Accounting Test 3
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What journal entries are necessary for the declaration of a cash dividend?
Debit Cash Dividends, Credit Dividends Payable
- Cash Dividends.......................$50,000
- Dividends Payable......................$50,000
- (to record declaration of cash dividend)
What journal entries are necessary to record payment of declared cash dividends?
Debit Dividends Payable, Credit Cash
- Dividends Payable...............$50,000
- (to record payment of cash dividend)
What journal entries are made for the purchase of treasury stock?
Debit Treasury Stock, Credit Cash
- Treasury Stock............$32,000
- (to record purchase of $4,000 shares of
- treasury stock at $8 per share)
What affect does the purchase of treasury stock have on the balance sheet?
The Treasury Stock account would increase by the cost of the shares purchased. The original PIC account wouldn't be affected because the the number of issued shares does not change. Companies show treasury stock as a deduction from total PIC and retained earnings in the stockholders' equity section of the balance sheet.
The term outstanding stock means the number of shares of issued stock that are being held by stockholders
Why do corporations issue stock dividends or do stock splits?
Stock dividends often issued by companies that don't have enough cash to issue a cash dividend. This way they are still offering a gesture for something. Decreases RI, increases PIC. Issued: pro rata (proportional to ownership)
Stock splits - issues additional shares of stock to holders according to their % ownership. However stock split results in a reduction in the par value or stated value of the stock. Purpose: to increase the marketability of the stock by lowering it's market value per share. Makes it easier to sell additional stock.
What effect do Stock Dividends have on retained earnings and stockholders' equity? Also, how do they affect par value and market value?
- Total paid in capital increase
- Total retained earnings decreaseTotal par value(common) increasePar value per share No change
What effect do Stock Splits have on retained earnings and stockholders' equity? Also, how do they affect par value and market value?
- Total paid in capital no change
- Total retained earnings no change
- Total par value(common) no change
- Par value per share Decrease
- Basically, Stock Splits decrease the price of the stock, but doesn't affect any balance sheet accounts/dollar amounts. The Stock Dividends, on the other hand, increase PIC, Decrease RI, increase total par value common stock, but doesn't affect the par value per share price.
What are the advantages of a coproration?
- Countinuous life
- Separate legal existence
- Transferable ownership rights
- Ability to acquire capital
What are the disadvantages of a corporation?
- Government regulations (SEC, State laws, federal reg, Stock exchange requirements)
- Additional taxes (double taxation on dividends)
- Coprorate Management (board of directors, reduces owners' ability to actively manage the company)
How is paid in capital and in general Stockholders' equity shown on the balance sheet?
- Stockholders' equity
- Capital Stock
- x% preferred stock, $xxx par value, cumulative
- xx,xxx shares authorized, x,xxx shares issued and
- outstanding $xx,xxx
- Common Stock, xxx par (or stated value),
- xx,xxx shares authorized, xx,xxx shares
- issued and xx,xxx shares outstanding xx,xxx
- Total capital stock xx,xxx
- Additional PIC
- In excess of par value - preferred stock x,xxx
- In excess of par value - common stock xx,xxx
- Total additional PIC xx,xxx
- Total Paid-in-capital xx,xxx
- Retained Earnings xxx,xxx
- Total PIC and RI xxx,xxx
- Less: Treasury stock- common(x shares) (xx,xxx)
- Total Stockholders' equity xxx,xxx
What items are added and subtracted for cash flows from Operating Activities for the indirect method?
- Depreciation Expense AddLosses AddGains Deduct
- Increase in CA Deduct
- Decrease in CA AddIncrease in CL AddDecrease in CL Deduct
***Note: Long term assets (plant assets, etc), long term liabilities (bonds, etc), and stockholders' equity don't come into play on the Operating Activities section.
What are the three catagories of the Statement of Cash Flows?
- Cash flows from Operating activities
- Cash flows from Investing activitiesCash flows from Financing activities
Income statement items
- Changes in investments* and long term assets
- Sale or purchase of PPE
- Sale or purchase of investments in debt or equity securities of other entities
- Making loans to other entities
- Changes in long term liabilities* and stockholders' equity
- Inflows= sale of common stock, issuance of bonds,notes
- Outflows=Dividends, redeeming long term debt or reacquiring capital stock/ treasury stock.
What is an Extraordinary Item?
Item that satisfies BOTH conditions below
1. abnormal and only incidentally related to the customary activites of the entity. (Unusual in nature)
2. infrequent- the event should not be reasonably expected to recur in the foreseeable future.
Companies report extraordinary items net of taxes in a separate section of the income statement, immediately below discontinued operations, but before Net Income.
