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110 Cards in this Set
- Front
- Back
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Chapter 9
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Chapter 9
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What are the 4 types of Plant Assets?
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-Land
-Land Improvements -Buildings -Equipment |
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What are plant assets recorded at?
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The implied cash price
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What is Land?
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Companies often use land as a building site for a manufacturing plant or office site.
All necessary costs incurred in making land ready for its intended use. The cost of land includes: -The cash purchase price -Closing costs such as title and attorney fees -Real estate brokers commissions -Accrued property taxes and other liens on the land assumed by the purchaser. |
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What is Land Improvements?
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Structural additions made to Land.
-Fences -Driveways -landscaping -underground sprinklers |
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What is Buildings?
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Facilities used in operations
All costs required to get the building ready for its intended use. -Stores -Offices -Factories -Warehouses -Airplane Hangers Purchase of building: -Purchase price -Closing cost -Real Estate Commission Self Constructed: -contract price -architects fees -building permits -excavation costs |
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What is Equipment?
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All costs to get asset ready for intended use.
-Purchase price -sales tax -transportation costs -installation costs -testing costs Assets used in operations. |
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How is Insurance classified?
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It doesnt count towards any of them, still just as prepaid insurance or insurance expense. Same with something like a Drivers License, it does not count towards equipment even if you had to get one because of the new truck you just bought.
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What is Depreciation?
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The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner.
All of the 4 Plant Assets are suspect to depreciation except LAND. Depreciation is a cost allocating process, not an asset valuation process. Depreciable assets revenue-producing ability decline over time due to wear and tear. |
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What is Obsolescence?
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The process by which an asset becomes out of date before it physically wears out.
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Recognizing Depreciation for an asset does NOT result in what?
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The accumulation of cash for replacement of the asset.
The balance in Accumulated Depreciation represents the total amount of the assets cost that the company has charged to expense to date; it is NOT a cash fund. |
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What is Salvage Value?
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An estimate of the asset's value at the end of its useful life.
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What is the formula for Depreciation Expense?
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(Cost - Salvage Value) / Useful Life
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What are the 3 Depreciation methods?
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Straight Line
Declining Balance Units of Activity |
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What is the Straight-Line Method?
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-Used by roughly 95% of U.S. Companies
-companies expense an equal amount of depreciation each year of the asset's useful life |
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What is Depreciable Cost?
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The total amount of Depreciation over an assets life.
-Is the same no matter what method is used. Cost - Salvage Value =Dep. Cost |
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What is the Declining-Balance Method?
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It computes periodic depreciation using a declining book value.
This method is called an Accelerated-Depreciation Method because it results in higher depreciation in the early years of an asset's life than does the straight-line approach, but has less depreciation in the final years. An accelerated approach might be chosen if managers think than an asset's utility will decline quickly. A popular declining balance rate is double the straight line rate, its called the Double-Declining-Balance Method. |
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What is the Units-Of-Activity Method?
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Under the U-O-A method, Useful Life is expressed in terms of the total units of production or the use expected from the asset.
This method is ideally suited to factory machinery (units of output or machine hours used in operating the machinery). Also can be used for delivery equipment (miles driven) or airplanes (hours in use). -Not generally suitable for such assets as buildings or furniture because activity levels are hard to measure for these assets. |
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What are the 4 factors in Computing Depreciation?
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-Cost
-Useful Life -Salvage Value -Method |
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What happens when a change in the estimate of depreciation occurs?
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The company makes a chance in current and future year, but NOT to prior periods.
The two factors that cause a change in estimate are SALVAGE VALUE and USEFUL LIFE. Apply new estimates for Salvage Value and Useful Life to the beginning of the year book value and compute "new" Depreciation Expense. |
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What does Amortization mean?
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The process of allocating to expense the cost of intangibles is referred to as Amortization.
Amortization = Straight Line Method |
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How do you record Amortization for an Intangible Asset?
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If an intangible asset has a limited life, the company allocates its cost over the assets useful life using a process similar to depreciation, called amortization.
