Appunti seconda parte Bilancio BIEM Bocconi, Appunti di Cost Accounting

Scarica Appunti seconda parte Bilancio BIEM Bocconi e più Appunti in PDF di Cost Accounting solo su Docsity! LECTURE 1&2 Chapter 11 – STOCKHOLDER’S EQUITY CORPORATIONS • Limited-liability companies (SRL = società responsabilità limitata) usually small company, not on the stock market • Public companies (SPA = società per azioni) usually large companies, on the stock market Corporations can be attributed a critical advantage that corporations have over sole proprietorships and partnerships: they can raise large amounts of capital because both large and small investors can easily participate in their ownership. This ease of participation is related to several factors: • Shares of stock can be purchased in small amounts • Ownership interests can be easily transferred through the sale of shares on established markets such as the New York Stock Exchange. • Stock ownership provides investors with limited liabilities: in the event of bankruptcy, creditors have claims against only the corporation’s assets, not the assets of the individual owners. The corporation is the only business form the law recognizes as a separate entity. As a distinct entity, the corporation enjoys a continuous existence separate and apart from its owners. It may own assets, incur liabilities, expand and contract in size, sue others, be sued, and enter into contracts independently of its stockholder owners. To protect everyone’s rights, the creation and governance of corporations are tightly regulated by law. Corporations are created by application to a state government (not the federal government). On approval of the application, the state issues a charter, sometimes called the articles of incorporation. It concerns: • Decisions about the corporate activity (ex. what the company produces and sells) • Administrative stuff (management team, BOD) • Maximum number of shares to be sold AUTHORIZED SHARES • Par value of the shares (not required by every state) BENEFITS OF STOCK OWNERSHIP When you invest in a corporation, you are known as a stockholder or shareholder. As a stockholder, you receive shares of stock that you subsequently can sell on established stock exchanges. Owners of common stock receive a number of benefits: 1. A voice in management. You may vote in the stockholders’ meeting on major issues concerning management of the corporation. Each share of stock represents one vote. 2. Dividends. If a company pays dividends, you receive a proportional share of the distribution of profits. Ex. if you have 20% of the shares, you will receive 20% of the dividends declared. Potential larger gain than a bond, which has a fixed revenue. 3. Residual claim. You will receive a proportional share of the distribution of remaining assets upon the liquidation of the company. Shareholders are the last to be paid. SHARES OF A COMPANY ISSUED SHARES – TREASURY STOCK = OUTSTANDING SHARES COMMON STOCK TRANSACTIONS Common stock is held by investors who are the “owners” of a corporation. Depending on state law, a company’s common stock may be required to have a par value, a nominal value per share established arbitrarily in the corporate charter. Par value is not equal to market value (=selling value of a share of stock). It is very a small amount, typically less than $1 per share. It is also the legal capital of the business, which is the amount of capital, required by the state, that must remain invested in the business. In addition to par value stock, some states permit no-par value common stock. Initial sale of stock An initial public offering, or IPO, involves the very first sale of a company’s stock to the public (i.e., when the company first “goes public”). Once a company’s stock has been traded on established markets, the company may wish to raise additional capital with another sale of stock to the public: additional sales of new stock to the public are called seasoned offerings. BOARD OF DIRECTORS Elected by shareholders SHAREH D E S owners Hav an annual meeting (shareholders’ MANAGEM NT TEAM CEO, CFO, COO AT SALE Assume it resells it for $30 Cash (+A) (10,000 × $30) 300,000 Treasury stock (−XSE, +SE) (10,000 × $20) 200,000 2 0 1 0Additional paid in capital (+SE) 100,000 If, instead, it resold it for $15 Cash (+A) (10,000 × $15) 150,000 Additional paid-in capital (−SE) (10,000 × $5) 50,000 Treasury stock (−XSE, +SE) (10,000 × $20) 200,000 NB: No gain or loss is recorded when treasury stock is reissued. In addition to repurchasing shares for employee stock option plans, companies buy their own stock to support the market price, to increase shares needed to use in the acquisition of another company, to limit the shares available for a hostile takeover, and to return cash to shareholders who wish to sell their shares. DIVIDENDS ON COMMON STOCK Dividends are one of the reasons that investors buy common stock (together with stock appreciation). Wealthy investors in high tax brackets prefer to receive their return in the form of higher stock prices because capital gains may be taxed