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Why do companies extend credit?
to make the sale sooner!
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Disadvantages of extending credit to customers:
- increased wage cost (people to keep track of payments)
- bad debt cost
- delayed payment
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Recording sales on account
- dr. Accounts receivable
- cr. Sales Revenue
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Record estimate of bad debt
- dr. Bad Debt Expense
- cr. Allowance for Doubtful Accounts
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Writing off bad debt
- dr. Allowance for Doubtful Accounts
- cr. Accounts Receivable
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% of Credit Sales Method
Credit Sales This Month * Bad Debt Loss Rate = Bad Debt Expense This Month
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Aging of Accounts Receivable
- based on age of each accounts receivable at end of period
- older age is less likely to pay
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Promissory Note:
documents company's right to collect money from somone
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Interest formula:
Principal * Interest Rate * Time (years)
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Receivables Turnover Ratio
- Net Sale Revenue ÷ Avg. Net Receivables
- higher = faster collection = better
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Tangible:
- actively used in operations
- not used up in 1 year
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Intangible:
- value represented by rights to produce benefits
- only limited life intangibles are amortized
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Acquisition cost includes
- purchase price
- all expenses needed to prep the asset for intended use
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Capitalizing costs:
when you record costs as part of assets
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Basket Purchase:
total cost of land + buildings
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Component allocation:
different parts wear out at different times
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Maintenance cost:
- small cost that doesn't increase productivity and doesn't extend the life
- ordinary, expensed
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Extraordinary costs:
large cost that may extend the life of the asset and increase productivity
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What sheet does the depreciation expense go on?
income statement
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what sheet does the accumulated depreciation go on?
balance sheet
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Recording the entry for depreciation:
- dr. Depreciation Expense
- cr. Accumulated Depreciation
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What do you need to calculate depreciation?
- acquisition cost
- estimated useful life
- book value
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Straight line depreciation
(Cost - Residual Value) * 1/useful life
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Units of production depreciation
(Cost- Residual Value) * actual production this period/estimated total production
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Double Declining depreciation
(Cost - Accumulated Depreciation) * 2/Useful Life
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Asset Impariment
- casualty, obsolescence, lack of demand
- loss recognized when asset suffers a permanent impairment
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Impairment:
estimated future cash flows from a long-lived asset falls below book value
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Recording Impairment entry
- dr. Loss on Impairment
- cr. Equipment
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Record gain on disposal
- dr. Cash
- dr. Accumulated Depreciation
- cr. Gain on Disposal
- cr. Equipment
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Record loss on disposal
- dr. Cash
- dr. Accumulated Depreciation
- dr. Loss on Disposal
- cr. Equipment
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How are intangible assets amortized?
Straight line
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Goodwill:
- when a company buys another for more than it's worth
- purchased goodwill is an intangible
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Fixed Asset Turnover Ratio
- Net Sales Revenue ÷ Avg. Net Fixed Assets
- tell sales dollars made by each dollar invested into asset
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Recording amortization entry
- dr. Amortization Expense
- cr. Accumulated Amotization
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How to make changes in depreciation
(Book Value at Data Change - Residual Value at Date of Change) ÷ Remaining Useful Life @ Date of Change
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When is a liability made?
- buy goods/services on credit
- short term loan
- issues long term debt
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Accrued Liabilities:
liabilities that are incurred and not yet paid
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Balance Sheet for Liabilities
- Accounts Payable
- Less: Accrued Liabilities
- Notes Payable
- Current portion of Long-Term debt
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Recording Payroll Deductions
- dr. Salaries and Wages Payable
- cr. Cash
- cr. Withheld Income Taxes Payable
- cr. FICA Payable
- cr. Charity (or other deduction payable)
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Recording Employer Payroll Taxes
- dr. Payroll Tax Expense
- cr. FICA Tax Payable
- cr. Unemployment Tax Payable
- *Lump state and federal unemployment together
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Recording Accrued income tax
- dr. income tax expense
- cr. income tax payable
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Recording note establishment
- dr. cash
- cr. notes payable
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Recording interest paid
- dr. interest expense
- dr. interest payable
- cr. cash
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Recording sales tax
- dr. cash
- cr. sales tax payable
- cr. sales revenue
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Bonds:
instrument that outlines future payments as a company needs more NOW
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Bond Pricing:
amount investors are willing to pay you
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Recording bonds issued at premium
- dr. Cash
- cr. Bonds Payable
- Cr. Premium on Bond Payable
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Recording bonds issued at discount
- dr. Cash
- dr. Discount on Bonds Payable
- cr. Bonds Payable
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When depreciating bonds, what values stay constant?
- Cash paid
- amortized premium/discount
- interest expense
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Recording bond retirement
- dr. Bonds Payable
- cr. Cash
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Debt to Asset ratio
- Total Liabilities ÷ Total Assets
- lower = better, less money owed
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Times Interest Earned Ratio
- (Net Income + Interest Expense + Income Tax Expense) ÷ Interest Expense
- to see if you can cover costs and interest
- higher = better coverage ability
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Stockholder benefits
- voting rights
- dividends (if enough to pay cash)
- residual claims
- preemptive rights
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Advantages of equity financing
- equity doesn't have to be repaid
- dividends optional
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Advantages of debt financing
- interest on debt is tax deductible
- debt doesn't change stockholder control
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Authorized shares
max # of shares you can distribute
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Outstanding share:
stockholder owns it
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Treasury share
bought back by company
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Par value:
nominal amount used to record journal entries on balance sheet
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Market Price:
found on stock market, amount each share holds
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IPO:
initial public offering, first time corporation goes public
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Recording distribution of common stock
- dr. Cash
- cr. common stock (at par value)
- cr. Additional paid-in capital
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Stock Option:
stock offered to employee at a good price to make up for employee payment
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Why would you repurchase stock?
- send signal that company's stock is worth shit
- for redistribution or for employee stock option
- reduce outstanding shares to raise value
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Recording reacquiring of stock
- dr. Treasury Stock
- cr. Cash
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Recording reissuing of stock
- dr. Cash (@price sold for)
- cr. Treasury Stock (@price reacquired it for)
- cr. Additional Paid-in Capital
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Recording dividend declaration date
- dr. Dividends
- cr. Dividends Payable
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Recording dividend date of record
NO ENTRY
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Recording dividend date of payment
- dr. Dividends Payable
- cr. Cash
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Recording dividend Year End (closing)
- dr. Retained Earnings
- cr. Dividends
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Stock Dividends:
- additional shares distributed to stockholders
- stockholder still owns same %
- equity stays the same
- small is @ stock value, large is @ par value
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Stock Splits:
- creates more pieces of same pie
- equity stays same
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Preferred Stock:
- priority over common stock
- usually fixed dividend rate
- usually no voting rights
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Recording issuing of preferred stock
- dr. Cash
- cr. Preferred Stock
- cr. Additional Paid-in Capital
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Current Dividend Preference:
current preferred dividends must be paid before paying common stock
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Cumulative dividend preference:
any unpaid dividends from past years must be paid before common stock
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EPS
- (Net Income - Preferred Dividends) ÷ Avg. # of common shares outstanding
- money generated per share ($)
- higher = better
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ROE
- (Net Income - Preferred Dividends) ÷ Avg. Common Stockholder's Equity
- higher = higher returns for stockholders (%)
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P/E
- Current stock price per share ÷ Earnings per share (EPS)
- higher = improvement anticipated for future
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