The cost of intangible assets with indefinite lives should not be amortized. (debit) Amortization Expense (credit) The specific intangible asset Intangible assets are typically amortized on a straight-line basis. Example: If a patent has the legal life of 20 years, companies amortize the cost of a patent over its 20-year life or its useful life, whichever is shorter. |
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Chapter 10
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Chapter 10
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What are Liabilities defined as?
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"Creditors' claims on total assets" and "existing debts and obligations"
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What is a Current Liability?
What is a Long-Term Liability? |
Current Liab = A debt that a company reasonably expects to pay :
1. From existing current assets or through the creation of other current liabilities and; 2. Within one year or the operating cycle, which ever is longer. Long-Term = Debts that do NOT meet both of those two criteria are LONG-TERM LIABILITIES |
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What does a company that has more Current Liabilities than Current Assets often lack?
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Liquidity or short-term debt-paying ability
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What are the different types of current liabilities?
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-Notes Payable
-Accounts Payable -Unearned Revenues -Accrued Liabilities (such as taxes, salaries, wages, and interest) |
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How do companies record obligations?
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In the form of written notes as NOTES PAYABLE
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Do companies use Notes Payable or Accounts Payable more?
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Notes Payable, because notes payable gives the lender written documentation of the obligation.
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Why do companies frequently issue notes payable?
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To meet short-term financing needs
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What do Notes Payable usually require the borrower to pay?
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Interest
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When are Notes Payable classified under current assets?
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(probably all of them on the test) but when they are due for payment within one year of the balance sheet.
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How are Sales Taxes expressed?
What does the selling company do with the tax? |
As a percentage of the sales price.
The selling company collects the tax from the customer when the sale occurs and periodically (usually monthly) remits (sends) the collections to the state's department of revenue. |
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Under most state laws, what must the selling company do when ringing up a sale on the cash register? What is the major exception?
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ring up separately the amount of the sale and the amount of the sales tax collected. Gasoline sales are a major exception.
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After the sale, what does the company then use the cash register readings to do?
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They use it to CREDIT Sales (or Sales Revenue) and Sales Tax Payable.
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Does the company record sales taxes as an expense?
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No, it simply forwards the money to the government the amount paid by the customer. Basically the company serves as a COLLECTION AGENT for the taxing authority.
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What are the main types of Unearned Revenues?
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-Magazine Subscriptions
-Airline Tickets -Season Tickets |
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How do companies account for unearned revenues that are received before goods are delivered or services are provided?
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1. When the company receives an advance it: increases (debits) cash and also increases (credits) a current liability identifying the source of the unearned revenue (i.e. unearned ticket revenue).
2. When the company earns the revenue it: decreases (debits) the unearned revenue account and increases (credits) an earned revenue account (i.e. Ticket Revenue) |
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What are unearned revenues reported as?
What happens when the company earns the revenue? |
Current Liability
It reclassifies the amount from unearned revenue (i.e. unearned ticket revenue) to earned revenue (i.e. ticket revenue). |
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Do companies ever have a portion of long-term debt that comes due in the current year?
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They often do.
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How do companies often identify current maturities of Long-Term Debt on the Balance Sheet?
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They do it as Long-Term Debt Due Within One Year
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Is it necessary to prepare an adjusting journal entry to recognize the current maturity of long term debt?
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No it is NOT necessary to do that.
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What are types of payroll deductions that normally occur for most companies?
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-FICA (Social Security) Taxes
-Federal Income Taxes -State and City Income Taxes -Charity -Insurance, Pensions, and/or Union Dues |
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What is Net Pay?
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It is the amount the employee earned, minus all the deductions that the employer takes out. It equals Salaries and Wages Payable.
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What do companies do as a result of these deductions?
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Companies withhold from employee paychecks amounts that must be paid to other parties. The company therefore has incurred a liability to pay these third parties and must report this liability in its balance sheet.
Essentially the company is serving as a TAX COLLECTOR |
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In addition to the liabilities incurred as a result of withholdings, what is the second type of payroll-related liability employers also incur?
What does this second type include? |
PAYROLL TAXES. With every payroll, the employer incurs liabilities to pay various payroll taxes levied upon the employer.
These payroll taxes include the EMPLOYER'S SHARE of Social Security (FICA) Taxes and state and federal unemployment taxes. |
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What do companies classify the payroll and payroll tax liability accounts as?
