Accounting 131 ALL chapters outlined
Accounting 131 ALL chapters outlined 131
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Popular in Accounting
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Date Created: 02/07/16
Chapter 1 Financial Statements (listed in order of listing) Users inside: managers use to plan decisions, employees for future position, outside: investors to evaluate, governments use for taxes, creditors decide to loan Buisness Organizations Sole Proprietorship: owned by 1 person, accounting for more than 70% Partnership: joint owner by 2 or more, increase skill and resources of each partner Corporation: organized under the laws of a particular state (pays most taxes) 1. Income Statement(total period of Profitability) revenues: sales revenue, service revenue expenses: cost of goods sold, admin expense, research expen, income tax single step OR multistep Gross margin= net sales cost of goods income from operations= gross amrgin operating expense 2..Balance Shee t (snapshot in time) (Liquidity pay obligations as due) A= L + SE Assests current: expected to be used up in 1 year operating cycle, cash, inventory longterm: beyond 1 year, real estate, equipment, build material Property,Plant, Equip: land equipment intangible: trademark, franchise, patent, lack physical subsance Liabilities(creditors/sources) Current: satisfied with 1 operating cycle year, listed in order of paid Long term: payment beyond 1 year, notes payable, bonds payable Bank: note payable Vendor/supplies: Account payable Employees: Wage Paid Stockholders Equity Common Stock /Contrib Capital owners contributions of acash and assets Retained Earnings: Rev, Exp, Div Working Capital= current assests current Liab Current Ratio= current assests / current Liab Net Profit Margin= net income / sales revenue (x100 for a%) 3.Statement of Retained Earnings (Profitability) change in balance from 1 period to the next add Net Income, less dividends, and other, then NET 4. Statement of Cash Flows Financing Activities creditor(person whom corp owe money) liability( liability to repay crediot, notes payable, bond payable) assets( economic resources, caimed by stockholders and creditors) Stockholder equity (resiual interest int he assets of a corp that reamin after deducting Liab) Investing Activities buying assets whice re used to generate revenues Operating Activities Revenue (the increase in assets that results from the sale of products/services Expense (cost of assets used or the liab created in the opertion to generate revenue) Annual Report 1.Notes to Financial Statement>full disclosure and clarity detail 2.Managment Discussion/Analysis→ the Risks to company 3.Auditors Report→ audit books exam records and F/S. must be independent of company. checks Chapter 2 Accounting Information System7 questions Accounting Cycle 1. analyze transactions 5. adjust the accounts 2. journalize transactions 6.prepare financial statements 3.post to the ledger 7. close the accounts 4. prepare a trial balance GeneralAcceptedAccountingPrinciples Accounting Rules Designed to disclose buisness performance and inform clients measurements become part of F/S complete the Accnt Cycle FinancialAccountingStandardsBoards Create Basic Objectives of Financial Reporting objectives: provide info useful to investors/creditors to make decisions asses the amount/timing/risk of the buisness cashflows about bbuis assests, claims on assessts, changes through time Characteristics of Accounting Info 1.Primary Qualities Relevance: influence decisons of user predicted value confirmtory value materiality Faithful Representation completeness free of error neutral info/ unbias 2.Secondary/Enhancing Qualities Comparibility: info measured in a similar manner by diff. companies thats considered imparable Consistency: achieved when same accnt rules are applied to same items through time Verifiability: agreement of the acitivity between parties Timliness Understandability: Assumptions Economic Entity company is acccounted for sepeart from owners own transactions Continuity Going concern of lasting long enough to fulfill going commitments Time Period divided into time periods to make assumptoins Monetary Unit financial results reported in monetary units, so excludes customary satisfac etc. Principles Historical Cost Principl faithful representation of value when it was purchased Revenue Recognition Principle when to record revenue, in the time period or relevative guarentee Expense Recognitoin(matching) only recorded with what revenue it helped produce ^^^ Conservatism take care in overstating understating, (lower of cost/market value) Journal chronological record showing the debit and credit efects of transactions on a company. General Ledger each account has own pages to track balance and activity (T accounts) 1. Assests, LIab, SE, Rev, Exp IN THAT ORDER Trial Balance list of all active accounts and balances in order they appear in ledger, ass, liab, se, rev,exp proves equality of debits and credits Double Entry System when you record a cash sale, you also record a Revenue sale. 1. 