accounting 2

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test 1

Corporation

legal entity and a creature of the state(state creates corp.) you must request that they create you.

Characteristics of a corporation

1.)unlimited stockholders
2.)limited liability (only reason to become a corporation)
3.)heavy regulations (ex:1120 form which is corporate tax return)
4.)double taxation-taxed on earnings that they make . then given to shareholders and taxed again.
5.)unlimited life

sole proprietorship

1.) 1 owner
2.)unlimited liability
3.)limited life
4.)easy formation

partnership

1.) multiple owners
2.)unlimited liability
3.)mutual agency (1 partner can cause entire partnership to be sued)joint and severally liable.
4.)limited life
5.)easy formation

why sell stock?

to capitalize the corporation

par value

arbitrary value established by the organizers.

selling at par value journal entry
par value =10,000 sold for 15,000

cash 15000
common stock at par value 10000
paid in cap in excess of par 5000

retained earnings

earnings retained in corporation from inception to the current date it consists of :
(beginning retained earnings + net income -net loss LESS div. declared= ending retained earnings)

why invest in a corporation ?

for growth

all dividends are ?

public relations

every year common stockholders do what?

they elect a board of directors, hire the president, and establish dividend policy

3 important dates

1.)declaration date-when board declares there will be a dividend
2.)record date-when the board states who will get the dividend
3.)payment date- when shareholders are paid the dividend

stock dividends are issued because?

they have no cash but they want to give the investor something.

stock split

large stock dividend

They do it to dilute the shares because the price of stock is selling too high.It is pure manipulation

reverse stock split

they combine shares of stock into 1 because stock is selling too low.

treasury stock

-when corporation buys its own stock
-it is legal
-they do this to manipulate the value of the stock.
-good way to make $
-used to provide shares and bonuses to employees.

rights of common stockholder

1.) vote for board of directors
2.)right to receive dividends if declared.
3.)right to receive assets upon liquidation
4.)preemptive right- right of 1st refusal. right to maintain there percentage of ownership if more investors are desired.if more shares are issued you can choose to buy more to maintain your percentage of ownership in the company.

rights of preferred stockholders

1.)preference to dividends(get paid 1st)
2.)preference upon liquidation (get paid 1st)
3.)no power to vote

preferred stock features

1.) cumulative preferred (you get paid cumulative before common stockholders get paid out.)
2.)participating- participates in the common dividend as well.(they do this to help sell their stock.)
3.)redeemable- redeemed at a certain date and a certain rate (stockholder has the right to sell back to the company)
4.)callable preferred-redeemed at a certain date and a certain rate (corporation has the right to buy back the preferred stock).

characteristics of treasury stock

1.)company buys its own stock
2.)no power to vote
3.)no dividends

why buy treasury stock?

-to make $
-manipulate the value of the stock(the less shares on the market the more they are worth.)
-shares to give to employees.

bonds

they are a debt from a company
- sold on open market
-they sell bonds because banks can not issue that amount of capital to a corporation
-they are sold with an interest rate.

explain 1.)bond discount and 2.)bond premium

1.)bond discount occurs when the bonds face interest rate is below the market interest rate.
2.bond premium occurs when the bonds face interest rate is higher than the market interest rate.

what is the benchmark in which all bonds are judged from ?

US government bonds

are bonds guaranteed no risk $ ?

yes

state & municipal bonds 2 types

1.)general obligation bonds
2.)revenue bonds

general obligation bonds

-state is backing the bond by their full faith and credit.(if problem then the state must raise taxes or sell buildings to come up with the funds)
-tax exempt from federal interest.
- state tax depends on the state... sometimes exempt sometimes not.

revenue bonds

- state
-municipal
-federally tax exempt
-morally obligated to pay the bonds.
(there are many defaults on these types of bonds)

AAA rated

highest rating for a bond

what are the 2 rating agencies for bonds?

1.)moodys
2.) standard and poors

corporate bonds

-IOU to pay bond holder
-corporation states that they will pay back the bonds.
-some companies are too big to fail ex: general motors.
-some are junk bonds- very high risk/ interest rates are high because you may loose everything. ex: normally new companies just starting out.
- sold based on what the market will bare. to entice people to buy they offer added features.

added features of corporate bonds

1.)redeemable bonds- bond holder has the right to redeem the bond at a certain time, certain date, and a certain rate.
2.)callable bonds-(only good companies issue these) the corporation has the right to redeem the bonds at a certain date and a certain rate. they play with interest rates
3.)convertible bonds- bonds that can be converted usually to common stock at a certain date and a certain rate.

issue bonds over common stock because?

1.) bonds do not dilute ownership
2.)bond interest that is paid every year is completely tax deductible.

bond discount

...

bond premium

...

long term installment notes

...

time value of $

it is always assumed that a dollar today is worth more than a dollar tomorrow.

bonds are based on

future payments and future installments.

if a company buys 20-50% of another companies stock they they have ?

