Chapter 1. Financial Statements and Business DecisionsThe Balance SheetElementsA/P: purchase of goods or services frm suppliers on credit w/o a formal written contractN/P: formal written debt contract w. lending institutions such as banksThe Income StatementRev are reported whether or not they have yet been paid for.Statement of Retained EarningsReports the way net income and distribution of dividends affected the financial position of the coSpecified period of timeBeg RE+NI-Dividends = End REElementsStatement of Cash FlowsOperating, investing, and financing activities (CFO, CFI, CFF = change in cash) ElementsCFO: directly related to earning incomeCFI: acquisition or sale of the cos productive assets (purchase equipment ->meet growing demand)CFO: directly related to the financing of enterprise itself -> payment of money to investors and creditors (dividends)Relationships among the statements-NI -> increase End RE on S of RE-End RE: one of the two components of stockholders equity-Beg CF+ CF => End CF on B/SChapter 2. Investing and financing decisions and the balance sheet Balance SheetCompanies list assets in order of liquidityCreditor: entities that a company owes money to are called creditorsA/R: payments due from franchisees and others on accountA/P: payments due to suppliersWhat Business activities cause changes in financial statement amounts? Nature of Business TransactionsExternal events: exchanges of assets, good, or services by one party for assets, services, or promises to payInternal events: measurable internal event such as the use of assets in operationsSelling stock and borrowing from creditors are financing transactions Current ratioCurrent ratio: managing st debt / total asset turnover ratio: utilizing assets / net profit margin: controlling rev and costsThe higher the ratio, the more cushion a company has to pay its current obligationsToo high of a ratio suggest inefficient use of resources (having CA 1.0-2.0 is good)
*investing and financing activities-investing activities include buying and selling noncurrent assets and investmentsEg) Lending cash to others / Receiving payments on loans made to others-financing activities include borrowing and repaying debt, including st bank loans, issuing and repurchasing stock, and paying dividendsEg) repaying the principal on borrowings from banksRepurchasing stock w/ cashPaying cash dividends->p) repaid debt: Financing activities / -
Chapter 3. Operating Decisions and the Income statementAccrual Accounting Revenue principle1. delivery has occurred or service shave been rendered2. there is persuasive evidence of an arrangement for customer payment3. the price is fixed or determinable4. collection is reasonably assured.P116 check (a), (h),
Chapter 4. Operating Decisions and the Income Statement
Chapter 5. Communicating and Interpreting Accounting InformationInstitutional investors: managers of pension, mutual, endowment, and other funds that invest on the behalf of othersPrivate investors: include individuals who purchase shares in companiesLenders: include suppliers and financial institutions that lend money to companiesConservatism: care should be taken not overstate assets and revenues or understate liabilities and expensesThe disclosure processClassified B/SAssetsCurrent AssetsNoncurrent assetsTotal assetsLiabilitiesCurrent LiabilitiesLong-term liabilitiesTotal liabilitiesStockholders equityContributed Capital (Common Stock-nominal par value & APIC)Retained EarningsTotal Stockholders equityTotal liabilities and stockholders equityCommon Stock: par value is a legal amount per share established by the board of directors( x relationship to the mkt price of stock)Classified I/SNet sales-COGSGross profit = net sales less COGS-Operating expensesIncome from operations (EBIT) = net sales less cogs and other operating expenses+/- Nonoperating revenues/expenses and gains/losses Income before income taxes (EBT=pretax earnings) = revenues all expenses except income tax expense-Income tax expenseNet Income*nonoperating items: income, expenses, gains, and losses that do not relate to the cos primary operations e.g) interest income/expense & gain and losses on the sale of fixed assets and investments Nonrecurring items1. Discontinued operations2. Extraordinary itemsEPS( Earnings Per Share) = Net Income / Average number of shares of common stock outstanding during the period Statement of Cash FlowsCFO: ~ earning incomeCFI: productive assets, investments in other companiesCFF: financing the business thru borrowing and repaying loans, stock issuances and repurchases and dividend paymentROA analysisReturn on Assets = Net Income/ Average Total AssetsEvaluate performance at any level within the organization (independent source financing -debt & equity) ROA Profit Driver AnalysisNet Inc/Avg TA = NI/Net Sales * Net Sales/ Avg TANet profit marginTotal asset turnoverIncrease sales volume and sales pricecollecting A/R quickly, reduce inv on handDecrease COGS and OPS expensereduce amt of assets necessary to produce Business strategy: high-value or product-differentiation strategyLow-cost strategy
*discontinued operations: result frm the disposal of a major component of the business and are reported net of income tax effect -> separately disclosed in a note*extraordinary items: are gains and losses that are both unusual in nature and infrequent in occurrence; they are reported net of tax on the income statement -> report such items very rarelyNote disclosure is needed*Form 10-K: annual report that publicly traded companies must file with the SEC*Form 10-Q: quarterly report that publicly traded companies must file with the SEC*Form 8-K: disclose any material event not previously reported that is important to investors
Chapter 6. Reporting and Interpreting Sales Revenue, Receivables, and Cash FOB shipping point: title changes hands at shipment and buyer pays for shipping FOB destination: title changes hands on delivery, and seller pays for shippingPrincipal methods: (1) allowing consumers to use credit sales (2) providing business customers direct credit and discounts for early payment (3) allowing returns from all customers Credit card discount: fee charged by the credit card company for its service
Sales Discount to Business2/10: discount percentage / number of days in discount periodn/30: Net / Maximum credit period*sales discount: cash discount offered to encourage prompt payment of an account receivable-> prompt receipt of cash from customers reduces the necessity to borrow money to meet operating needs-> Since customers tend to pay bills providing discounts first, a sales discount also decreases the changes that the customer will run out of funds b/4 Deckers bill is paidChoosing to take or not to take the discount See interest rate for the 20-day discount periodAmount saved / amount paid = interest rate for 20 days (= 2/98 = 2.04% for 20 days)Interest rate for 20 days * 365 days/20days = annual interest rateBank interest rate < interest rate with failing to take cash discounts -> save by taking cash disC 20 quick payment & discount Sales Returns and Allowances*Sales returns and allowances: reduction of sales revenues for return of or allowances for unsatisfactory goodsReporting Net SalesSales RevenueLess: (Credit card discounts)(Sales Discount)(Sales returns and allowances)Net Sales Gross Profit Percentage = Gross Profit / Net Sales ->How effective is management in selling goods and services for more than the costs to purchase or produce them?Measuring and reporting receivablesClassifying ReceivablesA/R vs N/RA/R: open accounts owed to business by trade customersN/R: written promises that require another party to pay the business under specified conditions (amount, time, interest)Accounting for Bad Debts Making the end-of-period adjusting entry to record estimated bad debt expense Writing off specific accounts determined to be uncollectible during the period*Bad Debt expense: expense associated with estimated uncollectible accounts receivableRecording BDE estimates
