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What happenes to Plant Assets, Nastural Resources, and Intangible Assets over time?
- Plant Assets = Depreciate
- Natural Resources = Depletion
- Intangible Assets = Amortization
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Land vs. Land Improvements
- Land is NOT Depreciated
- But
- Land Improvements DO Depreciate
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What is a Lump sum purchase or "Basket purchase"
When you purchase a group of assets for a single price
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Capital Expenditures vs. Expenses
- Capital Expenditures
- -Debited to an asset account
- -Increase asset’s capacity or efficiency
- -Extend useful life
- Expenses-Debited to an expense account
- -Maintain asset in working order
- - Ex. Oil changes, tires, batteries, Patching a roof
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Accidently recording a Capital Expenditure as an Expense does what?
- -Overstates Expenses
- -Understates Net Income
- -Understates Capital
- -Understates assets (Equipment)
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What are the 3 methods for Depreciation?
- 1. Strait Line: Equal amounts per period
- 2. Units of Production:Different amounts; based upon usage
- 3. Declining-balance: Decreasing amount over time as it ages
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What is the Strait-Line Depreciation equation?
(Cost – Residual value) × 1/life × #/12
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What is "Net Book Value"?
- The carrying value of an asset as it
- depreciates
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What is the Double Declining Balance method?
- - More depreciation expense near the
- start of an asset’s life
- - More depreciation expense near the
- start of an asset’s life
- -Less depreciation expense as it ages
(Cost - Accumilated Depreciation x 2/Life x #/12)
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When to use Strait Line Depreciation
- - For Assets that generate revenue evenly over time
- - ex. Depreciating a building
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When to use Units of Production
- - For Assets that are subject to wear and tear from use
- - ex. Natural resources like Coal and Oil
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When to use Double-declining-balance
- - For Assets that produce more revenue in their early years
- - ex. Computers
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When is an Asset Fully Depreciated?
- - Asset has reached the end of its estimated life
- (Asset never reported below residual value)
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What is FICA, SUTA, & FUTA tax?
- -FICA (Employer tax): Employer matches amount withheld from employees’ pay
- -SUTA (State Unemployment tax): Usually 5.4% of first $7,000 paid to each employee
- -FUTA (Federal Unemployment tax): Usually 0.8% of the first $7,000 paid to each employee
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What are the 2 parts of Bonds
- Principal: amount to be paid back at maturity
- Interest: amount paid to bondholders over the
- life of the bond based on the stated interest rate on the bond
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What is a Authorized stock?
- How many shares of a class of stock a
- corporation may issue
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What is Outstanding Stock?
- Stock that is held by its stockholders
- (The outstanding stock of a corporation represents 100% of its ownership)
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What are the rights of Common Stock?
- Vote—voting on corporate matters
- Dividends—receive a proportionate part of dividend declared
- Liquidation—receive a proportionate part of assets remaining
- Preemption—maintain their proportionate ownership
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What are the rights of Preferred Stock?
- -Receive dividends before common stock holders
- -Fixed dividend amount
- -Upon liquidation, receive assets before common stock holders
- (Still have same rights of Common stock holders)
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What is Par value for stocks?
- - Arbitrary amount assigned to a sehare of stock
- - Set when the corporate charter is filed
- - Usually set low as to avoid legal
- difficulties
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What is a Premium?
When an amount is received above Par value
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Order of Equity Accounts
Preferred stock , Common stock, Retained earnings
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Market Value of Stock
- - Price at which a person can buy or sell a share
- - Most important to shareholders
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Liquidation Value of Stock
- Amount guaranteed to preferredstockholders if company liquidates
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Book Value of Stock
- - If preferred stock exists, subtract preferred equity from total equity to compute book value of common shares
- (Amount of equity per share of stock)
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What is the Rate of Return for Total Assets
(Net Income + Interest Expense) / Average Total Assets
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What is the Rate of Return on Common Stockholders’ Equity?
(Net income – Preferred dividends) / Average common stockholders’ equity
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Income Tax Expense vs. Income Tax Payable
- Income Tax Expense: Income before tax on the income
- statement x Income tax rate
- Income Tax Payable: Taxable income from the IRS filed tax return x Income tax rate(Depreciation methods differ)
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What is a Stock Dividend?
- - A distribution of a corporation’s own stock
- - Affects only stockholders’ equity accounts
- (does not give any assets to the shareholders)
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