-substantial influence
- they must use equity accounting (everything goes against the investment account)

if more than 50% is owned by the parent company then they must?

-consolidate their assets, income, liabilities, and merge it into 1 company.
-they use consolidation accounting

when less than 20% is owned there is

-no significant influence.must record with their ability and intent. if it is going to be sold in 90 days .
-fair value accounting
-must be revalued every balance sheet date.
-3 types- held to maturity, trading, available for sale.

held to maturity

-normal accounting
-long term investment
*valued at -amortized cost

*changes in valuation are reported as:premium or discount amortization is reported as part of interest revenue on the income statement.
*reported on the balance sheet as: amortized cost of investment.
*classified on balance sheet as: either as a current or noncurrent asset, depending on remaining term to maturity

trading

-company makes investment for 90 days or less and they have the intent to sell the security.
*changes in valuation are reported as: unrealized gain or loss is reported on income statement as other income(loss).
*reported on the balance sheet as: cost of investments plus or minus valuation allowance.
*classified on balance sheet as: a current asset

available for sale

investment the company makes other than trading or held to maturity.
-no intent to sell in 90 days.
-the unrealized gain or loss goes in stockholders equity.
- cam be classified as current or long term depending on intent of company.
-this is shown on balance sheet at fair market value.
*changes in valuation are reported as: accumulated unrealized gain or loss is reported in stockholders equity on the balance sheet.
*reported on the balance sheet as: cost of investments plus or minus valuation allowance.
*classified on balance sheet as: either as a current or non current asset , depending on managements intent.

what is the purpose of a dividend

pure public relations

what is significant influence?

-one company can manipulate another company to do their will.
-must report investment using equity accounting
-greater than 20% less than 50%

what are stock dividends?

-small stock dividend is 20% or below. small stock dividends are disproportionate to the percentage of the dividend.
- large stock dividend is 20% or more, and it will be proportionate to the percentage of the dividend.

what are serial bonds?

multiple maturity dates.

junk bonds?

junk as collateral

explain what paid in capital is ?

issuance of common or preferred stock.

what is comprehensive income?

all changes in stockholders equity except for dividends and investments.

what is a stock split

increases shares outstanding

decreases the value

RATIOS****

*method of computation
-use

solvency measures:
working capital

*current assets- current liabilities
-to indicate the ability to meet currently maturing obligations

solvency measures:
current ratio

*current assets/current liabilities
-to indicate the ability to meet currently maturing obligations

solvency measures:
quick ratio

*quick assets/current liabilities
- to indicate instant debt paying ability

solvency measures:
accounts receivable turnover

*net sales/average accounts receivable
- to assess the efficiency in collecting receivables and in the management of credit.

solvency measures:
numbers of days sales in receivables

*average accounts receivable/average daily sales.
- to assess the efficiency in collecting receivables and in the management of credit.

solvency measures:
inventory turnover

*cost of goods sold/average inventory
-to assess the efficiency in the management of inventory.

solvency measures:
number of days sales in inventory

*average inventory/average daily cost of goods sold.
-to assess the efficiency in the management of inventory.

solvency measures:
ratio of fixed assets to long term liabilities

*fixed asset (net)/long term liabilities
-to indicate the margin of safety to long term creditors.

solvency measures:
ratio of liabilities to stockholders equity

*total liabilities/total stock holders equity
-to indicate the margin of safety to creditors.

solvency measures:
number of times interest charges are earned.

*(income tax+interest expense)/interest expense
-to assess the risk to debt holders in terms of number of times interest charges are earned.

profitability measures:

...

profitability measures:
ratio of net sales to assets

*net sales/average total assets(excluding long term investments)
-to assess the effectiveness in the use of assets.

profitability measures:
rate earned on total assets

*(net income+interest expense)/average total assets
-to assess the profitability of the assets.

profitability measures:
earned on stockholders equity

*net income/average total stockholders equity
-to assess the profitability of the investment by stockholders.

profitability measures:
earned on common stockholders equity

*(net income-preferred dividends)/average common stockholders equity
-to assess the profitability of the investment by common stockholders

profitability measures:
per share(EPS) on common stock

*(net income-preferred dividends)/weighted # of shares of common stock outstanding
-to assess the profitability of the investment by common stockholders

profitability measures:
earnings (p/e) ratio

*market price per share of common stock/earnings per share on common stock
-to indicate future earnings prospects, based on the relationship between market value of common stock and earnings.

profitability measures:
per share

*dividends on common stock/shares of common stock outstanding.
-to indicate the extent to which earnings are being distributed to common stockholders

profitability measures:
yield

*dividends per share of common stock/market price per share of common stock
-to indicate the rate of return to common stockholders in terms of dividends.

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