PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. CARL S. WARREN SURVEY OF ACCOUNTING Chapter 8

2 LEARNING OBJECTIVES When you finish this chapter, you should be able to

3 1.Describe how businesses finance operations. 2.Describe & illustrate current liabilities, notes payable, taxes, contingencies, & payroll. 3.Describe & illustrate the financing of operations through issuance of bonds. LEARNING OBJECTIVES Continued

4 4.Describe & illustrate the financing of operations through issuance of stock. 5.Describe & illustrate accounting for cash & stock dividends. 6.Describe effects of stock splits on financial statements. LEARNING OBJECTIVES Continued

5 7.Describe reporting of liabilities, stockholders’ equity. 8.Analyze impact of debt, equity financing on earnings per share. LEARNING OBJECTIVES

6 LEARNING OBJECTIVE 1 Describe how businesses finance operations.

7 LO 1 How does a business finance operations? 2 ways:  Liabilities  Equity

8 LEARNING OBJECTIVE 2 Describe & illustrate current liabilities, notes payable, taxes, contingencies, & payroll.

9 CURRENT LIABILITIES  Examples of current liabilities include  Accounts payable  Notes payable  Payroll liabilities LO 2

10 ACCOUNTS PAYABLE  Short term debt  Usually 30-day  Purpose  Buying goods, services for use in operations  Buying merchandise for resale LO 2

11 NOTES PAYABLE  Short term debt  Usually more than 30-days  Requires payment of interest  Purpose  Buying goods, other assets  Borrowing cash from bank Example: Issued 90-day, 12%, $1,000 interest bearing note to satisfy overdue account. LO 2

12 Assets =Liabilities +Equity A/P N/P 8/1-1,000 1,000 Cash Flows Balance Sheet Income Statement LO 2 BORROWING Account payable replaced with interest bearing note payable.

13 Assets =Liabilities +Equity CashN/P Ret Earn 8/1-1,030-1, Cash Flows Balance Sheet Income Statement LO 2 PAYMENT Payment of 90-day, 12% note. Operating -1, Int Exp

14 TAXES PAYABLE  Examples  Income taxes  Payroll taxes  FICA LO 2

15 PAYROLL LIABILITIES  Examples  Are short term liabilities  Include employee taxes withheld  Include employer taxes  Examples  Are short term liabilities  Include employee taxes withheld  Include employer taxes LO 2

16 PAYROLL TAXES  Employee taxes withheld  FICA tax  Employees’ federal income tax  Employees’ state income tax  Employer taxes include  FICA tax  State and federal unemployment taxes LO 2

17 CONTINGENT LIABILITIES: Characteristics Contingent liabilities  Arise from past transactions  Are often estimated  Must be paid if certain events occur in future  Ex.: warranty expense Contingent liabilities  Arise from past transactions  Are often estimated  Must be paid if certain events occur in future  Ex.: warranty expense LO 2

18 LEARNING OBJECTIVE 3 Describe & illustrate the financing of operations through issuance of bonds.

19 BONDS  Most common form of long term debt  Bond issue divided into individual bonds  Most common face value (denomination): $1,000  Interest paid annually, semi-annually, or quarterly  Most common form of long term debt  Bond issue divided into individual bonds  Most common face value (denomination): $1,000  Interest paid annually, semi-annually, or quarterly LO 3

20 CALCULATING BOND PRICE  Bond price is function of  Face value of bond  Interest payments made  Bond market rate  Bond price is function of  Face value of bond  Interest payments made  Bond market rate LO 3

21 LO 3 How does a firm record the sale of $100,000 of bonds at face value?

22 Assets =Liabilities +Equity CashB/P Ret Earn 12/31100,000 Cash Flows Balance Sheet Income Statement LO 3 ISSUING BONDS $100,000 of 5-year, 12% bonds issued for cash. Financing +100,000

23 LO 3 If the bonds pay 6% interest semiannually, how does the firm record the first interest payment?

24 Assets =Liabilities +Equity CashB/P Ret Earn 12/31-6,000 Cash Flows Balance Sheet Income Statement LO 3 INTEREST PAYMENT Payment of semi-annual interest payment. Operating -6,000 -6,000 Int Exp

25 BOND REDEMPTION When bonds redeemed  All related accounts removed  Gain or loss recognized When bonds redeemed  All related accounts removed  Gain or loss recognized LO 3

26 BOND SOLD AT DISCOUNT Bonds sold below face value  Are sold at a discount  Contract rate is less than market interest rate Bonds sold below face value  Are sold at a discount  Contract rate is less than market interest rate LO 3

