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Accounting Chapter 8
Acct Ch 8
| Question | Answer |
|---|---|
| Debt Financing | • A way a business finances operations • Includes all liabilities owed by a business |
| Equity Financing | o A way a business finances operations o Investments from owners of the business o Stock is issued to represent ownrship interest in a corporation |
| Liability | o Debt owed to others o Two types: Current Long-term Contingent o Some of THESE are contingent on the outcome of future events |
| Current Liabilities | o A debt owed to others o Liabilities that are to be paid out of current assets and are due within a short time, usually within one year |
| Long-Term Liabilities | • A debt owed to others • Liabilities due beyond one year or liabilities that will be paid out of noncurrent assets |
| Contingent Liabilities | • Potential liabilities if certain events occur in the future |
| Notes Payable | • Longer and more formal than accounts payable • Usually bear interest • Issued to creditors when merchandising or other assets are purchased • Usually current liabilities |
| Notes Payable Are Often Issued To | • Satisfy an account payable • Purchase merchandise or other assets |
| Borrower | Issuer of a note |
| Lender | Party recieving the note |
| Income Taxes | • Included federal income taxes and possibly state and local income taxes • Most corporations are required to pay federal income taxes in four instllments throughout the year |
| Temporary Differences | • Differences between taxable income and income before income taxes • Created because items are recognized in one period for tax purposes and in another period for income statement purposes |
| Most Corporations will have one of these liabilities at end of year | • Current income tax liability; which is due on the current year’s taxable income • Postponed or deferred tax liability; which is due in the future when the temporary differences reverse Reported as a liability |
| Current Income Tax Liability | due on the current year's taxable income |
| Postponed or Deferred Tax Liability | due in the future when the temporary differences reverse |
| Permanent Differences | • Differences such as between income before taxes and taxable income • Create no special financing reporting issues, because it is reported on the income statement |
| Contingent Liabilities Rely on Two Factors | • Likelihood of occurring: probable, reasonably possible, or remote • Measurement: estimable or not estimable • These two determine the accounting treatment • WANT TO BE PROBABLE AND BEABLETO ESTIMATE • Disclosed in financial statement |
| Probable and Estimate | • Factor of contingent liabilities • It is recorded by increasing an expense and a liability • Record and disclose • Ex. a warranty |
| Probable and Not Estimable | • Factor of contingent liabilities • Contingent liability is disclosed in the notes to the financial statements • Ex. a company polluting into a river – the cost of cleanup and any fines cannot be THIS |
| Reasonably Possible | • Factor of contingent liabilities • Does not have a measurement • Ex. company may have lost a lawsuit, but company has appealed & lawyers feel verdict will be reversed • the contingent liability is disclosed in the notes to the financial statements |
| Remote | • Factor of contingent liabilities • Does not have a measurement • Ex. skier has an injury & sues resort, resort won't incur liability (b/c skier accepts risk when participating in activity) unless resort is VERY negligent • No disclosure needs to be m |
| Payroll | • The total amount paid to employees for a certain period • THIS and related taxes significantly impact the net income of most businesses • Can include salary, wages, or both |
| Salary | • Type of payroll • Refers to payment the managerial, administrative, or similar services • Normally expressed in terms of a month or a year |
| Wages | • Type of payroll • Refers to payment for manual labor, both skilled and unskilled • Normally stated on an hourly or weekly basis |
| Gross Pay | • The total earnings of an employee for a payroll period • What employees are paid |
| Net Pay | • Gross pay less payroll deductions • The amount the employer is obligated to pay an employee |
| Payroll Taxes** | • Two types Employer Employee • Become a liability when the related payroll is paid to the employees The liability is relieved when the taxes are paid to the appropriate agencies |
| Employer Taxes | • Type of payroll tax • Includes FICA Federal and State Unemployment Taxes |
| Employee Taxes | • Type of payroll tax • Includes FICA Federal and State Income Taxes |
| FICA | • A payroll tax • Half paid by employees and other half paid by employers • Portions of earnings taken for Medicare or Medicaid |
| Bond | • Form of interest-bearing note • Used by a corporation to borrow on a long-term basis • THESE face value must be repaid at maturity • Normally divided into several individual bonds • Most common face value is $1000 |
| Bond Indenture | • The contract between a corporation issuing bonds and the bondholders |
