Accounting 500-2
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Sole proprietorship, Partnership, Corporations, stocks, stockholders, dividends, commons stocks, preferred stocks, market value stocks, issuance stocks, treasury stocks, stocks dividends, stocks splits, paid in capital, stock holder equity,treasury stocks, journal entries, cash flow, statement of cash flow, fraud, indirect method, direct method, internal control, cash control, segregation of duties, bank reconciliation, classification of cash, book value, market value, depreciation, depreciation methods, straight line depreciation, Advance Business Consulting, Jose Cintron, mba4help.com
Transcript of Accounting 500-2
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Corporations
Advantages of Corporations Owners' personal assets are protected from
business debt and liability Corporations have unlimited life extending beyond
the illness or death of the owners Tax free benefits such as insurance, travel, and
retirement plan deductions Transfer of ownership facilitated by sale of stock Change of ownership need not affect management Easier to raise capital through sale of stocks and
bonds
Disadvantages
More expensive to form than proprietorship or partnerships
More legal formality More state and federal rules and
regulations
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Structure
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Ownership Rights of Stockholders
When chartered, the corporation may begin selling ownership rights in the form of shares of stock.
When a corporation has only one class of stock, it is common stock.
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Different kind of Stocks
There are thousands of stocks to choose from, so investors usually like to put stocks into different categories: size, style and sector. Thinking of stocks this way helps you diversify - that is, to choose several stocks that are different enough from each other that they won't all tank at the same time.
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Different kind of Stocks Stock typically takes the form of shares of either common stock or preferred stock.
Common stock typically carries voting rights that can be exercised in corporate decisions.
Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.
Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a predetermined date.
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Cumulative DividendPreferred stock often contains a cumulative dividend feature. This means that preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends. When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.
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Different kind of Stocks
Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a predetermined date.
Cumulative dividends Cumulative stockholders must be paid dividends for present and previous years before commons stockholders get paid for dividends.
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Issuance of StockA corporation can issue common stock directly to investors. Or it can issue the stock indirectly through an investment banking firm that specializes in bringing securities to market.
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Market Value of StockThe stock of publicly held companies is traded on organized exchanges. The interaction between buyers and sellers determines the prices per share. In general, the prices set by the marketplace tend to follow the trend of a company's earnings and dividends. But, factors beyond a company's control, such as an oil embargo, changes in interest rates, and the outcome of a presidential election, may cause day-to-day fluctuations in market prices.
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Market Value of StockA recent stock quote for PepsiCo, listed on the NYSE under the ticker symbol PEP, is shown below. Stock Volume High Low Close Net Change PepsiCo 4,305,600 60.30 59.32 60.02 +0.41 These numbers indicate that PepsiCo's trading volume was 4,305,600 shares. The high, low, and closing prices for that date were $60.30, $59.32, and $60.02, respectively. The net change for the day was an increase of $0.41 per share.
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Treasury Stocks
Treasury stock is a corporation’s owned stocks that have been reacquired by the corporation and is been held for future use.
1. To share with officers and employees2. To increase trading and confident 3. To acquire other companies 4. Increase earning per share
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Stock dividends and splits
Stock dividends is a pro rata distribution of the corporation own stocks to stockholders. Cash dividends is a pro rata distribution of cash to stockholders. Stock splits is issuing of additional shares of stocks to stockholders according to the %.
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Paid-in capital Retained Earning
Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. As noted earlier, when a corporation has only one class of stock, it is common stock.
Retained earnings is net income that a corporation retains for future use.
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The stockholders' equity section
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Stock Transactions
Sale 2k shares of $1 par value for at par.Cash 2,000Common Stock 2,000
Sale 2K shares of $1 par value for $5ea.Cash 10,000Common Stock 2,000Paid in capital in excess 8,000
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Stockholders’ Equity
Stockholders equity Paid in capital Common Stocks $4000Paid in capital in excess of par 8000Total Paid in capital 12 000Retained Earning 48 000Total Stockholders’ equity 60 000
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Treasury Stocks
Acquires 5k shares of its stocks at $5ea.
Treasury Stocks 25 000 Cash 25 000
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Journal Entry Ex.Acker Inc. issues 4,772 shares of $96 par value preferred stock for cash at $145 per share. Journalize the issuance of the preferred stock.