1 or more accnts Dr/Cr 2. total $ must equal Dr=Cr Assests Cash/ Investments/ Accnt Recieveable/inventory/land/building/equip/patent/copyright Liabilities Accnt payable/salaries/unearend sales rev/ intrest pay/ income tax/ notes/ bonds SE Common Stock Retained Earn Revenue sales revenue, intrest income, rent revenue Expense CofGS, salaries expense, rent E, Insure E, Depreciat E, Ad E, Utilites Ex, Repairs, Property Tax Debit Credit Expenses Revenue Assets Liab Dividens Stockholder Equity Chapter 3 Accrual Basis of Accounting→ GAAP accepted revenue is recognized as it is earned and expenses recognized when they are incurred. cash and non cash transactions, superior becasue focuses on selling TimePeriod Assumption: divides into specific periods, month a quarter or a year Revenue Recognition Principle: revenue earned, collelction of cash reasonably assured Matching Expense Principle: record expenses of that period of which ONLY helped generate the rev contra account: accounts that have a balance that is opposite of the balance in related account CashBasis of Accounting→ revenue is recorded when cash is recieved, regardless of when it is earned expenses is recorded when cash is paid, rather than when it is inccured Adjusting Journal Entries 1. Deferral/Prepayment buisness recieves cash, but doesnt recognize the revenue right away because rev hasnt been EARNED YET, unearned starts as liability and moves to revenue 2. The buisness pays cash, but doesnt recognize the expense right away becasue the expense has not been used up yet prepaid items, Longterm Assests, Supplies> start as Assests move to Expenses as used\ Chapter 4 Internal Control 1. hiring practices 2.control/limit access definition: system of policies, activites, procedures and the control environment designed to support protect the buisness Elements 1. Control environment manamgnemt, culture, buisness practices 2. Risk Assesment Internal Busines process risks: risk with inventory and distribution ExternalStrategic Risk, competetion, customores, subsitutes 3.Control Activities Segregation of Duties: authorization, records, handling assests safeguard assests encourage managerial procedure followed adquete documents checks on recorded accounts: done by auditor/seperate party Limits Human error: unintentional or intentional(manager) Collision: 2 or more workers wokring together to harm Cash Equivalence shorterm invenstments of excess cash for better return, bank doesnt give high interest maturity: 90 days or less treasure bills, money market fund, certif of deposit Bank Statement & Reconciliation Record by Business NOT BY BANK Outstanding Checks, lowers the bank balance once the check is cash Deposits in Transit, cause bank balance to be lower becasue they havent identified Recorded by bank NOT BY BUISNESS Service Charge, bank balance to be smaller but lowers the buisness once they reocrd NSF check, bank balance to be smaller but lowers the buisness once they record it Debit/Credit Memos, debit cause bank to be smaller, credit cause it to be bigger Cash Over and Short when cash in register does not reconclile with register tapes, discrepeancy record in this account shortage: requires a debit to cash over and short overage: requires a credit to cash over and short debit cashcredit sales revenue and accoutns recievable Petty Cash more costly to issue checks for small amounts appose to just pay in cash compile all expense receipts into a compound journal entry at end of the month Operating Cycle : elasped time between purchase of goods for resale and collection of cash 1.buy inventory 2.pay inventory 3.sell inventory Chapter5 SALES & Recievables5questions Revenue recognition principle (when earned) Realized: noncash resources/inventory exchanged for cash/accnt recievable Realizable: noncash resources converted into cash (gold) Earned: substantially complete earning process, point of sale, Sales Returns and Allowances credit accnt recievable debit sales reurnts and allow Accounting for Bad Debits Direct Write Off method: account deemed uncollectivble before reducing accnts reciebale or bad debt may violate matching principle, no GAAP, no Estimate made Allowance Method bad debt recorded in period of sale, properly matched with revenue recognized before the actual default accnt reciebale isnt lowered, but new accnt created (allow for doubtful) Debit bad debt expense, credit allow for doubtfull accounts Percentage of Credit Sales Method(income statment) no target bal indicated, 5 of credit sales to default added to allowance for doubtful accounts and then balance calculated AGING method(balance sheet) method that analyzes account recievable, calculate allow accnts ending calculate all porportions to default and total up and that is adjust balance have to make entry above adjust balance to reconcile Notes Recievable maturity date: specific date, specfic # of mo, specifc # of days do not count day note is executed but do count the due date Interest rate is stated on APR, annual basis Gross Profit Margin gross profit/ net sales Operating Margin Ratio operation income/ net sales Net Profit Margin Ratio net income/ net sales Chapter 6 COST OF GOODS SOLD Inventory Beg inventory +purchases =cost of goods available for sale ending inventory =cost of goods sold Periodic Inventory System (^^method above used at end of period^^) not dialed upto date inventoy records, inventory account at end of period physical