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Current Liabilities, because they must be paid to employees or remitted to taxing authorities periodically and in the near term.
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What happens to employers if the withholding and payroll taxes are NOT computed correctly and paid on time?
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Taxing authorities impose substantial fines and penalties on the employers
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Chapter 11
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Chapter 11
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What is a corporation created by?
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A corporation is created by law.
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As a legal entity, how much of the rights and privileges does a corporation have that a person does?
What are the major exceptions? |
Most of them.
The major exceptions relate to privileges that can be excercised only by a living person, such as the right to vote or to hold public office. |
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Are corporations subject to the same duties and responsibilities as a person?
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Yes (I.E. it must abide by the law and it must pay taxes)
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What are the two common classifications of corporations and what are they?
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1. By Purpose: Purpose of making a profit (Nike, General Motors)or it might be a nonprofit charitable, medical, or educations corporation (Salvation Army)
2. By Ownership: Many stockholders and sells stock to the public or few stockholders and doesnt sell stock to the public. |
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What does classification by ownership differentiate?
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Publicly Held Corporations
-may have many stockholders -its stock is traded on a national securities market (NY Stock Exchange). -I.E. IBM, General Electric Privately Held Corporations -often referred to as a closely held corporation -usually has only a few stock holders -does not offer its stock for sale to the general public Privately held corporations are generally much smaller than publicly held corporations, although some notable exceptions exist (Cargill Inc.) |
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What are the characteristics of a corporation and what are they?
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-Separate Legal Existence (The corp acts under its own name rather than in the name of its stockholders)
-Limited Liability of Stockholders (creditors have no legal claim on the personal assets of the stockholders unless fraud has occurred. The stockholders liability is limited to their investment in the corp) -Transferable Ownership Rights (ownership of a corporation is held in shares of stock, which are transferable units) -Ability to Acquire Capital (it is relatively easy for a corp to obtain capital through issuance of stock) -Continuous Life (the life of a corp in stated in its charter. it may be perpetual or it may be limited to a specific number of years) -Corporation Management (although stockholders legally own the corporation, the manage it indirectly through a board of directors they elect) -Government Regulations (a corp is subject to numerous state and federal regulations) -Additional Taxes (corps must pay federal and state income taxes as a separate legal entity. taxes can |
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How is a corporation formed?
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By grant of a state CHARTER. The charter is a document that describes everything about the corporation.
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When a corporation has only one class of stock, it is identified as what?
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Common Stock
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How is proof of stock ownership evidenced?
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By a printed or engraved form known as a Stock Certificate
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What do stockholders have the right to do?
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1. Vote in election of board at annual meeting and vote on actions that require stockholder approval
2. Share the corporate earnings through receipt of dividends 3. Keep the same percentage of ownership when new shares of stock are issued (called the Preemptive Right) 4. A share in assets upon liquidation in proportion to their holdings. This is called a Residual Claim because owners are paid with assets that remain after all other claims have been paid. |
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What is Authorized Stock?
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It is the amount of stock that a corporation is authorized to sell as indicated in its charter.
If the corporation has sold all of its authorized stock, then it must obtain permission from the state to change its charter before it can issue additional shares. |
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Does the authorization of common stock result in a formal accounting entry?
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No, because the event has no immediate effect on either corp assets or stockholders equity. The corporation must disclose in the stockholders equity section of the balance sheet the number of shares authorized.
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What are the two ways a corporation can issue common stock? Explain each.
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Directly
-corp issues common stock directly to investors -typical in closely held companies Indirectly -corp issues common stock through an investment banking firm that specializes in bringing securities to the attention of prospective investors -customary for a publicly held corporation |
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What is Par Value Stock?
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It is capital stock that has been assigned a value per share in the corporate charter.
Par has no relationship with Market Value and in the vast majority of cases is an immaterial amount. Nowadays many states do not require a par value. They use to require one to protect corporate creditors. |
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What is No-Par Value Stock?
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It is a capital stock that has not be assigned a value in the corporate charter. No par value stock is fairly common today. In many states, the board of directors assigns a Stated Value to the no-par shares.
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What does the Stockholders' Equity section of a corporation's balance sheet include?