- Companies report two types of irregular items
- 1. Discontinued Operations
- 2. Extraordinary Items
Reported net of tax. If there's a gain, subtract the portion of tax. If there's a loss, reduce the loss by subracting the taxes you saved. In both scenaries, you subtract the tax amount.
What type of statement uses component percentages?
Vertical Analysis. But the book doesn't really label it as its own statement.
AKA common size analysis. Compares the parts to the whole. Current liabilities, long-term liabilities measured in relation to Total liabilities. (Amounts and Percentages). Ditto with Current Assets, Long term assets, and Total Assets, and with the Stockholder's equity accounts. And with total Liabilities and Stockholder's equity. You can measure different slices, but the base amount will always be considered at 100%. You can measure the Income statment by vertical analysis, but most of our HW had us measuring the balance sheet this way.
- AKA Trend Analysis
- Comparing a companies performance with previous years/balance statement years. etc.
- Presented as % change (for each balance sheet account) compared to the last year (or to the base year). Income statement can also be analyzed this way
What is Management Accounting?
a field of accounting that provides economic and financial information for managers and other internal users.
What are the three main manufacturing costs (cost of goods manufactured)?
Direct Materials + Direct Labor + Factory Overhead
According to teacher's T accounts, what goes into Work-in-process, and what comes out of it?
Beginning On the left (debit) side, we have
- Debit side Credit Side
- Beginning WIP | =COGS or is it COGM?
- +Direct Materials used | this gets "transferred/exported
- +Direct Labor used | to the Finished goods acct
- + Factory Ovrhd
- Total=Ending WIP
What are the differences between product costs and period costs?
- PRODUCT COSTS: manufacturing costs. becomes part of COGS/COGM=
- Manufacturing overhead (the overhead= indirect materials, indirect labor, and other indirect costs)
- PERIOD COSTS=nonmanufacturing costs. Expenses are matched with the revenue for the period=
- Selling expenses
- Administrative Expenses
- Raw materials that cannot be easily associated with the finished product.
- Not physically part of the finished product or they are an insignificant part of finished product in terms of cost.
- Considered part of manufacturing overhead
- Work of factory employees that has no physical association with the finished product or for which it is impractical to trace costs to the goods produced.
- Part of mfg overhead.
Work of factory employees that can be physically and directly associated with converting raw materials into finished goods.
How do you do a journal entry for the sale of common stock in excess of par
- Common stock (1,000 x $1)..........................$1,000
- PIC in excess of par value................................4,000
- (to record issuance of 1,000 shares
- of common stock in excess or par)
Work in process costs/cost of goods manufactured
Cost of beginning WIP + mfg costs for the period=Total WIP for the year.
Total WIP cost - Ending WIP inventory = Cost of goods manufactured
Three manufacturing inventory catagories
- 1. Raw materials
- 2. Work-in-process
- 3. Finished goods
What does manufacturing overhead consist of?
- Indirect Materials
- Indirect Labor
- Other indirect costs.
It DOES NOT include any selling or marketing expenses or administrative expenses.
What kind of ratio? Working capital
Current Assets - current liabilities
What kind of ratio? Current Ratio
What kind of ratio? Inventory turnover ratio
What kind of ratio? Current cash debt coverage ratio
Cash provided by operations/avg current liabilities
What kind of ratio? Days in Inventory
365 days/inventory turnover ratio
What kind of ratio? Receivables turnover ratio
Net credit sales/average net receivables
What kind of ratio? Average collection period
Liquidity ratio (te liquidity ratios all seem to deal with ONLY current accounts)
365 days/receivables turnover ratio
What kind of ratio? Debt to total assets ratio
Total liabilities/total assets
What kind of ratio? Cash debt coverage ratio
- Solvency ratio
- Cash provided by operations/avg total liabilities
What kind of ratio? Times interest earned ratio
- Solvency ratio
- (NI+intrs exp+tax exp)/Intrs exp
What kind of ratio? Free cash flow
Solvency ratio (doesn't limit itself to current accounts at all, so it's not about liquidity)
Cash provided by operations-capital expenditures-cash dividends
What kind of ratio? Earning per share
(NI-preferred stk dividends)/avg common shares outstanding
What kind of ratio? Price-earning ratio
- Profitability ratio
- Stock price per share/earnings per share
What kind of ratio? Gross Profit rate
- Profitability ratio
What kind of ratio? profit margin ratio
What kind of ratio? Return on Assets ratio
Net Income/Avg total assets
What kind of ratio? Asset turnover ratio
Net sales/Average total assets
What kind of ratio? Payout ratio
Cash Dividends declared on common stock/Net income
What kind of ratio? Return on common stockholders' equity ratio
(Net income-preferred stockholders' dividends)/average COMMON stockholders' equity
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