count of inventory, and estiamte the amount of inventory simpler, less expensive, no up to date balances disadvantge: no comaprison, losses hard to identify (hidden in CoGS) Perepetual Inventory System up todate, expensive, complex, lots of workre order, restock, replace slow moving items advantage : computer records and physical inventory match, Shipping Agreement Free on Board shippint point/destinationwhen the title passes to buyer seller pays freight out, selling expense, debit buyer pays the freight, frieght in, becomes part of cost of inventory Inventory Costing Good flow: actual phsical flow of inventory as it moves in and out of buis sustantially iedntical goods: cant tellt hem apart, oreos, cheerios determine total cost of goods purchased + shipping, make CGS assumption of flow out Cost Flow: Avg Cost: middle net margin FiFO: cheapest, highest net margin LiFO: expense, lowest net margin Chapter 7 Operating Assets / Long Term Assets6questions operation use only, not sold to customers/resale, greater than 1 year of life (usualy 410) depreciate overtime until service potential is exhausted 1.PPE : fixed assets or plant assets, land building, machines and ars 2.Intangible Assets: patents, copyrights, rademarks, licenses, and goodwill 3.Natural Resources: naturally occuring materials that have economic value, timberlands, deposits coal oils Historical Cost Principle: reported as cost of acquisition cost and prepreation cost to obtain the assests Goal: better determine net income by matching revenues the LTassests helped generate against their expenses capitalized: these costs are reported as longterm assets with service potential greater than 1 year, as the service potential of operation declines the assets is allocated as an expense among the accounting period in which the asset is used and benfits are recieved (matching principle) allocation: DEPRECIATION for PPE AMORTIZATION for Intangible assets DEPLETION for Natural Resources Cost: historical cost principle requires a company record its fixed assets at the exchange price at the time the asset is purchased. cash paid, given, other expenditures necessary to prepare, become part of the historical cost. or acquiring an assest and being issued debt liability + interest down the road Depreciable Cost: estimated depcritiaion taken for useful life of LT assts Cost Residual value 1. PPE Land: (unlimited life, no depreciation) purchase price, real estate commissions, delinquent property taxes, closing costs/fees, clearing and grading costs, demolition of unwanted buildings Land Improvements: purchase price, sales tax, installation costs Buildings: purchase price, closing costs, architectual fees, permits, excavation costs, remodeling Equipment: purchase price, sales tax, transport cost, insurance during transport, install cost, trial runs Depreciation: allocationg the cost of tangible fized asset to expense over the asets useful life (not land), not an attempt to accumulate cash, just a way to keep track of allocation over useful life doesnt measure actual physical deteriation, does not measure marketvalue changes.buy use dispose Estimated through exact cost, residual value, and useful life. Depreciation Expense xxx (DR income statement) Accumulated Depreciation xxx (CR contra asset on balance sheet) Straight Line Method: (passage of time) Cost Residual Value / Expected Useful Life measures a constant amount in each period and matches with service potential Units of Production Expense Method: Purchase Residual / expected life unit usage measures use of asset each period and , tailored to individual use of assets Declining Balance Rate/Method: (SLx2) Book Value/Carrying value X (100% / Useful Life X 2 ) measures accelrates an assests, allocating larger earlier AFTER ACQUISTION Revenue Expenditures : do not increase the future conomic befits of the assets, expensed in same period the expenditure is made. short term and made for daily operation, smaller dollar amounts benefit the current period records as EXPENSE when used up and reported on the INCOME STATEMENT Capital Expenditures : extend the life of the asset, expand productive capacity, increase efficenty, or improve the quality of a product. benefit current and mainly future periods, large dollar amounts Not reported in period Record as a LT asset on BALANCE SHEET Impairments: are made when error in allocation or not enough depreciation accounted for, permanent decline. Depletion Voluntary disposal: company decided asset is no longer useful maybe due to unforseen tech advances Involuntary disposal: occurs when assets are lost or destroyed through theft/nature/accident 2. Intangible Assets: Patent:right to manufacutre sell or use a product, legal life is 20years purchase price, registration fees, legal cost. amortized shorter of the legal life Copyright: right to publish, sell, or control a literary artistic work, legal life of author plus 70yrs purchase price, registration fees, legal costs. amortized shorter of the legal life Trademark: right to exclusive use of distincive name, phrase, or symbol, 10 year or indefinite purchase price, registration fees, legal costs. no amortized but reviewed annually Franchise: exlcusive right to conduct a certain type of business in