A/R could not be credited in the journal entry b/c there is no way to know which customers A/R are involvedWriting off specific uncollectible accounts
This journal entry did not affect any income statement accounts X change the net book value of accounts receivable When customer makes payment on account that has been written off, the journal entry to write off the account is reversed
A/R includes the total A/R, both collectible and uncollectibleReporting A/R and Bad DebtsTrade A/R, net of allowances of $XX and $XXX in 2008 and 2007, respectivelyEstimating Bad DebtsEstimated (1) a percentage of total credit sales for the period or (2) aging of accounts receivable(1) Percentage of Credit Sales MethodBases BDE on the historical percentage of credit sales that result in bad debtsBad debts can be computed by dividing total bad debt losses by total credit salesCredit * Bad Debt loss rate (1.0%) = Bad debt expense ADA e.g_ $900,000 / 1% BDE rate -> 9,000 estimate
(2) Aging of A/REstimates uncollectible accounts based on the age of each account receivablesEstimated ending balance that should be in ADA
Comparison of two methods*Percentage of credit sales: directly compute the amt to be recorded as BDE on I/S for adj*Aging: compute the estimated ending balance of ADA on B/SIn either case -> B/S for 2009 A/R less ADA -> $108,000 (=$120,000-$12,000)Controls over A/RReceivables Turnover Ratio How effective are credit-granting and collection activities?Receivables Turnover = Net Sales / Avg Net Trade A/R R/T reflects how many times avg trade receivables are recorded and collected during the periodHigher -> faster collectionAverage collection period = 365 / Receivables Turnover = 365/7.6 = 48 days-A/R on partial Cash Flow Statement
Reporting and Safeguarding cashCash and Cash Equivalents Defined*Cash equivalents: ST investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to changeInternal control of cash1. Separation of duties 2. Prescribed policies and procedures Reconciliation of the cash accts and the bank statements*EFT (electronic funds transfers) -> no additional entry is needed*NSF Check (non sufficient funds) ->1) Check for $18 received frm customer and deposited by Company2) customers account does not have sufficient funds to cover the check3) the amount of customers check returned to the company -> NSF check remains as receivable (debit receivable & credit cash)*SC (Service Charge)*INT (Interest earned) -> bank pays interest on checking account balances (increases Cos acct)*Bank reconciliation: the process of verifying the accuracy of both the bank statement and the cash accounts of a business The most common causes of differences b/t the end bank balance & the end book balance1. Outstanding checks: written by the co and recorded cos ledger as credits to the cash but have not cleared in the bank -> deduction frm the bank balancce2. Deposits in transit: deposits sent to the bank by co and recorded in the cos ledger as debits to the cash but bank has not recorded these deposits -> Add on bank balance3. Bank service charges: expenses for bank service but not recorded on the cos books4. NSF checks: bad checks or bounced checks ->deposited but must be deducted frm cos cash amt and recorded as A/R5. Interest: interest paid to co by bank6. Errors: may occur when the volume of cash transactions is large
Steps to the bank reconciliation1. Identify the outstanding checks: comparison of the checks and EFT -> total was entered as deduction from bank reconciliation2. Identify the deposits in transit: comparison of the deposit slips on hand with those listed on bank statement -> addition to the bank statement3. Record bank charges and creditsa. Interest received from bank / b. NSF check / c. Bank service charges4. Determine the impact of errorsObjectives of reconciliation: 1) correct cash balance on B/S 2) id previously unrecorded transactions -> any transactions or changes on cos books side need journal entries
Recording Discounts and Returns
Chapter 7. Reporting and interpreting cost of goods sold and inventoryNature of inventory and COGSItems included in inventory*Merchandise inventory: goods held for resale in the ordinary course of business*Raw materials inventory: items acquired for the purpose of processing into finished goods*Work in process inventory: goods in the process of being manufactured*Finished goods inventory: manufactured goods that are complete and ready for saleCost included in inventory purchasesAny additional costs to selling the inventory to the dealers, such as marketing dep salaries & dealer training sessions, are uncured after inv is ready for use -> included in SG&A expenseFlow of inventory costA. Merchandiser: Merchandise purchased -> Merchandise inventory -> COGSB. Manufacturer: RM/DL/MOH ->RM inv, WIP, FG -> COGS*Direct Labor: earnings of employees who work directly on the products being manufactured*Factory overhead: manufacturing costs that are not raw material or direct labor costse.g) supervisors salary, cost of heat, light, and power to operate the factoryNature of COGSBI+ new purchase = Goods available for saleEI (ending inventory) = what remains unsold at the end of the period -> B/SThe portion of goods available for sale that is sold -> COGS on I/S
*BI+P-EI = CGS (BI+P=Goods available for sale)Inventory Costing MethodsFour generally accepted inv costing methods1. Specific identification / 2. FIFO / 3. LIFO / 4. Average Cost*Specific Identification Method: Identifies the cost of the specific item that was sold Cost Flow AssumptionsFIFO: first goods purchased are the first goods soldLIFO: the most recently purchased units are sold firstAverage Cost Method: weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventoryAverage Cost = Cost of Goods available for sale / number of units available for saleFinancial Statement effects of Inventory MethodsMethod that gives the highest EI amount gives the lowest CGS and highest gross profit, income tax expense, and income amounts When unit costs are rising, LIFO produces lower income & lower inventory valuation than FIFO When unit costs are declining, LIFO produces higher income and higher inventory valuation than FIFO
Managers choice of Inventory Methods1. Net income effects (higher earnings) / 2. Income tax effects (least amt of taxes allowed by law least-latest rule)*LIFO conformity rule: if LIFO is used on the income tax return, it must also be used to calculate inventory and CGS for the financial statements.-> For inventory with increasing costs, LIFO is used on the tax return b/c it normally results in lower income taxes-> For inventory with decreasing costs, FIFO is most often used for both the tax return and financial statementsA company can use any of the inv costing methods -> HOWEVER, accounting rules require companies top apply their accounting methods on a consistent basis over time.(Change is allowed only if the change will improve the measurement of financial results and financial position)Valuation at lower of cost or market*replacement cost (): current purchase price for identical goods*net realizable value (NRV-): expected sales price selling costs*Lower of cost or market (LCM): valuation method departing frm the cost principle-> It serves to recognize a loss when replacement cost or NRV is < Cost When the goods remaining in ending inventory can be replaced with identical goods at a lower cost, the lower replacement cost should be used as inv valuation Damaged, obsolete, and deteriorated items should be assigned a unit cost that represents their current estimated net realizable value (Sales price Costs to sell) (conservatism) Holding loss: when the replacement cost of an item drops, rather than in the period the item is sold -> purchase cost lower replacement cost is added to CGS