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1. Paid-In Capital (contributed)
2. Retained Earnings (earned capital) |
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What is Paid-In Capital?
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It is the amount stockholders paid to the corporation in exchange for shares of ownership.
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What is Retained Earnings?
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It is earned capital held for future use in the business.
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What accounts does the issuance of common stock affect?
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ONLY Paid-In Capital accounts
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How does a company record the issuance of Par-Value Common Stock for Cash?
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It credits the par value of the shares to Common Stock, and records in a separate Paid-In Capital account the portion of the proceeds that is above or below par value.
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How do companies record the issuance of No-Par Value Common Stock for Cash if the stock has a Stated Value?
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For accounting purposes, companies treat the Stated Value in the same way as the Par Value. The entries would be the same as the Par-Value stock except the term "Stated Value" would replace "Par Value".
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How do companies record the issuance of No-Par Value Common Stock for Cash if the stock has no Stated Value?
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It credits to the Common Stock Account the full amount received. In such a case, there is no need for the Paid-In Capital in Excess of Stated Value account.
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What is Treasury Stock?
What type of account is it? |
Treasury Stock is a corporations own stock that has been reacquired by the corporation and is being held for future use.
It is a contra-stockholders equity account. |
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Do a lot of corporations have treasury stock?
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Yes, many corporations have treasury stock, approximately 70% of companies in the U.S. have treasury stock.
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Why would a corporation acquire treasury stock? 5 Reasons.
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1. To reissue the shares to officers and employees under bonus and stock compensation plans
2. To increase trading of the company's stock (shows that management is buying the stock because they think its undervalued) 3. To have additional shares available for use in acquiring other companies 4. To reduce the number of shares outstanding and thereby increase earnings per share. 5. Management may want to eliminate hostile shareholders by buying them out. |
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What is the Cost Method?
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The purchase of Treasury Stock is generally accounted for by the Cost Method.
It gets its name from the fact that the Treasury Stock account is maintained at the cost of shares purchased. Under the Cost Method: Companies increase (debit) Treasury Stock by the price paid to reacquire the shares. Treasury Stock decreases by the same amount when the company later sells the shares. |
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If a company reacquires shares of its stock that had already been issued, how would it affect the original Paid-In Capital Common Stock, account?
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The original Paid-In Capital Common Stock account would not be affected because the number of issued shares does not change.
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How and where do companies show Treasury Stock in the balance sheet?
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They show it as a deduction from Total Paid-In Capital and Retained Earnings in the Stockholders Equity section of the Balance Sheet.
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Do companies disclose share numbers in the balance sheet?
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Yes, they disclose both the number of Shares Issued and the number in the Treasury.
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How do you find the number of Shares Outstanding?
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Shares Issued - Shares of Treasury Stock = Shares Outstanding
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What does the term Outstanding Stock mean?
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It means the number of shares of issued stock that are being held by stockholders.
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What quality do acquiring companies look for in companies they are looking into buying?
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Acquiring companies like to purchase companies with large cash reserves so they can pay off debt used in the acquisition. When companies buy large numbers of Treasury Stock they can significantly reduce their cash, making them a less attractive company to buy. (Reebok example)
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What is an additional class of stock a corporation may issue?
Why would they do this? Do most companies do this? |
Preferred Stock
To appeal to a larger segment of potential investors. No, only roughly 7% of U.S. companies have one or more classes of preferred stock. |
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What is Preferred Stock?
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Preferred Stock has contractual provisions that give it preference or priority over common stock in certain areas.
Typically preferred stockholders have a priority in relation to: 1. Dividends 2. Assets in the event of liquidation However, preferred stockholders sometimes do not have voting rights. Like common stock, companies may issue preferred stock for cash or noncash considerations. Preferred stock may have either a par value or a no-par value. Most preferred stocks have a preference on corporate assets if the corporation fails. The preference to assets may be for par value of the shares or for a specified liquidating value. |
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Where do companies show preferred stock in the balance sheet?
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In the stockholders equity section of the balance sheet, companies show preferred stock first because of its dividend and liquidation preferences over common stock.
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Are preferred stockholders guaranteed dividends?