area, depends on contract initial cost paid to acquire franchice, amortized shorter than legal life Goodwill: unidentifieable arise from customer satisf, quality products, skilled employees excess of purchase price, not amortized due to infinite life represent future economic benefit to the company, but lack physical substance. benefits associated with in form of legal rights and privilegs. consistent with historical cost principle, include registration, filing, legal fees. Research & Development / Organizatational Cost Expense lead to IAs but are not themself an IA Chapter 8 Current and Contingent LIABILITES6questions commitments that arise from acivities that have already ocurred, requires a transfer of an asset or service be provided in the future payment: cash, account payable, performance of a service Recognition: when goods or services are recieved or money is borrowed Measurment: on balance sheet only record interest that has occurred Current Liabilities (balance sheet) (NO UNCERTAINTIES) require the firm to pay cash or another current asset, create a new current liab, or provide goods or services within the longer of 1 year/operating cycle 1.Accounts Payable: purchase goods or services on credit. Inventory xxxx Accnt Payable xxxx Accnt payable xxxx Cash xxxxx 2.Accrued Liabilites: recognized when goods or services change hands, recognized by AJE, end of period Wages Expense xxxx Cash xxxx a.definitely determinable: A/P, N/P, wage pay, sales tax, interest payable b.Estimated LIabilites: Timing issues propert tax and income tax payable c. Elements of liability to measure: product warranty, vacation pay liability 3.Notes Payable: arise when a buisness borrows oney or goods that require a formal agreement w/ interest interest rate: rate, principal and maturity date…. (can be payment extension) Cash xxxx Note payable xxxx 4.Long Term Debt: amount of debt principla that is due within the next year, reclassified as a current Liab a new long term debt issued in a year is a LONGTERM, reclassifiny an already existing is a CURRENT 5.Sales Tax: collected as part of total selling price, not addition to revenue. collected for governemtn levying. are liabilites until they are paid to the taxing authority 6.Withholding and Payroll Tax: employess: pay certain taxes that are withheld from their paycheck, gross pay vs. net pay. fed, state, social, medicate, retirement accounts, aprking, health insurance employers: business itself taxes based on employee payrolls. match employee contribution fring benefits employer contributes to retirment and health inssurance 7.Unearned Revenues: created when customer pay for goods in advance, liability for the seller. time revenue recognition when provide the services or refund it CONTINGENT LIABILITIES (UNCERTAINTIES) existing condition , situation, or set of circumstance involving uncertainty as to possible gains/loss Recognized when both met: , recognitin relies on how likely the occurence of event is and wheter a good estimate of the payment amount can be made. i.e. past transac dependent on future (mom pays car bill) a. Probable: likely to happen and reasonable estimate made of Amny record JE on financial statment Dr. Expense Cr. Payable (if not, make footnote) b.Reasonably Possible: whether or not can be estimated, NO JE, disclose in footnotes c.Remote: very unlikely to happen, no estimate, DO NOT JE or footnote Warranties : goods sold to customer usually provided with a warranty ( days to years of replacement) matching concept requires all expenses required to produce sales revenue for period in that period, warranty are sales related and must be recorded in the sales period, so must be estimated. estiamte are made at the end of the period and over/unders are combine din next estimate made Chapter 9 LONG TERM LIABILITIES6 questions more long term debt means more interest expense, but are tax deductible unlike dividens creditors dont share in the profits of the company but stockholder do borrowed money > greater than interest expesne on debt the stockholders benefit Bonds Payable & Notes Payable larger corporations issue bonds instead of notes bond:is a type of note that requires the issueing entity to pay the face value of the bond to the holder when it matures and usually the interest periodically at a specific rate. appose to having one bank issue 800mill at once they issue 800000 bonds at 1000 face face value/par value/principle:amount of money the borrower must repay, usually at maturity (specifid future date) Stated/Coupon/Contract Rate: rate of interest paid on the face value, pay each period until matur Market/Yield Rate: market rate of interest demanded by crediotrs, crediworthiness of borrower or paid in installment loans like car student and home loans coupon notes/debentures/bonds: regual interest payment coupons attached from the bond Calculated from face amount X interest/coupon/contact rate X number of TIME in years Types of Bonds: 1.Secured Bonds: collateral pledged against the corps ability to pay, mortage bonds if fail to pay can reposses the propert 2.Unsecured/Debenture Bonds: typical, no collateral, lender is relying on the general credit of the corp, so if the borrower goes bankrupt the secured holder get before the unsecured. last