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Solution
Cash 691,940 Preferred stock 458,112 Paid-in cap. in excess of par value - Pref. stock 233,828
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Stockholders' equity section
If Delta Robotics has a balance of $800,000 in common stock at the end of its first year, its stockholders' equity section is as follows.
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Owner’s Equity Statement
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Classification of Cash Flows
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Statement of cash flows involves three major steps
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Why do differences exist? Company Net Income Net Cash Provided by Operating A. Kohl's Corporation $ 1,083 $ 1,234 Wal-Mart Stores, Inc. 11,284 20,164 J. C. Penney Inc. 1,153 1,255 Costco Corp. 1,082 2,076 Target Corporation 2,849 4,125 The differences are explained by differences in the timing of the reporting of revenues and expenses under accrual accounting versus cash. Under accrual accounting, companies report revenues when earned, even if cash hasn't been received, and they report expenses when incurred, even if cash hasn't been paid.
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Cash flow from operatingWhy does GM's cash provided by operating activities drop so precipitously when the company's sales figures decline?
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Cash Flow Indirect Method
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Indirect and Direct Methods
In order to perform step 1, a company must convert net income from an accrual basis to a cash basis.
The indirect method adjusts net income for items that do not affect cash. A great majority of companies (98.8%) use this method, as shown in the nearby chart.1 Companies favor the indirect method for two reasons: (1) It is easier and less costly to prepare, and (2) it focuses on the differences between net income and net cash flow from operating activities.
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Cashflow -Teamwork
The net income for Adcock Co. for 2010 was $279,013. For 2010 depreciation on plant assets was $65,978, and the company incurred a loss on sale of plant assets of $13,993. Compute net cash provided by operating activities under the indirect method.
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SolutionCash flows from operating income Net income $279,013 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense $65,978 Loss on sale of plant assets 13,993 79,971 Net cash provided by operating activities $358,984
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What is Fraud?
Fraud is a dishonest act by an employee that result in personal benefits to employee at a cost to the employer.
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Why Fraud occur?
Opportunity – Lacks sufficient controlFinancial pressure- Employee brokeRationalization- underpaid
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Internal Controls
Internal Controls consist of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance.
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Principles Internal Controls
Establishment of responsibilitySegregation of dutyDocumentation procedures Physical controlIndependent internal verificationHuman Resource control
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Internal Control for Cash
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Establishment of Responsibility
Only designate personnel are authorized to handle cash receipts. Cashier
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Segregation of duties
Different individuals receive cash, record cash receipts, and hold the cash.
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Documentation Procedures
Use mail receipts, cash register tapes and deposit slips
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Physical controls
Store cash in safes and bank vaults.
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Independent Verification
Supervisors count cash receipts daily, treasurer compares total receipts to bank deposits slips.
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Human Resource Control
Bond personnel who handle cash, required vacations and backgrouCredits checks???
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Bank Reconciliation
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Reconciliation of Bank Balances
1.DEPOSITS IN TRANSIT. End-of-month deposits of cash recorded on the depositor's books in one month are received and recorded by the bank in the following month.
2. OUTSTANDING CHECKS. Checks written by the depositor are recorded when written but may not be recorded by (may not “clear”) the bank until the next month.
3. BANK CHARGES. Charges recorded by the bank against the depositor's balance for such items as bank services, printing checks, not-sufficient-funds (NSF) checks, and safe-deposit box rentals. The depositor may not be aware of these charges until the receipt of the bank statement.
4. BANK CREDITS. Collections or deposits by the bank for the benefit of the depositor that may be unknown to the depositor until receipt of the bank statement. Examples are note collection for the depositor and interest earned on interest-bearing checking accounts. 5. BANK OR DEPOSITOR ERRORS. Errors on either the part of the bank or the part of the depositor cause the bank balance to disagree with the depositor's book balance.
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Reconciliation of Bank Balances
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Bank Reconciliation
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Sample Bank ReconciliationNugget Mining Company's books show a cash balance of $20,502. The bank statement shows an ending balance of $22,190. Identified the following reconciling items.