Evaluating Inventory ManagementMeasuring efficiency in inventory managementInventory Turnover ->How efficient are inventory management activities?*Inventory Turnover = CGS / Avg InvIt reflects how many times average inventory was produced and sold ~ the period -> higher ratio indicates that inv moves more quickly thru the production process*Average Days to Sell Inventory= 365/ Inventory TurnoverInventory and Cash Flows
Inventory Methods and financial Statement AnalysisConverting the I/S to FIFO
*LIFO Reserve: contra-asset for the excess of FIFO over LIFO inventory
FIFO CGS is lower, income b/4 income taxes would have been $8,000 higherIf tax rate is 35% -> increase in tax expense is $8000*0.35 = $2,800
Converting Inventory on the B/S to FIFOAdjust inventory amounts on B/S to FIFO by substituting FIFO values in note for the LIFO values 441,042 / 381,831Or add LIFO reserve to the LIFO value on B/SLIFO and Inventory Turnover Ratio
LIFO inventory turnover = 19574.8 / (3042+2337)/2 = 7.3FIFO inventory turnover = 19754.8 (1324-1233) / (4366+3570)/2Control of InventoryInternal Control of Inventory1. Separation of responsibilities for inv accounting and physical handling of inventory2. Storage of inventory in a manner that protects it from theft and damage3. Limiting access to inv to authorized employees4. Maintaining perpetual inventory records5. Comparing perpetual records to periodic physical counts of inventoryPerpetual and periodic inventory systems*Perpetual Inventory System: detailed inventory record is maintained, recording each purchase and sale during the acct period*Periodic inventory system: ending inventory and CGS are determined at the end of the acct period based on a physical count-> for distinguishable high-value items, specific identification may be usedErrors in measuring ending inventory
b/c CGS was understated, income b/4 taxes would be overstated by $10,000 in the current yearIt overstates beg inv and causes the overstatement of CGS in the nxt yrSo, clerical errors are inadvertently offset in the endDemonstration case
Solutions to calculate End Inv & CGS
When costs are rising, LIFO should be selecter b/c LIFO produces higher CGS, lower pretax income, and lower income tax payments
Inventory turnover ratio = CGS / Avg Inventory= 1760 / (2200+2420)/2 = 0.76Beg Inv + End Inv
Chapter 8. Reporting and Interpreting property, plant, and equipment; natural resources; and IntangiblesAcquisition and Maintenance of Plant and EquipmentClassifying Long-Lived Assets*Long-lived assets: tangible and intangible resources owned by a business and used in its operations over several years1. Tangible assets- physical substancee.g) land / buildings, fixtures, and equipment / natural resources2. intangible assets w/o physical substanceMeasuring and Recording Acquisition CostFixed Income Turnover -> How effectively utilizing fixed asset to generate rev?Fixed Asset Turnover = Net Sales / Avg Net Fixed Asset->Lower or declining fixed assets turnover rate may indicate company is expanding->increasing ratio could signal a firm cut back on capital expenditure-When purchasing land, all incidental costs should be included-Renovation & repair costs incurred prior to assets use should be included*Acquisition cost: net cash equivalent amt paid or to be paid for asset.-acquisition by equity: when giving 1,000,000 shares of its $1.00 par value common stock w/ market value of $50
-acquisition by construction*capitalized interest: interest expenditures included in the cost of a self-constructed asset-> recorded by debiting assets and crediting cash when the interest is paide.g) $60,000 labor, $1,300,000 supplies, $100,000 interest exp
Repairs, maintenance, and Additions1. Ordinary repairs and maintenance: rev exp-> small amt, x lengthen useful life of the asset2. additions and improvements: infrequent exp that increases assets economic usefulness in the future -> added to asset accts*Capital expenditures: increases the productive life, operating efficiency, or capacity of the asset and are recorded as increases in asset accounts, not as expensesDecision to capitalize vs expense Capitalizaing exp ->increases asset & net income by amt of annual dep Expensing amt -> decreases taxes immediatelyUse, impairment, and disposal of plant and equipmentDepreciation Concepts*depreciation: process of allocating the cost of bldg. and equipment over their productive lives using a systematic and rational method-> its cost allocation -> x process of determining an assets current market value or worth(remaining balance sheet amt probably does not represent its current market value)*Net book value (carrying value): acquisition cost of an asset - accumulated depreciationThree amounts are required for each asset -> 1. Acquisition cost / 2. Estimated useful life to the co / 3. Estimated residual (salvage) value at the end of the assets useful life to the company*Estimated useful life: expected service live of an asset to the present owner (useful economic life, x total economic life )*Residual (Salvage) value: estimated amt to be recovered by the co at the end of the assets estimated ownerAlternative Depreciation Methods1. Straight-line2. Units-of-production3. Declining-balance*Straight-line depreciation: allocates the cost of an asset in equal periodic amts over its useful life(Cost Residual Value) * 1/ Useful Life = Depreciation ExpenseDepreciable costStraight-line rate-depreciation expense is a constant amt each yr-accumulated dep increases by an equal amt each yr-Net Book value decreases by the same amt each yr until it equals the estimated residual value*Units-of-production method: allocates the cost of an asset over its useful life based on the relation of its periodic output to its total estimated output(Cost-Residual Value) / Estimated Total Production * Actual production->Depreciation rate per unit of production*Declining-balance method: allocates the cost of an asset over its useful life based on a multiple of the straight-line rate (=declining-balance depreciation)-> match higher depreciation exp w/ higher rev in the early yrs and lower depreciation exp w/ lower rev in later yrs.Double-declining-balance rate: double the straight-line rate (Cost-Accumulated Depreciation) * 2/ Useful Life = Depreciation Expense*** Not residual value -> A.D is included in formula***Assets book value cannot be depreciated below residual value->companies that expect fairly rapid obsolescence of their equipment use the declining-balance methodHow Managers ChooseFinancial ReportingTax ReportingFinancial Reporting (GAPP)/Tax Reporting (IRC)Provide econ info ~ businessraise sufficient rev to pay for the expenditures of govtLeast and the latest rule: pay the lowest amt of tax that is legally permitted and at the latest possible date-MACRS (Modified Accelerated Cost Recovery System): similar to declining-balance method and applied over relatively short asset lives to yield high dep exp in the early years ->reduces taxable income. However, x acceptable for financial reporting purposesMeasuring Asset ImpairmentStep 1) Test for impairment If net book value > estimated future cash flows, then the asset is impairedStep 2) Computation of Impairment LossImpairment Loss = Net Book Value Fair Value The asset is written down to fair value