paid 3.Junk Bonds: unsecured with high risk of failure, higher interest to compensate for risk 4.Callable Bonds: borrower the right to pay off the bonds prior to their due date, called off when interest rate being paid is mpuch higher than therrent market conditions (refinancing a home for lower interest) 5.Convertible Bonds: give the lender the option to convert the bond into other securities, typically shares of common stock. excercise when shares are more valuable than interest principle payments Selling New Debt Securities borrowin through notes is attaractive to abuisness as a source of money beasue the cost of issuing debt/interest is lower than issuing equity/ownership of shares. can be sold to the public for cheaper or more marketrate/ yield creidt standing of the borrowin business, and current codinion of credit markets 1Premium : Yield100% < Stated Rate Interest Expense < Interest Paid 2. Par: = = 3.Discount: Yield 100% > State Rate Interest Expense > Interest Paid Accoungtin for LONGTERM Debt issuance: cash recieved when the bonds are issue (issue or selling price) interest: interest payment Repayment: repayment of the principle/face value Recording Issuance market price for debt is typically quoted as a percentage of face value face value issued at 103, selling price is a premium 103% bond issued below face value is a discount less Premium/Disoucnt on Bonds payable: contra asset on balance sheet Cash xxx Cash xxx bonds payable xxx discount on bonds xxx premium on bonds payable xxx bonds payable xxx Recognizing Interest Expense and Repayment of Principle to repay merely need to do the oppo of issue which is,,,,,debit the note/bond and credit the cash however repayment of discount is additional interest, and premium is reduction on interest Interest Amortization: process used to determine the amount of interest to be recorded in each periods actual interest payment mad to the lender during the period amortizing any premium or discount on the bond Methods: effective interest rate methodbosed on compound interest calcs. interest expense is alwasy the yield(interest rate) X the carrying/book value of the bonds at the beginning of the period StraightLine method: interest rate technically changes but interest expense is constant a simple approix of effective interest amortization.equal amounts of premium or discount are amortized to interest expense each period Par: interst expense reported ont he income statement is equal to the interest payments made Premium(adjunct accnt) or Discount(contra): be conscous of amount of periods appose to years must pay the actual amount of the bond each amortize period and the interest amortized ALSO then Dr. Bond Int Expense, record discount or premium in seperate accounts(start as Dr) Accruing Interest at period end must DR. interst expense for the period and CR.interest payable then when the annual interest is paid in full, dt interest payable and create new Dr. interest expense Pros and Cons of Debt Financiang pro Tax Deductible Interest Expense: financing with debt rather than stock is beneficial cus interest expense is deductible for income tax purposes pro Leverage: advanttage of debt is that it fixes the compensation to the lender, creditors only get the specificed return. stockholder benefit here by the use of borrwed capital to produce more income than needed to pay the interest pro nflation debt permits the borroer to repay the lender in dollars that have declined in purchase power. con Payment Schedule: inflexibility, speccific payments on specific dates, riskier source of capital than equity, larger proportion of debt used to finance capital needs runes greater risk of default Chapter 10 StockHolders Equity19questions equity represents the owners claims against the assets of a corportation after all liabilites have been deducted made up of: Capital stock preferred stock, common stock, AND additional paidin capital Retained earnings or deficit Accumulated other comprehensive income Treasury stock Raising Capital large business are organized as corporations because incorporation increases the companys ability to raise cash by easing the transfer of ownership and limiting the liability of owners. made up of shares, owned by tockholders Authorization to Issue Stock corps are chartered(authorized) in accordance with the provisions of STATE laws that govern the structure and operation of corporations. location of headquarters can be seperate from where a corp is charted (Deleware favorable) Corporate Charter /article of incorporation: a document that authorizes the creation of the corp setting forth its name and purpose and the names of the incorporators and describes how. authorizes the corp to issue stock in a limited number of classes sets an upper limit on the number of shares that may be issued in each class sets a lower limit on the amount for which each share must be sold authorized shares: maximum number of shares the business may issue in each class of stock issued shares: number of shares actually sold to stockholders, rarely hits the “authorized” outstanding shares: the number of issued shares actually in the hands of the stockholders, NOT counted if Corp buy back shares (ALL share types reported on Balance Sheet