1. Deposit of 3,680 does not appear on the bank statement.2. Checks written in transit. Ck. 7327-$150, ck.7348-$4820, ck.7349-$313.Not yet recorded the $600 of interest collected by the bank.4. Bank service charges of $18 are not yet recorded on the books. 5. The bank returned customer's checks for $220 with the bank statement, “NSF.” 6. Incorrectly recorded check #7322, written in November for $131 in payment of an account payable, as $311. 7. A check in the amount of $175 that the bank incorrectly charged to Us accompanied the statement. 7. ($21,044)
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Bank Reconciliation
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Classification of Cash
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Accounts Receivables vs. Note Receivable
Accounts receivable are oral promises of the purchaser to pay for goods and services sold. They represent “open accounts” resulting from short-term extensions of credit. A company normally collects them within 30 to 60 days. Notes receivable are written promises to pay a certain sum of money on a specified future date. They may arise from sales, financing, or other transactions. Notes may be short-term or long-term and they require to pay interest.
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How companies recognize accounts receivable
ABC Co. on July 1, 2010, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30.
On July 10, ABC receives payment from Polo Company for the balance due.
July 1 Accounts Receivable—Polo Company 1,000 Sales 1,000
July 10 Cash ($900-$18) 882 Sales Discounts ($900 × .02) 18 Accounts Receivable—Polo Company 900 (To record collection of accounts receivable)
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Recognizing Accounts Receivable
Assume that you sale to ABC $300 on account in merchandise and ABC pay you back on the 30. Jan. 1- ABC, Accounts Receivable 300 Sales 300 (To record sale of merchandise)
Jan. 30 Cash 300 ABC, Account Receivable 300 (to record received money from ABC)
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The Client Invoice Aging
Client aging reports show unpaid invoices from Accounts Receivable. These reports show how much clients owe you. The Client Invoice Aging shows individual unpaid invoices by client.
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Account Receivable Aging
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Book value vs. Market valueThe difference between the cost of any depreciable asset and its related accumulated depreciation is its book value.
The book value of an asset generally differs from its market value—the price at which the asset could be sold in the marketplace.
Depreciation is a means of cost allocation, not a market valuation.
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Depreciation
Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life. Cost allocation enables companies to properly match expenses with revenues in accordance with the matching principle.
It is important to understand that depreciation is a process of cost allocation. It is not a process of asset valuation.
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Computing Depreciation
1. Useful life. Useful life is an estimate of the expected productive life, also called service life, of the asset. Useful life may be expressed in terms of time, units of activity (such as machine hours), or units of output. Useful life is an estimate.
2. Salvage value. Salvage value is an estimate of the asset's value at the end of its useful life. This value may be based on the asset's worth as scrap or on its expected trade-in value. Like useful life, salvage value is an estimate.
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Computing Depreciation
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Depreciation Methods
Depreciation is generally computed using one of the following methods:
1. Straight-line 2. Units-of-activity
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Depreciation Methods
Once a company chooses a method, it should apply it consistently over the useful life of the asset. Consistency enhances the comparability of financial statements. Depreciation affects the balance sheet through accumulated depreciation and the income statement through depreciation expense.
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Straight-line method
Under the straight-line method, companies expense the same amount of depreciation for each year of the asset's useful life. It is measured solely by the passage of time.
Depreciable cost is the cost of the asset less its salvage value
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Straight-line method
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Depreciation and Income Taxes
The Internal Revenue Service (IRS) allows corporate taxpayers to deduct depreciation expense when they compute taxable income. However, the IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
Many corporations use straight-line in their financial statements to maximize net income. At the same time, they use a special accelerated-depreciation method on their tax returns to minimize their income taxes. Taxpayers must use on their tax returns either the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS)
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Individual work
Straight-Line DepreciationOn January 1, 2010, AGM Corp. purchased a new snow-grooming machine for $50,000. The machine is estimated to have a 10-year life with a $2,000 salvage value. What journal entry would AGM Corp. make at December 31, 2010, if it uses the straight-line method of depreciation?
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Solution
The entry to record the first year's depreciation would be: Dec. 31 Depreciation Expense 4,800 Accumulated Depreciation 4,800 (To record annual depreciation on snow-grooming machine)
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It is up to you!