at a lower rate than dividend income. Other investors, such as retired people who need a steady income, prefer to receive their return in the form of dividends. • Wealthy people price appreciation capital gains less taxes wrt dividends • Retired people dividends steady income Cash dividends Cash dividends are usually declared by the board of directors (in Italy it’s the stockholders’ meeting). There is no legal obligation to declare a cash dividend, but once declared, there is a legal obligation to pay the dividend. Most corporations that pay cash dividends pay them quarterly. To pay a cash dividend, a corporation must have sufficient retained earnings to absorb the dividend without going negative and enough cash to pay the dividend. Cash dividends follow three steps: 1. DATE OF DECLARATION date the directors declare the dividend. At this time, a liability is created and must be recorded. Retained earnings (−SE) 43,000,000 Dividends payable (+L) 43,000,000 2. EX-DIVIDEND DATE date two days before the date of record. This date is established by the stock exchanges to account for the fact that it takes time to officially transfer stock from a seller 2 0 1 0to a buyer. If someone buys stock before the ex dividend date, they will be listed as the owner 2 0 1 0and paid the dividend. If someone buys stock on or after the ex dividend date, the previous 2 0 1 0owner will be listed as the owner of the dividend. Stock prices often fall on the ex dividend date since the stock no longer includes the right to the dividend. 3. DATE OF RECORD date on which the corporation prepares the list of current stockholders who will receive the dividend payment (usually immediately after the meeting). The dividend is payable only to those names listed on the record date. No journal entry is made on this date. 4. DATE OF PAYMENT date is the date on which cash is disbursed to pay the dividend liability. Dividends payable (−L) 43,000,000 Cash (−A) 43,000,000 Stock dividends A stock dividend is a distribution of additional shares of stock to stockholders on a pro rata basis at no cost to the stockholder. The phrase pro rata basis means that each stockholder receives additional shares equal to the percentage of shares held. A stockholder with 10 percent of the outstanding shares would receive 10 percent of any additional shares issued as a stock dividend each stockholder owns exactly the same portion of the company as before. No change in par value occurs. Additionally, no change in TOTAL stockholders’ equity takes place. The final effect is null. Why do corporations issue stock dividends, which are merely more pieces of paper evidencing the same percentage ownership? • To reduce the market price per share of stock to make the shares more affordable for investors to purchase The stock market reacts immediately when a stock dividend is issued, and the stock price falls The lower market price may make the stock more attractive to new investors. • Signal that the management expects strong financial performance in the future At the date of declaration, the board of director can declare a stock dividend which is: LARGE SMALL >20-25% of outstanding shares <20-25% of outstanding shares Record the change in RE= CS at par value Record the change in RE at market value, CS at par value and additional paid-in capital as the remainder Assume the company issued 50 million shares of its $1 par value stock. The outstanding shares are 100 million. The journal entry to record the stock dividend is: Assume the company issued an additional 5,000,000 shares. On the date of declaration, Trader Joe’s stock was trading at $12 per share. The journal entry Trader Joe’s would enter is: Retained Earnings (–SE) ($1 par value × 50,000,000) ….….……… 50,000,000 Common stock (+SE) ($1 par value × 50,000,000) ……………. 50,000,000 Retained earnings (−SE) ($12 market price × 5,000,000) . . . . . . 60,000,000 Common stock (+SE) ($1 par value × 5,000,000) . . . . . . . . .. 5,000,000 Additional paid-in capital (+SE)………. 55,000,000 STOCK SPLIT In a stock split, a company commits to giving stockholders a specified number of additional shares for each share that they currently hold, by reducing the par value. For example, when a company declares a two-for-one stock split, the number of outstanding shares will double, so a stockholder who owned one share of stock before the split will own two shares of stock after the split and the par value will be halved. In this way, the common stock account will remain unchanged. A stock split does not but is disclosed in the notes to the financial statements. PREFERRED STOCK TRANSACTIONS In addition to common stock, some corporations issue preferred stock. The journal entries required to record the issuance and repurchase of preferred stock are the same as the journal entries required to record the issuance and repurchase of common stock. Preferred stock, however, differs from common stock in a number of ways. The most significant differences are: • Preferred stock typically does not have voting rights Issuing preferred stock permits them