or in notes) Common Stock All classes of stock are either common stock or preferred stock, these come with different financial benefits and provide different rights regarding the government of the corp. rights: voting in the election of the board of directors, (board controls operating financial policies) sharing in the profits and dividens of the company keeping the same percentage of ownership if new stock is issued(preemptive right) sharing in the assets in liquidation in proportioin to their holdings. “residual claim”, only paid after all creditors and preferred stockholders are paid in full (very rare in liquidation) Stock appreciation: value of the stock increases above the price initially paid( or decrease) Dividends: payments to a companys stockholders from earnings. usually in cash but noncash assets and stock can pay dividens also. depends on companies alternatives such as electing to pay down debt or fund into growth opportunities, many dont pay dividens to commonstock holders Preferred Stock generally pays a regular dividend. in this regard it is similar to debt, the preferred stock dividend equats to interest payments. value of PS is closely tied to interest rate levels and the comapnys overall creditworthiness; (common stock is tied to performance of the company), in this respect PS is less risky investment than CS, PS also recieve priority over CS in the payment of dividens and distribution of assets in the event of liquidation *Comparison between CS & PS* Divdend prefences: PS paid firts, cumulative and participating Conversion Privileges: PS may be convertible into common shares (1 PS turned into 10 CS) Liquidation preferences: if/when corporation dissolved, liquidating distributation are made to stock holders. PS satistifed before CS Call provisionscharter may authorize/require the corporation to repurchase(edeem ) any preferred shares that are sold. by fixing t call pri(amount paid to PS) and specifies a date on which the share may must be repurchased. similar to repayment of a principle on a loan at matuirty date Denial of voting rightsPS cant vote at stockholders meetings Accounting for issuance of common and preferred stock Par value: an arbitrary monetary amount printed on each share of stock that establishes a minimum price for the stock when issued, but does not determine market value usually issued stock is sold for more than par, excess money is recorded in account “Additional PaidIn Capital”, these are the first account shown in SE section of BS Preferred Stock ($22 x 200shares) 4400$ Common stock (2.50$ x 20000shares) 50000$ Jan2 Cash 4400 Preffeered Stock 4000 additonal paidin capital 400 Stated Capital and NoPar Stock Stated Capital(legal capital: is the amount of capital that, under law, cannot be returned to the corporations owners unless the corporation is liquidated, even when issuing no par stock No Par stock: stock without a par value, Stock Warrants is the right granted by a corp to purchase a specified number of shares of its comomn stock at a stated price and within a stated time period. issued in 2 situations 1. they may issue warrants along with bonds or preferred stock as an “equity kicker” to make the bonds or preferred stock more attractive. duration of 5 or more years 2. they may issue warants to existing stockholders who have a legal right to purchase a specified share of a new stock issue, in orer to maintain their realtive level of ownership. less than 6mo Stock Options corps also grant employees and executive the right ot buy stock at a set price. these rights are called stock options, are frequently given to employees and executives as compensation for their services. excercise/strike price: price at which employees can buy the stock stock options allow cashpoor companies to compete for top talent in the employee market stock options are believed to better align the incentives of the employee with those of owners, employee wealth is now tied to the performance of companies stock price. Accounting for Distirbution of Liquidity to Stockholders the corporation can repurchase the shares from the owners the corporation can issue dividens Repurchasing has tax advantages for stockholders, only trigger tax consequence if elect to sell back Dividens are paid to all stockholders, creating tax consequences for everyone, usually taxed at higher rates than gains from selling stocks, but do have the advantage of allowing stockholders to receive assets from the corpo without reducing their ownership share. Stock Repurchases (Treasury Stock) treasury stock: the stock a corporaton purchases that it previously issued out. advantages: to buy out the ownership of one or more stockholders to reduce the size of corporate operations to reduce the number of outstanding shares of stock in attempt to increase earning per share and market value per share to acquire shares to be transferred to employees under stock bonus, stock option, stock purchase plans to satisfy the terms of a business combination in which the corporation must give a quanitty of shares of its stock as part of the acquistion of another business to reduce vluberability an unfriendly takeover Tender offerStock may be purchased on the open market by a genral offer Purchase: a reduction