e.g) Disposal of Property, Plant, and EquipmentThe disposal of a depreciable asset usually requires two journal entries:1. adjusting entry to update the depreciation expense and accumulated depreciation accounts2. entry to record the disposal -> cost of the asset & any accumulated dep of disposal must be removed from the accountsDifference b/t any resources received on disposal of an asset and its book value -> treated as a gain or loss (gain I/S, x operating revenue, shown as a separate item on I/S)
Natural Resources and intangible assetsAcquisition and depletion of natural resourcesWasting assets: depleted resources, such as gold or iron ore*depletion: systematic and rational allocation of the cost of a natural resource over the period of its exploitation
Acquisition and Amortization of Intangible AssetsIntangible assets are recorded at historical cost only if they have been purchased.-Definite Life: intangible asset with definite life is allocated on a straight-line basis each period = *amortization: systematic and rational allocation of the acquisition cost of an intangible asset over its useful life
-Indefinite Life: not amortized, -> tested at least annually for possible impairment*Goodwill: the excess of the purchase price of a business over the fair value of the businesss assets and liabilities->The only way to report goodwill as an asset is to purchase another businessGoodwill to be reported = Purchase price Fair value of identifiable assets and liabilities*Trademark: exclusive legal right to use a special name, image, or sloganValuable asset, but rarely seen on balance sheets b/c not recorded unless they are purchased*Copyright: exclusive right to publish, use, and sell a literary, musical, or artistic work*Technology: includes costs for computer software and web development*Patent: granted by the federal government for an invention; it is an exclusive right given to the owner to use, manufacture, and sell the subject of the patentPatents are recorded at their purchase price or if developed internally -> recorded at registration and legal costs (GAPP requires immediate expensing of R&D)*Franchises: contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region*Licenses and Operating Rights: obtained thru agreements with governmental units or agencies, permit owners to use public property in performing their services*R&D expense -> ** NOT intangible asset under U.S.GAPPProductive Assets and Depreciation-Depreciation exp must be added back to net income to eliminate its effect-gain or loss on the sale of long-lived assets (investing activities) is added to determine net income -> must be subtracted from net income to eliminate its effect
Chapter 9. Reporting and Interpreting LiabilitiesLiabilities defined and classified*liabilities: probable debts or obligations that result frm past transactions, which will be paid with assets or services*current liabilities: short-term obligations that will be paid within the current operating cycle or one year, whichever is longer*Liquidity: ability to pay current obligationsQuick Ratio: does a co currently have the resources to pay its short-term debt?Quick Ratio = Quick Assets / Current LiabilitiesHigh quick ratio suggest good liquidity -> too high a ratio -> inefficient use of resourcesCurrent LiabilitiesAccounts Payable*Accounts Payable turnover-> how efficient is management in meeting its obligations to suppliers?Accounts Payable Turnover = Cost of Goods Sold / Average Accounts PayableAverage Age of Payables = 365 Days / Turnover RatioHigh A/P ratio normally suggests that co is paying its suppliers in a timely mannerAccrued Liabilities*Accrued Liabilities: expenses that have been incurred but have not been paid at the end of the accounting period-Accrued Taxes Payable-Accrued Compensation and Related Costs
Payroll taxesAll payrolls are subject to a variety of taxes, including federal, state, and local income taxes(employees pay some of these taxes and employers pay others)-Employee Income Taxes: employers are required to withhold income taxes for each employee = FITW (Federal Income Tax Withheld)-Employee and Employer FICA Taxes: imposed in equal amounts and both the employee and the employer. (Social Security taxes)-Employer Unemployment Taxes: employers are charged unemployment taxes thru FUTA and SUTA-Employee compensation expense includes all funds earned by employees & funds paid to others on behalf of employees
Notes Payable*time value of money: interest that is associated with the use of money over timeInterest = Principal * Interest Rate * Time
Deferred revenues*deferred revenues: revenues that have been collected but not earned; they are liabilities until the goods or services have been providedEstimated Liabilities Reported on the B/S-the estimated amt of product that will be returned is reported as a reduction frm sales rev in the year the sales are recordedEstimated Liabilities Reported in the Notes*Contingent Liability: potential liability that has arisen as the result of a past event; it is not an effective liability until some future event occurs-> may or may not become a recorded liability depending on future eventse.g) Lawsuits, environmental problems, and product warranties
1. Probable the chance that the future event or events will occur is high2. Reasonably possible the chance that the future event or events will occur is more than remote but less than likely3. Remote the chance that the future event or events will occur is slight1) a liability that is both probable and capable of being reasonably estimated must be recorded and reported on the b/s2) a liability that is reasonably possible must be disclosed in a note in the financial statements whether it can be estimated or not3) remote contingencies are not disclosedWorking Capital Management*working capital: dollar difference b.t total current assets and total current liabilitiesWorking capital and Cash Flows
Long-Term Liabilities*Long-term liabilities: all of the entitys obligations not classified as current liabilities (LT notes payable over one year in the future)-secured debt: liability supported by the ownership of the asset if liability is not satisfiedLong-Term notes payable and bondsPrivate placement: raise long-term debt frm financial institutions -> notes payable having maturity date-liability is recorded when the debt is incurred and interest expense is recorded with the passage of timeLease Liabilities*Operating Lease: does not meet any of the four criteria established by GAAP and does not cause the recording of an asset and liability-ST basis, no liability is recorded when an operating lease is created -> records rent expense as it uses the assete.g) rent five large trucks during Jan 2012 -> No liability is recorded in 2011 & rent exp is recorded during January 2012 when trucks are actually used*Capital Lease: meets at least one of the four criteria established by GAPP and results in the recording of an asset and liability ->purchase and financing of an asset1. The lease term is 75% or more of the assets expected economic life2. Ownership of the asset is transferred to the lessee at the end of the lease term3. The lease contract permits the lessee to purchase the asset at a price that is lower than its fair market value4. The present value of the lease payments is 90 percent or more of the fair market value of the asset when the lease is signed-most prefer to record lease as an operating lease -> co is able to report less debt on its B/S
