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