday, September 24, 2013
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