to raise money without diluting common stockholders’ control. • Preferred stock is less risky holders receive priority payment of dividends and distribution of assets if the corporation goes bankrupt • Preferred stock typically has a fixed dividend rate it’s similar to a bond DIVIDENDS ON PREFERRED STOCK Because investors who purchase preferred stock give up certain advantages that are available to investors who hold common stock, preferred stock offers a dividend preference. The two most common dividend preferences are: • Current: must be paid to preferred stockholders before any dividends are paid to common stockholders (this is always a feature of preferred stock). They don’t receive dividends in arrears (non-cumulative dividends) • Cumulative: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. Example Common stock 300 shares $1000 PV 300,000 Preferred stock 200 shares $1000 PV 200,000 8% dividend 16,000 The company declares that it will pay 80.000$ in dividends and last year did not pay any dividend. In case of current preferred stock: the other types of investments do. Investments in debt securities are always considered passive investments because you receive a fixed amount and you don’t have voting rights. On the other hand, investments in stock are considered passive only if less than 20% of the other company’s outstanding shares is purchased. ii. Significant influence (>20%, <50%) ability to have an important impact on the operating, investing, and financing policies of another company. The purpose of this investment is to take an active role as an investor. Significant influence is presumed if the investing company owns from 20 to 50 percent of the outstanding voting shares of the other company. However, other factors may also indicate that significant influence exists, such as membership on the board of directors of the other company (or possibility to vote the members being owners, for example, of Class A shares or through a shareholders’ agreement even though you have a small % of shares, you have a great influence) , participation in the policy-making processes, evidence of material transactions between the two companies, an interchange of management personnel, or technological dependency iii. Control (>50%) ability to determine the operating and financing policies of another company through ownership of voting stock. The purpose of this investment is to achieve vertical integration, horizontal growth or operational synergy. Acquisition accounting and consolidation are applied to combine the companies. According to this classification, the accounting method used will be: Amortized cost method This method is used for investments in debt securities held to maturity. These securities should be recorded at cost on acquisition date (NOT at fair value) as “Held-to-maturity investments”, if management has the intent and the ability to hold them until maturity. Then they should be adjusted for any premium or discount. Any change in the fair value is NOT accounted. AT PURCHASE On the date of purchase, a bond may be acquired at the maturity amount (at par), for less than the maturity amount (at a discount), or for more than the maturity amount (at a premium). The total cost of the bond, including all incidental acquisition costs such as transfer fees and broker commissions, is debited to the Held-to-Maturity Investments account. To illustrate accounting for bond investments, assume that on July 1, 2016, Graham Holdings paid the par value of $100,000 for 8 percent bonds that mature on June 30, 2021.2 Interest at 8 percent is paid each June 30 and December 31. Management plans to hold the bonds for five years, until maturity. The journal entry to record the purchase of the bonds follows: Held-to-Maturity Investments (+A) 100,000 Cash (-A) 100,000 WHEN INTEREST IS EARNED The revenue earned from the investment each period is measured as the amount of interest collected in cash or accrued at year-end. The following journal entry records the receipt of interest on December 31: Cash (+A) [$100,000 × 0.08 × 6/12] 4,000 Interest Revenue (+R, +SE) 4,000 The same entry is made on succeeding interest payment dates. AT MATURITY When the bonds mature on June 30, 2021, the journal entry to record receipt of the principal payment would be: Cash (+A) 100,000 Held-to-Maturity Investments (-A) 100,000 If the bond investment must be sold before maturity, any difference between market value (the proceeds from the sale) and net book value would be reported as a gain or loss on sale. Ex. if the market value is 100,002$, the entry will be: Cash (+A) 100,002 Gain on sale of investment (+R, +SE) 2 Held-to-Maturity Investments (-A) 100,000 If management intends to sell the bonds before the maturity date, they are treated in the same manner as investments in stock classified as available-for-sale securities. Fair value method Investments in debt securities that are not to be held to maturity and passive investments in equity securities are accounted for using the fair value method. The investment is initially recorded at