Present Value Concepts*Present value: current value of an amount to be received in the future; a future amt discounted for compound interestPresent value of a single amtPresent value of an annuity*Annuity: series of periodic cash receipts or payments that are equal in amt each interest periodAccounting Applications of Present Values-Computing the amt of a liability with a single paymente.g) Starbucks bought new delivery trucks, signed a note and agreed to pay $200,000 (lent price + interest for two years)
Interest expense is recorded in an adjusting entry of each year as follows:
-Computing the amt of a liability with an annuitye.g) Bought new printing equipment, finance the purchase with a note payable to be paid off in 3 years in annual installments of $163,686 (each installment includes principal + interest on the unpaid balance)
-Computing the amt of a lease liability
Chapter 10. Reporting and Interpreting BondsCharacteristics of Bonds PayableReasons to issue bonds instead of stocks1. Stockholders maintain control2. Interest expense is tax-deductible3. The impact on earnings is positive: borrowed at a low interest rate & invested at a higher rateMajor disadvantages ~ w/ issuing bonds1. Risk of bankruptcy::2. Negative impact on cash flows
*Indenture: bond contract that specifies the legal provisions of a bond issue*trustee: independent party appointed to represent the bondholders-bonds with ratings above Baa/BBB are investment gradeReporting Bond Transactions2 types of cash payment in the bond contract1. Principal: single payment that is made when the bond matures = par value, face value2. Cash interest payments: coupon rate-to determine pv of bond, compute the pv of the principal and the pv of the interest payments -> add two amts*market interest rate: current rate of interest on a debt when incurred (=yield, effective interest rate) , rate that should be used in computing the pv of a bondCoupon rate < Market rate -> discountCoupon rate = market rate -> parCoupon rate > market rate -> premium when a bond pays interest rate less than the rate creditors demand, they will not buy it unless its price is discounted when a bond pays more than creditors demand, they will be willing to pay a premium to buy it-corporations and creditors do not care whether a bond is issued at par, at a discount, or at a premium b/c bonds are always priced to provide the mkt rate of interestBods Issued at ParBonds selling price is determined by the pv of its future cash flows, not the par value
-Reporting interest expense on bonds issued at par
interested expense is reported as a deduction frm operating income interest expense that has been incurred but not paid must be accrued with an adjusting entryTimes Interest Earned-is the co generating sufficient resources frm its profit-making activities to meet its current interest obligations?Times interest earned = (Net Income+ Interest Expense + Income Tax Expense) / Interest Exp-high ratio is viewed more favorably than a low one. -> it shows the amt or resources generated for each dollar of interest expense-often misleading for new or rapidly growing companiesBonds Issued at a Discount
-when bond is sold at a discount, B/P account is credited for the par amt, and discount is recorded as a debit to Discount on B/P
-whil co received only $96,536 when it sold the bonds, it must repay $100,000 when the bonds mature. (extra cash is an adjustment of interest expense to ensure that creditors earn the mkt rate of interest)-to adjust I/ Exp, borrower amortizes the bond discount to each interest period as increase in I/ Exp. They use (1) straight line (2) effective interest-Part A: Reporting Interest Expense on Bond Issued at a Discount Using Straight-Line AmortizationStraight-line amortization: simplified amt of amortizing a bond discount or premium that allocates an equal dollar amt to each interest period
At the end of the 1st interest period -> book value of bonds increases to $97,402 (96,536+866) each period, the book value of the bonds increase by $866 (amortizing) At the maturity date of the bonds, the unamortized discount is zero
Part B: Reporting Interest Expense on Bonds Issued at a Discount Using Effective-Interest Amortization*Effective-interest amortization: a method of amortizing a bond discount or premium on the basis of the effective-interest rate; it is the theoretically preferred method1) Compute interest expenseCurrent unpaid balance * mkt rate of interest (on the date of sold) * n/122) Compute amortization amountInterest Expense Cash Interest
-the additional $792 was added to the principal of the bond and will be paid to bondholders when the bond matures-interest expense for 2H is calculated by multiplying the unpaid balance 96536+792 = 97.328
-interest expense increases each year b/c of the amortization of the bond discount
Bonds issued at a premium
Part A: Reporting Interest Expense on Bonds issued at a premium using straight-line amortization
Part B: Reporting Interest Expense on Bonds Issued at a Premium Using Effective-Interest Amortization
Debt-to-EquityRelationship b/t amt of capital provided by owners and the amt provided by creditors?Debt-to-Equity = Total Liabilities / Stockholders EquityEarly Retirement of Debt
Effects on Cash Flows: Bond Payable
Chapter 11. Reporting and Interpreting owners equityBenefits of stock ownershipA voice in management, dividends, residual claim*authorized number of shares: maximum number of shares of a corporations capital stock that can be issued as specified in the charter*issued shares: the total number of shares of stock that have been sold*Outstanding shares: total number of shares of stock that are owned by stockholders on any particular date
*Treasury stock: stock that has been bought back from issued companyEarnings per share (EPS)-how well is a company performing?EPS = NI / Avg number of common shares OutstandingCommon stock transactions*common stock: basic voting stock issued by a corporation*par value: nominal value per share of capital stock specified in the charter; serves as the basis for legal capital*legal capital: permanent amt of capital defined by state law that must remain invested in the business; serves as a cushion for creditors*no-par value stock: capital stock that has no par value specified in the corporate charterInitial sale of stock
Sale of stock in secondary marketsStock issued for Employee compensationRepurchase of Stock*Treasury stock: corporations own stock that has been issued but subsequently reacquired and is still being held by that corporation -> no voting, dividend, or other stockholder rightsReason for acquiring-> existence of an employee bonus plan that provides workers with shares of stocks-it is less costly to give employees repurchased shares than to issue new ones b/c of regulations
Dividends on common stockDividend yield->what is return on investment based on dividends?Dividend Yield = Dividends per share / Market price per share-investors in C.S. earn a return frm both dividends and capital appreciation*Declaration date: the date on which the board of directors officially approves a dividend*Date of record: the date on which the corporation prepares the list of current stockholders as shown on its records; dividends can be paid only to the stockholders who own stock on that date*Payment date: date on which a cash dividend is paid to the stockholders of record