27 BOND SOLD AT PREMIUM Bonds sold above face value  Are sold at a premium  Contract rate is more than market interest rate Bonds sold above face value  Are sold at a premium  Contract rate is more than market interest rate LO 3

28 LEARNING OBJECTIVE 4 Describe & illustrate the financing of operations through issuance of stock.

29 OWNERSHIP RIGHTS: Common Stock  Right to vote in matters concerning corporation  Right to share in distributions of earnings  Right to share in assets upon liquidation  Right to vote in matters concerning corporation  Right to share in distributions of earnings  Right to share in assets upon liquidation LO 4

30 COMMON STOCK  Stock assigned monetary value  Par value  Related to state laws for legal capital  When no monetary value assigned  No-par stock  Sometimes Boards assign a stated value to no-par stock  Stock assigned monetary value  Par value  Related to state laws for legal capital  When no monetary value assigned  No-par stock  Sometimes Boards assign a stated value to no-par stock LO 4

31 OWNERSHIP RIGHTS: Preferred Stock  Preferred right to stated dividend  Dividend stated in monetary terms or as % of par  Cumulative preferred stock has right to dividends passed (in arrears) LO 4

32 LO 4 How do you record the sale of 2,000 shares of $1 par common stock for $55 per share?

33 Assets =Liabilities +Equity CashC/S PICE 12/31110,0002, ,000 Cash Flows Balance Sheet Income Statement LO 4 SALE OF STOCK 2,000 shares of $1 par value common stock sold for $55 per share. Financing +110,000

34 LO 4 What is treasury stock and how does a corporation get it? Treasury stock (T-stock) is a contra-equity that arises when a corporation repurchases its own stock.

35 LEARNING OBJECTIVE 5 Describe & illustrate the accounting for cash & stock dividends.

36 CASH DIVIDEND  Requirements for cash dividend are  Sufficient retained earnings  Sufficient cash  Formal action by board of directors  Requirements for cash dividend are  Sufficient retained earnings  Sufficient cash  Formal action by board of directors LO 5

37 LO 5 How do you record the declaration of $12,500 cash dividends for preferred stock and $30,000 cash dividends for common stock?

38 Assets =Liabilities +Equity Div Payable Ret Earn 12/142, ,500 Cash Flows Balance Sheet Income Statement LO 5 DIVIDEND DECLARATION Common dividends of $30,000 & preferred dividends of $12,500 declared.

39 LO 5 What is a stock dividend? A stock dividend is a distribution of stock to current stockholders.

40 STOCK DIVIDEND  Requirements for stock dividend are  Sufficient retained earnings  Formal action by board of directors  Small stock dividend recorded at market price  Requirements for stock dividend are  Sufficient retained earnings  Formal action by board of directors  Small stock dividend recorded at market price LO 5

41 LEARNING OBJECTIVE 6 Describe the effects of stock splits on financial statements.

42 STOCK SPLITS  Stock splits  Reduce the par value of stock  Increase number of shares of stock proportionately  Stock splits  Reduce the par value of stock  Increase number of shares of stock proportionately LO 6

43 LEARNING OBJECTIVE 7 Describe financial statement reporting of liabilities and stockholders’ equity.

44 FINANCIAL REPORTING  Liabilities  Current liabilities due within 1 year  Long term liabilities due after 1 year  Stockholders’ equity  Changes in stockholders equity disclosed separately and in detail  Liabilities  Current liabilities due within 1 year  Long term liabilities due after 1 year  Stockholders’ equity  Changes in stockholders equity disclosed separately and in detail LO 7

45 LO 7 EXHIBIT 1

46 LO 7 EXHIBIT 2

47 LEARNING OBJECTIVE 8 Analyze the impact of debt or equity financing on earnings per share.

48 LO 8 How do you compare the effects of different financing methods ? Look at the impact on earnings-per-share.

49 3 PLANS  Plan #1: 100% financing by $10 par common stock  Plan #2: 50% financing by 9%, $50 par preferred stock and 50% financing by $10 par common stock  Plan #3: 50% financing by 12$ bonds; 25% financing by 9%, $50 par preferred stock and 25% financing by $10 par common stock  Plan #1: 100% financing by $10 par common stock  Plan #2: 50% financing by 9%, $50 par preferred stock and 50% financing by $10 par common stock  Plan #3: 50% financing by 12$ bonds; 25% financing by 9%, $50 par preferred stock and 25% financing by $10 par common stock LO 8

50 EXHIBIT 3 LO 8

51 THE END CHAPTER 8