| Calculating the Bond Issue Price | 1. Face amount of the bonds due at the maturity value 2. The periodic interest to be paid on the bonds 3. The market (effective) rate of interest |
| Contract Rate | • Also called coupon rate • The periodic interest to be paid on the bonds that is indentified in the bond indenture • Expressed as a percentage of the face amount of the bond |
| Market Rate of Interest | • The effective rate of interest at the time the bonds were issued • Determined by transactions between buyers and sellers • Also called effective rate of interest |
| If Market Rate = Contract Rate | • Selling price = face amount of bonds |
| If Market Rate > Contract Rate | • Selling Price < Face Amount of Bonds • Also called Discount on Bonds Payable |
| If Market Rate < Contract Rate | • Selling Price > Face Amount of Bonds • Also called Premium on Bonds Payable |
| Discount on Bonds Payable | • The excess of the face amount of bonds over their issue price • Face amount of bonds less the selling price • Selling Price < Face Amount of Bonds • Buyers are NOT willing to pay face value for the bonds |
| Premium on Bonds Payable | • The excess of the issue price of bonds over their face amount • Selling price less the face amount of the bonds • Selling Price > Face Amount of Bonds • Buyers are willing to pay more than face value for the bonds |
| Outstanding Stock | -type of stock -the stock currently in the hands of the stockholders |
| Stock | -major means of equity financing -types of shares 1)authorized 2)issued 3)outstanding |
| Shares of Stock | -can be issued with or without monetary amount: par or no-par |
| Par | -a way shares of stock can be issued -monetary value stated on stock certificate |
| No-Par | -a way shares of stock can be issued -some state might require a stated value |
| Legal Capital | -minimum stockholder contribution required by some states -includes the amount of par or stated value of the shares of the stock issued |
| Stated Value | -a value, similar to par value, approved by the board of directors of a corporation for NO-PAR stock |
| Authorized Stock | -type of stock -total number of shares allowed to use |
| Issued Stock | -type of stock -shares issued to shareholders |
| Stock Rights | 1)the right to vote in matters concerning the corporation 2) the right to share in distributions of earnings 3) the right to share in assets on liquidation |
| Common Stock | -basic type of stock issed to stockholders of a corporation when a corporation has issued only one class of stock -each share has equal rights -each share has voting rights -HAVE TO HAVE THIS |
| Preferred Stock | -a class of stock with preferential rights over common stock -dividend rights stated in monetary terms or % of par |
| Price at which stock is sold depends on a variety of factors | 1) the financial condition, earnings record, and dividend record of the corporation 2) investor expectations of the corporation's pontential earning power 3) general business and economic conditions and prospects |
| Premium on Stock | -the excess of the issue price of a stock over its par value -when this happens, Cash (or other asset) is increased for the amount recieved |
| Treasury Stock | -stock that a corporation has issued and then reacquires (ex. to employees) -balance at year-end is reported asa reduction of stockholders' equity |
| Why a Company Purchases Its Own Stock | 1)to provide shares for resale 2)to reissue as bonuses to employees 3)to support the market price of the stock |
| Cash Dividend | -a cash distribution of earnings by a corporation to its shareholders -most common form of its type |
| Conditions for a Cash Dividend | 1)sufficient retained earnings 2)sufficient cash 3)formal action by the board of directors |
| Dates Included in a Dividen Anouncement | 1)date of declaration 2)date of record 3)date of payment |
| Dividend | -a sum of money paid regularly by a company to its shareholders out of its profits |
| Stock Dividend | -a distribution of stock to stockholders (usually common shares) -no distribution of cash or other assets -amount transferred for smallstock dividends (<25% of outstanding shares) is market value per share |
| Requirements of Stock Dividends | -sufficient retain earnings -formal action by board of directors |
| Stock Split | -the reduction in the par or stated value of common stock & issuance of a proportionate number of additional shares -increases the number of shares outstanding |
| Major Objective of Stock Split | -to reduce the stock's market price per share in order to attract more investors |
| How Liabilities Are Reported Financially | -current are due within 1 year -long term are due beyond 1 year |
| How Stockholder's Equity Is Reported Financially | -part of the balance sheet -details of the changes in stockholder's equity are disclosed in a separate statement |
| Businesses Must Finance Operations Through | -debt financing -equity financing |
Created by:
med0016
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