Declaration and payment of a cash dividend reduce assets and S.E. -> two requires1) sufficient retained earnings2) Sufficient cashStock Dividends and Stock SplitsStock Dividends*stock dividends
-pro rata basis: each stockholder receives additional shares equal to the percentage of shares held-when a stock dividend occurs, the company must transfer an additional amt frm the RE acct into C.S. acct to reflect the additional shares issued-the amt transferred depends on whether the stock dividend is classified as large or smallLarge: distribution of additional shares is more than 20-25% currently outstanding sharesSmall: distribution of additional shares is less than 20-25% currently outstanding shares
Stock Split*Stock Split: increase in the total number of authorized shares by a specified ratio; it does not decrease retained earnings-stock split is accomplished by reducing the par or stated value per share of all authorized shares (total par value is unchanged) .eg) 2-for-1-stock split does not result in the transfer of a dollar amt to the C.S. acct-> In both a stock dividend & a stock split, stockholder receives more shares of stock w/o having to invest additional resources-> dividend: journal entry O / split: no journal entry but disclosed in the notes
Preferred Stock*Preferred Stock: stock that has specified rights over common stockDifferences1) Preferred stock does not grant voting rights -> permit to raise funds w/o diluting common stockholders control2) Preferred stock is less risky: holders receive priority payment of dividends and distribution of assets if the corp goes out of business3) Preferred stock typically has a fixed dividend rateDividends on Preferred Stock*current dividend preference: the feature of preferred stock that grants priority on preferred dividends over common dividends-declared dividends must be allocated to preferred stock first, then the remainder of the total dividend can be allocated
Cumulative Dividend Preference*cumulative dividend preference: preferred stock feature that requires specified current dividends not paid in full to accumulate for every year in which they are not paid. These cumulative preferred dividends must be paid before any common dividends can be paid (dividends in arrears)*Dividend in arrears: dividends on cumulative P.S. that have not been declared in prior years
Effect on statement of Cash Flows
Chapter 12. Reporting and interpreting investments in other corporationsTypes of investments and accounting MethodsPassive Investments in Debt and Equity Securities-Debt securities are always considered passive investments1) If co intends to hold the securities until they reach maturity, the investments are measured and reported at amortized cost2) If the securities are sold b/4 maturity, they are reported using the fair value method-investments in equity securities: investment is presumed passive if the investing company owns less than 20% of the outstanding voting sharesInvestments in Stock for Significant InfluenceSignificant influence: the ability to have an important impact on the operating, investing, and financing policies of another co-presumed if the investing co owns frm 20-50 % of sharesInvestments in Stock for Control*Control: ability to determine the operating, and financing policies of another company-presumed when the investing co owns more than 50% of shares
Debt Held to Maturity: Amortized cost method*held-to-maturity investments: investments in debt securities that management has the intent and ability to hold until maturity-cost adjusted for the amortization of any discount or premium*amortized cost method: investments in debt securities held to maturity at cost minus any premium or plus any discountBond Purchase-total cost of the bond is debited to the Held-to-Maturity Investments acct
Interest Earned
Principal at maturity
-If the bond investment must be sold b/4 maturity, (no intention b/4) any difference b/t mkt value and net book value would be reported as a gain or loss on salePassive Investments: The Fair Value Method-only passive investments in marketable securities are required to be reported using fair value method on B/S*fair value method: used to report securities at their current market value (amt that would be received in an orderly sale)1) why are passive investments reported at fair value on B/S ?-Relevance / Measurability2) when the investment account is adjusted to reflect changes in fair value, what other account is affected when the asset account is increased or decreased?*Unrealized holding gains or losses: amts associated with price changes of securities that are currently held-the value of the investments increases by $100,000 -> adjusting journal entry by increasing investment account & unrealized holding gain-the value of the investments decrease by $ 75,000 -> adjusting journal entry by decreasing investment account & unrealized holding lossClassifying Passive Investments at Fair Value*Trading securities: all investments in stocks or bonds held primarily for the purpose of active trading -> Current Assets*Securities available for sale: all passive investments other than trading securities and debt held to maturity -> CA or NCASecurities Available for salePurchase of securities
Year-End Valuation-assume that fair value of per share is $8 (it was $10), and lost value is $2 per share for the year -> x being sold , so the loss is unrealized loss-Reporting the SAS investment at fair value requires asset Investments in SAS up or down to fair value @ the end of each period -> Net Unrealized Losses/Gains-reported in the S.E section of B/S under Other comprehensive Income (OCI)-Only when the security I sold are any realized gains or losses included in net income
Sale of Securities-Investments in SAS & Net Unrealized Losses/Gains (OCI) are eliminated-assume that sold all of its SAS investments for $13 per share -> receive $195,000Gain or loss on sale is computed as follows:Proceeds frm sale Investment Cost = Gain if positive (Loss if negative)
Comparing Trading and Available-for-Sale Securities1) Available-for-Sale Portfolio-balance in net unrealized holding gains and losses is reported as a separate component of S.E. (x reported on I/S & x affect net income)-@the time of sale, the difference b/t the proceeds frm the sale and the original cost is recorded as a gain or loss (investments in SAS & Net Unrealized Losses/Gains accts are eliminated)2) Trading Securities Portfolio-The amt of adj to record unrealized holding gains and losses is included on each periods I/S-Net holding gains increase and net holding losses decrease net income=amt recorded as net unrealized gains & losses on trading securities is closed to RE -When selling a trading security, cash and only one other B/S are affected: Investments in TS-difference b/t cash proceeds frm sale & book value of Investments in TS is recorded as a gain or loss on sale of TS-> total income is the same $60,000 for both TS & SAS
Reporting the Fair Value of InvestmentsStandard recognizes three approaches in order of decreasing reliabilityLev1) Quoted prices in active markets for identical assetsLev2) Estimates based on other observable inputsLev3) Estimates based on unobservable estimatesEconomic Return from Investing How much was earned per dollar invested in securities?Economic Return frm Investing = Divd & Interest Received + Change in Fair Value / Fair value of Investments (beg of period)beg Invst end InvstInvestments for significant influence: Equity Method*Equity method: when investor can exert significant influence over an affiliate; the method permits recording the investors share of the affiliates income*Investments in affiliates or Associated companies: invst in stock held for the purpose of influencing the operating and financing strategies of the entity for LTRecording Investments under the Equity Method-Net income of affiliates: records investment income = its percentage share of the affiliates net income & increases asset acct Investments in Afliliates-Dividends paid by affliates: reduces its investment account and increases cash