of equity appose to the acquistion of an investment. is instead a debt to a contra equity account, Tresury Stock. prohibits payment of dividens on treasury stock Resale: if reissued in the future, original cost of the shares is removed from the treasury stock amount. any excess of proceeds over the cost of the shares is not considered a gain because a corp cant genrate income by buying and selling its onw stock (income is reserved for buisness with nonwoners) debit or credit is makde to Adddiontal Paidin Capital Treasury Transfer among stockholders: stockholders list must be updated but equity doesnt change, usually verified and regulated by tock transfer agent Retirement of treasury Shares: no longer for trade. debit common stock and additional paidin accnt Dividens amount paid periodically by a corporation to a stockholder as a return on invested capital. Dividens represent distribution of accumulated net income, cash, non cash asset, or more shares Reduce RE, 3 forms: cash dividens, stock dividends(issue +stock), stock splits(transfer shares) Cash dividens: most common form declaration date date on which a corp announces its intentin to pay a dividen dollar amount of the dividned date of record date on which a stockholder must own one or more shares of stock to recieve payment date date of actual payment Dividend Policy: provide information to boards of directors and managgers who must formualte a dividen policy stockholders and potential investors who wish to evalute past dividen policies and assess prospects for future dividens designed to produce smooth pattern of dividens over long term times Liquidating Dividends : when RE reduced to 0, additional dividens come from common stock. must be charged first against additional paid in capital, then the common stock accnts not taxed, non residual, accompanies dissolution of the corporation, highly monitored Stock Dividends transfers shares of stock from the corp to its stockholders, additonal share of stock. capitalzation of RE: for each share outstanding, a fixed number of new shares is issued, and an amount of RE is transfered to contribued capital account. doesnt alter assets or equity like cash dividens do Small stock dividens: increase the number of outstanding shares by less than 25%; capitalized at stock market value before dividen Large stock dividens: increase the number of outstanding share by 25% or more; capitalized at par merely transfe dollars from RE to the Capital Stock account increase the number of shares held by each stockholder but proportion remains fixed Stock Splits increases the number of oustanding shares without altering the proportionate ownership involves a decrease in the pershare stated value, with no capitalization of retained earnings stock issue that increases the number of outstanding shares of a corporation without changing the balances of its equity accounts ex. 30$ x 10000shares is = to 15$ x 20000shares distributes par value over a larger number of shares, used to reduce the pershare price. Preferred Dividend Preferences established as one of the terms of issue, preferred stock issues fix their dividend rate as a percentage of par/stated value paid before CS in three form:s current, cumulative, participating 1.Current Dividend Preferences current dividens must be paid to preferred stockholdrs before any paid to CS current dividend preference does not guareantee payment of preffered dividends 2.Cumulative Dividend Prefernce requires the eventual payment of all preferred diviends(arrears¤t) before any paid to CS dividends in arrears : preffered stock dividends remaining unpaid for 1 or more years do not become a liabilty of a corp unless declared so by board, if not decl, listed in footnotes 3.Participating Dividend Preference participating preferred shares recieve, the stated dividend and a share of amount available for distribution as dividens to others classes of stock. not restricted to a fixed rate, dividens paid in excess of its stated divdend rate (participationg) preferred stock) preferred stock that cant pay dividens in excess of the current dividen preference plus cumulative dividend in arreas, called (nonprticipating preferred stock) full: recieve a share of ALL amounts available for dividends . CS allocated a dividend on par partial: al recieve a share of all amounts but limited to a specified percentage. Retained Earnings: accumulated earnings or losses over the entire life of the corp that have not been paid out in dividends. Beg RE + Net income Dividens= End RE Restrictions: in footnotes, set upper limit, dividends cant reduce retained earnings below zero may set a specified level RE cant go below may set aside a portion of RE and declare it unuseable for dividens(expansion plans) state law may require dividens not reduce RE below the cost of treasury stock Errors: prior period adjustment, correction to FS for mistatement of net income Other Comprehensive Income FASB has allowed some gains and loses from nonwonwers to bypass the Income Statement. comprehensive income and net income reported on same statment total net income on one statement, then comprehensive income statment shown in the SE portion of the balance sheet
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