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No, the first claim on dividends doesnt guarantee them.
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What do dividends depend on?
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They depend on many factors, such as adequate retained earnings and availability of cash.
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How do companies state the per-share dividend amount for preferred stock.
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Companies state it as a PERCENTAGE (3% dividend per share on its $1 par value stock) or as a SPECIFIED AMOUNT (10 cent dividend per share on its $1 par value stock
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What feature do preferred stock contracts often contain?
What does this right mean? |
A Cumulative Dividend feature.
This right means that preffered stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends. |
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What are Dividends in Arrears?
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When preferred stock is cumulative, preferred dividends not declared in a given period are called Dividends in Arrears.
Companies cannot pay dividends to common stock holders while any preferred stock dividends is in Arrears. |
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Are Dividends in Arrears considered a liability?
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No they are not considered a liability. No obligation exists until the board of directors formally "declares" that the corporation will pay a dividend.
However, companies should disclose in the notes to the financial statements the amount of Dividends in Arrears. |
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What is a dividend?
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It is a distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis.
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What are the 4 forms of dividends?
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1. Cash (main one)
2. Property 3. Scrip (promissory note to pay cash) 4. Stock |
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In the financial press, how are dividends generally reported?
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They are generally reported quarterly (sometimes annually) as a dollar amount per share.
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What is a Cash Dividend?
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It is a pro rata distribution of cash to stockholders.
Cash dividends are not paid on treasury shares. |
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For a corporation to pay a Cash Dividend, it must have what?
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1. Retained Earnings
2. Adequate Cash 3. Declared Dividends (board saying the will pay a dividend) |
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What companies do investors seeking regular dividends buy stock in?
What about those seeking growth in the stock price (capital gains)? |
Companies that pay periodical dividends
Companies that retain their earnings rather than pay dividends. |
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What are the 3 important dates in connection with dividends?
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1. Declaration Date
2. Record Date 3. Payment Date |
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What is the declaration date?
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On this date the board of directors formally authorizes the cash dividend and announces it to stockholders. The declaration of a cash dividend commits the corp to a binding legal obligation.
The company must make an entry to recognize the increase in Cash Dividends and the increase in the liability Dividends Payable. |
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What type of account is Dividends payable?
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A Current Liability
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What is the Record Date?
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On this date the company determines ownership of the outstanding shares for dividend purposes.
No entry is made on this date |
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What is the Payment Date?
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On this date the company makes cash dividend payments to the stockholders on record as of the Record Date.
The entry of (debit) Dividends Payable and (credit) Cash is recorded on the payment date. The payment of the dividend on the payment date reduces both current assets and current liabilities, but it has no effect on SE. |
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What is the cumulative effect of the declaration and payment of a cash dividend on a company's financial statements?
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A decrease in both SE and Total Assets
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What is a Stock Dividend?
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It is a pro rata distribution of the corporation's own stock to stockholders. (1000 share, you own 20. Makes 100 more, you now own 22 shares of 1100, same amount of ownership as before)
Does not result in a distribution of assets. The company disburses no cash and assumes no liability. The per share amount must be at least equal to the par or stated value. |
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What does a Stock Dividend result in?
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It results in a decrease in Retained Earnings and an increase in Paid-In Capital.
It has no effect on Total Assets or SE. |
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What are the two types of Stock Dividends?
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Small (less than 20-25% of the corps issued stock) and Large (more than 20-25%).
Small stock divs are more popular. That accounting professions recommends that companies use the Fair Value Per Share for small stock divs. Recommendation is based on the assumption that it will have little effect on the market value of the shares previously outstanding. Accounting profession does not have a rec for large stock divs, but companies normally use par or stated value per share. |
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What is the effect of Stock Dividends?
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they change the composition of SE because they result in a transfer of a portion of retained earnings to paid-in capital.
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The effect of a stock split on market value is generally what?
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Inversely Proportional to the size of the split.
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What effect does a Stock Split have?
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No effect on Paid-in captial, RE, or Total SE, but the number of shares outstanding increases.
Stock splits dont need to be journalized. |
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What is retained earnings?
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Net income that a company retains in the business.
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In closing entries, a company debits net loss to what account?
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retained earnings.
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