Reporting Investments under the Equity Method-do not adjust the investmsent account to reflect changes in the fair value of the securities that are held-gain/loss is recorded when being soldCash Flows after investments1) the cash resulting frm the sale or purchase is reflected in Investing Activities2) Operating activities- adjustments to net incomeGain/loss on the sale is subtracted (added) frm net incomeUnrealized holding gain is subtracted (added to) net incomeEquity in affiliate earnings/losses is subtracted from (added to) net income -> no cash is involvedDividend received frm affiliate are added to net income -> when cash is received, no rev was recordedControlling Interests: Mergers and AcquisitionsReasons1) vertical integration: different lev of channels2) Horizontal growth: same lev3) Synergy: combinedRecording a Merger*merger: occurs when one company purchases all of the assets and liabilities of another and the acquired co goes out of existence*purchase method: records assets and liabilities acquired in a merger or acquisition at their fair value on the transaction datePurchase price allocationStep1) Estimate the fair value of the acquired cos tangible assets, identifiable intangible assets, and liabilitiesStep2) Compute goodwill, the excess of total purchase price over the fair value of the assets liabilities listed in Step 1*Goodwill: excess of the purchase price of a business over the fair value of the acquired cos assets and liabilitiese.g) Step 1) equipment 350,000 / patents 600,000 / Note Payable 100,000 =950,000 AStep 2) Purchase price 1,000,000 / Less: Fair value of A L = -850,000 Goodwill purchased = 150,000
-the book values on the acquired cos B/S are irrelevant unless they represent fair value-Goodwill is reported only if it is acquired in a merger or acquisition transactionReporting for the Combined Companies-Consolidated financial statements must be presented-treat the acquired A & L in the same manner as if they were acquired indiavidually
Sheet1Amortization schedule: bond discount (straight-line)dateInterest to be paidI/ExpAmortizationBook Value1/1 2011965366/30 2011500058668669740212/31 201150005866866982686/30 2012500058668669913412/31 201250005866866100000
Sheet11H 2011Interest expense5792Discount on bonds payable792Cash5000
Sheet12H 2011Interest Expense5840Discount on bonds payable840Cash5000
Sheet1Amortization Schedule: Bond DiscountdateInterest to be paidI/ExpAmortizationBook Value1.1 2011965366.30 2011500057927929732812.31 201150005840840981686.30 2012500058908909905812.31 201250005943943100001
Sheet1(a) Single payment$100,000 * 0.854885480(b) annuity$5,000 * 3.629918150103630->total amt of premium3630Cash103630Premium on bonds payable3630Bonds Payable100000
Sheet1A/RADABegCollections on accountBegSales on accountWrite-offsWrite-offsBDE adjEndEnd
Sheet1Interest Expense4093Premium on bonds payable908Cash5000Amortization Schedule: Bond Premium (Straight-Line)DateInterest to be paidI/ExpAmortizationBook Value1.1 20111036306.30 20115000409390810272312.31 2011500040939081018156.30 20125000409390810090812.31 201250004093908100000
Sheet1unpaid balnce of the debt * mkt rate of interest$103630 * 8% * 1/24145amt cash paid5000amt of premium to be paidInterest Exp4145Premium of bonds payable855Cash5000
Sheet1Amortiation schedule: bond premiumDateInterest to be paidI/ExpAmortizationBook Value1.1 20111036306.30 20115000414585510277512.31 2011500041118891018866.30 20125000407592510096212.31 201250004038962100000
Sheet1Bonds payable1000000Loss on bond Call20,000Cash1,020,000
Sheet1Financing activitiesIssuance of bonds+Debt retirement-Repayment of bond principal upon maturity-
Sheet1Issuerd shares955000000Less: Treasury Stock-306000000Outstanding shares649000000
Sheet1Cash2000000Common stock100000Capital in excess of par1900000
Sheet1Tresury stock2000000Cash2000000*Tresury stock is contra-equity account (subtracted frm S.E)*GAPP does not permit a corporation to report income or lossesselling stock when its' price is increasedCash300000Treasury stock200000Capital in excee of par (+SE)100000selling stock when its' price is decreasedCash150000Capital in excess of par (-SE)50000Treasury stock200000
Sheet11) Assuming 649 mil shares are outstanding with the price of $0.09Retained Earnings58410000Dividends Payable584100002) Payment of th eliability on Sep 1Dividends payable58410000Cash58410000
Sheet1Assume large stock dividend, issued 400,000,000 sharesRetained Earnings400000000Common Stock400000000
Sheet1ADABeg10706Write-offs7706BDE adj9000End12000
Sheet1Stockholders' EquityBeforeAfter a 100%After a 2-for-1 Stock DividendStock SplitNumber of shares outstanding30,00060,00060,000Par value per share$10$10$5Total par value outstanding300,000600,000300,000Retained Earnings650,000350,000650,000Total stockholders' equity950,000950,000950,000
Sheet1e.gSophia CompanyPreferred stock outstanding, 6%, par $20; 2,000 shares = $40,000 parCommon Stock outstanding, par $10; 5,000 shares = $50,000 parExampleTotal Dividends6% P.S.C.S.No1$3,000$2,400$600No218,000240015,600
Sheet1ExampleTotal Div6% P.SCommon Stockno180007200800no230000720022800(2 months in arrears)
Sheet1Effect on CFFinancing activitiesIssuance of capital stock+Purchase of treasury stock-Sale of treasrybond+Payment of cash dividends
Sheet1Invst Debt SecuritiesInvst in C.S.Invst CategoryPassivePassiveSig InfluenceControlLev of ownershipheld to Not held to50%maturitymaturityMeasuring & reportingAmortizedFair valueEquityPurchase costmethodaccountingmethod&consolidation
Sheet1paid the par value of $100,00 for CR 8%Held-to-Maturity Investments100000Cash100000
Sheet1Cash4000Interest Revenue4000
Sheet1Cash100,000Held-to-Maturity Investments100,000
Sheet11) Purchase of securities15,000 shares, C.S. for $10 per share (a total of $150,000), 15%Investment in SAS150,000Cash150,0002) Dividends Earnedreturn comes frm (1) dividend income (2) price increasesCash15,000Dividend revenue15,000
Sheet1YearFair Value-Book value b/4 adj=amt for adj2009120000-150000-30000unrealized lossNet Unrealized Losses/Gains30,000Investments in SAS30,000Net Unrealized Losses/GainsInvestments in SAS1/1/0901/1/09150,000AJE30,00030,000AJE12/31/093000012/31/09120,000YearFair Value-Book value b/4 adj=amt for adj2010165000-12000045000unrealized gainInvestments in SAS45000Net Unrealized Losses/Gains45000
Net Unrealized Losses/GainsInvestments in SAS1/1/0901/1/09150,000AJE30,00030,000AJE12/31/093000012/31/09120,00045,000AJEAJE4500015,00012/31/1012/31/10165,000
Sheet1Aging ScheduleAged accounts receivableEst % uncollectibleest amt uncollectibleNot yet due$60,0002%$1,200up to 90 days past due$36,00010%$3,600over 90 days past due$24,00030%$7,200total uncollctible amt$120,000end balance of ADA$12,000ADA2009 Beg$10,7062009 Write-offs7,7062009 BDE adj$9,0002009 End $12,000
Sheet1Cash195,000Net Unrealized Losses/Gains15,000Investments in SAS165000Gain on Sale of Investments45,000
Sheet1Income inTSSAS2009$15,000divd rev$15,000divd rev-30,000unrealized lossN/A201045,000unrealized gainN/A201130,000realized gain45,000realized gaintotal$60,000$60,000
