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Accounting Chapter 8

Acct Ch 8

QuestionAnswer
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