Sheet1Investments in AffiliatesBeg balPurchsesSalesCompany's % share of affiliates net incomeCompany's % of share of affiliates' net losses(credit equity in affiliate earings-up Income)(debit Equity in Affiliate Losses-down income)Company's share of affiliates' dividendsdeclared for the period (debit Cash)1) Purchase of Stock(100,000 shares & acquire 40%)Investments in Affiliates400000Cash4000002) Earnings of Affiliatesaffiliated company reported NI of $500,000 for the year (40%)Investments in Affiliates200000Equity in Affiliate Earnings2000003) Dividends Received40000Investments in Affiliates40000Investments in AffiliatesEquity in Affiliate Earnings10-Jan001-JanPurchase400000200000net earningsNet Earning20000040000divid20000031-Dec31-Dec560000
Sheet1Equipment350000Patents600000Goodwill150000Note Payable100000Cash1000000
Sheet1200820072006CFONet Income$73,948$66,437$30,609Adj to reconmcile NICash in operating A & LTrade A/R, net of provision for doubtful acct$-35,920 $-22,638 $-9,888 Inventories$-40,964 $-19,401 $999Net Cash by operating activities$53,276$61,054$48,498
Sheet1End cash balance per books$xxxEnd cash balance per bank statement$xxx+Interest paid by bankxx+Deposit in transitxxNSF checks/service chargesxx-Outstanding checksxx+/- Company errorsxx+/- bank errorsxxEnd correct cash balance$xxxEnd correct cash balance$xxx
Sheet1(a)Cash20Interst Income20record interest by bank(b)A/R18Cash18record NSF checkBank Service expense6Cash6record service fees charged by bank(d)Cash9A/P9error made in recording a check payable to a creditor
Sheet1Sales Discount*Credit card company is charging 3% fee for its service and credit card sales are $3,000Cash2910Credit card discount90Sales Rev3,000*Credit sales of $1,000 are recorde with 2/10, n/30A/R1,000Cash980Sales Rev1,000Sales DisC20A/R1,000
Sheet1Sales Returns and Allowances*buy 40 pairs of sandals for $2,000 on accountA/R2,000Sales Rev2,000*return 10 pairs of sandalsSales Rev500A/R500
Sheet1Merchandise InventoryBeg Inv40,000Purchase55,000CGS60,000End Inv35,000
Sheet1Increasing CostsDecreasing CostsFIFOLIFOFIFOLIFOCGS on I/SLowerHigherCGS on I/SHigherLowerNet IncomeHigherLowerNet IncomeLowerHigherIncome TaxHigherLowerIncome Tax LowerHigherInv on B/SHIgherLowerInv on B/SLowerHigher
Sheet1ItemQuantityCost per ItemReplacement CostLCMTotal LCMIntel chips1,000$250$200$200$200,000Disk drives400$100$110$100$40,000->Dell maks journal entry;CGS(1,000*$50)50,000Inventory50,000->mkt price is higher than original cost -> no wrt-down necessary
Sheet1In case of Intel chips:Effects of LCM Write-DownCurrent PeriodNext Period (if sold)CGSIncrease $50,000Decrease $50,000Pretax incomeDecrease $50,000Increase $50,000Ending inventoryu on B/SDecrease $50,000Unaffected
Sheet1Operating ActivitiesEffect on Cash FlowNet Income$XXXAdjusted forAdd inventory decrease+Subtract inventory increase-Add A/P increase+Subtract A/P decrease-
Sheet1Beg InventoryDifferent+Purchases of merchandise ~ the yearSame-End InventoryDiffernetCGSDifferent
Sheet131-Dec20082007Inventories:Inventory at FIFO441042381831Excess of FIFO over LIFO cost(LIFO Reserve)4013432134Inventory at LIFO400908349697
Sheet1Beg LIFO Reserve (Excess of FIFO over LIFO)32134-Less: Ending LIFO Reserve (Excess of FIFO over LIFO)-40134Difference in CGS under FIFO-8000
Sheet1Decrease in CGS Expense (Income increases)$8,000Increase in Income Tax Expense($2,800)Increase in Net Income$5,200
Sheet120082007Inventories:Total FIFO value43663570Adjustment to LIFO basis13241233Inventories30422337CGS in 200819574.8
Sheet1Current YrNxt YrBeg InvBeg InvOverstated $10,000+Purchases of merchandise+Purchases of merchandiseduring the yearduring the year-Ending InventoryOverstated $10,000-End InventoryCGSUnderstated $10,000CGSOverstated $10,000
Sheet1UnitsUnit CostBeg inventory11200New inventory purchases9220Sales (selling price, $420)8?
Ending InventoryCGSUnitsDollarsUnits DollarsFIFO12258081600LIFO12242081760
Sheet1ComputationsBeg inv (11 units*200)2200+Purchases (9 units * 220)1980Goods available for sale4180FIFO inventoryLIFO inventoryGodds available for sale4180Godds available for sale4180-End Inv (220*9+200*3)2580-End Inv (220*1+200*11)2420Cost of Goods sold1600Cost of Goods sold1760
Sheet1I/SSales3360CGS1760Gross profit1600other exp500Inc b/4 tax1100Inc tax exp275NI825
Sheet1DebitCreditFlight Equipment75,000,000Common Stock1,000,000APIC49,000,000Cash25,000,000
Sheet1Building2,000,000Cash2,000,000
Sheet1Net book value$10,000,000Estimated future cash flows8,000,000step 1) testFair Value7,500,000Impairment Loss 10,000,000-7,500,000$2,500,000step 2)Asset Impairment Loss$2,500,000Flight Equipment$2,500,000
Sheet1Cash received11000000Original cost of flight equip30000000Less: Accumulated dep ($12,000*17yrs)20400000Book value at date of sale9600000Gain on sale of flight equipment14000001. update depreciation expense for year 17:DebitCreditDep exp1200000Accmulated Dep1200000
2. record the saleCash11000000Accumulated Dep20400000Flight Equipment30000000Gain on Sale of Assets1400000
Sheet1x expensed immediately, but is capitalized as part of the cost of invwhen inventory sold -> record an expenseDebitCreditInventory106000Timber Tract106000
Sheet1DebitCreditPatent Amortization expense40000Patents40000
Sheet1Operating activitiesNet Incomeadjusted for:Dep and amort. Exp+Gains on sale-Losses on sale+Losses due to asset impairment write-downs+Investing acticvities:Purchase of long-lived asssets-Sale of long-lived assets+
Sheet1Compensatiin exp125000Accrued vacation liability125000adj)Accrued vacation liability125000Cash125000
Sheet1BDE (+E, -SE)XXADA (+XA,-A)XX
Sheet1Salaries and wages earned1800000income taxes withheld275000FICA taxes (employees' share)105000FUTA taxes2300
1) amt paid to employees or withheld frm amts of earnedCompensation expense1800000Liability for income taxes withheld275000FICA payable105000Cash14200002) taxes that employers must pay frm their own fundsCompensation expense107300FICA payable105000FUTA payable2300
Sheet1Cash100,000Notes payable, ST100,000Interest Expense2,000Interest Payable2,000Interest Expense3,000Interest Payable2,000Cash5,000
Sheet1probablereasonably possibleRemotesubject to estimaterecord as liability Disclose in noteDisclosure not requirednot subject to estimateDisclose in noteDisclose in noteDisclosure not required
Sheet1Effect on CFOperating activitiesNet Incomexxxadjusted for: Decreases in CAor increases in CL+adjusted for: Increases in CAor decreases in CL-
Sheet1Leased equipment250000Lease Payable250000
Sheet1Delivery trucks159439Note Payable159439
Sheet112/31, 2011Interest expense19133Note payable1913312/31, 2012Interest expense21429Note payable21429when loan amt is repaidNote Payable200000Cash200000
Sheet1$163,686*400,002Printing equipment400000Note Payable400000-> record the payments on this note12/31, 2011Note Payable119686Interest expense44000Cash16368612/31, 2012Note Payable132851Interest expense30835Cash16368612/31, 2013Note Payable147463Interest expense16221Cash163686
Sheet120-year lease for equipment , 8% of EAR, annual payment of $10,000 on 12/31$10,000 *9.818198,181Roasting equipment98,181Lease payable98,181
Sheet1Bond TypeUnsecured bond (debenture)Secured bond: no assets are pledged:specific assets are pledgedCallable bondConvertible bond:called for early retirment by issurer:converted to common stock
Sheet1ADA (-XA, +A)XXA/R (-A)XX
Sheet1Cash100,000Bonds Payable100,000
Sheet1Interest expense5000Cash5000
Sheet1Single payment$100,000*0.792179210Annuity$5,0003.465117326Issue price of bonds96536the amt of the discount 3465