its cost. Interest received on debt securities is recorded as interest revenue. Dividends received from the investment in equity securities are recorded as dividend revenue. At each balance sheet date, the investment is adjusted to fair value. Fair value is a security’s current market value (the amount that would be received in an orderly sale). To measure fair value, accounting standards recognize the following three approaches in order of decreasing reliability: • Level 1: Quoted prices in active markets for identical assets. • Level 2: Estimates based on other observable inputs (e.g., prices for similar assets). • Level 3: Estimates based on unobservable estimates (the company’s own estimates of fact ors that market participants would consider). Fair value should be determined using the most reliable method (Level 1 if possible). The reporting company must then disclose the amounts determined under each approach in a note to the financial statements. Passive investments are reported at fair value for two reasons: 1. Relevance for predicting future cash flows. 2. Measurability fair value is measurable as the current price of these securities are traded each day on established stock exchanges As a result of the adjustment, unrealized holding gains and losses are recorded. Unrealized holding gains and losses may be reported in shareholders’ equity or in the income statement, depending on the classification of the security. If a security in either classification is actually sold, a realized gain or loss is recorded. If the proceeds from the sale exceed the cost of the investment, a realized gain is recorded. When the proceeds are less than cost, a realized loss is recorded. Realized gains and losses are always reported on the income statement. The securities can be classified as • Available-for-Sale securities debt or equity securities that are not actively traded but are available for sale. They are held to earn a return on invested funds that may be needed for future operations. They are classified as current or noncurrent assets, depending on whether management intends to sell them. The unrealized holding gains and losses are reported in stockholders’ equity under Accumulated Other Comprehensive Income (denoted as OCI). Thus, the balance sheet remains in balance. When the security is sold, OCI is closed and any realized gains or losses is included in net income. AT PURCHASE At the beginning of 2015, Graham Holdings purchases for cash 15,000 shares of Internet News common stock for $10 per share (a total of $150,000). There were 100,000 outstanding shares, so Graham Holdings owns 15 percent of I-News (15,000 shares ÷ 100,000 shares), which is treated as a passive investment. Graham Holdings does not plan to actively trade the shares. Instead, they will be held to earn a return on invested funds that may be needed for future operati 2 0 1 0 2 0 1 0ons. The shares should be classified as available for sale securities. Such investments are recorded initially at cost: Investments in AFS Securities (+A) 150,000 Cash (-A) 150,000 WHEN DIVIDENDS ARE EARNED associated companies). The investor records the initial investment at cost. Changes in fair value (and subsequent adjustments) are NOT accounted. The investor reports its portion of the affiliate’s net income as its income and increases the investment account by the same amount. Similarly, the receipt of dividends by the investor is treated as a reduction of the investment account, not revenue. A summary follows: ▲ Net income of affiliates: If affiliates report positive results of operations for the year, the investor then records investment income equal to its percentage share of the affiliates’ net income and increases its asset account Investments/Equity in Affiliates Earnings/Loss (or Associated Companies) (+R,+Exp). If the affiliates report net losses, the investor records the opposite effect. ▲ Dividends paid by affiliates: If affiliates declare and pay dividends during the year (a financing decision), the investor reduces its investment account and increases cash when it receives its share of the dividends At disposal, the difference between the cash received and the book value of the investment is recorded as a gain or loss on the sale of the investment and is reported on the income statement in the Other Items section. Example AT PURCHASE In 2015, Graham Holdings purchased 40,000 shares of the outstanding voting common stock of Internet News for $400,000 in cash. Since I-News had 100,000 shares of common stock outstanding, Graham Holdings acquired 40 percent and was presumed to have significant influence over the affiliate. Therefore, Graham Holdings must use the equity method to account for this investment. The purchase of the asset would be recorded at cost. Investments in Affiliates (+A) 400,000 Cash (-A) 400,000 EARNINGS OF AFFILIATES During 2015, I-News reported a net income of $500,000 for the year. Graham Holdings’ percentage share of I-News income was $200,000 (40% × $500,000) and is recorded as follows: Investments in Affiliates (+A) 200,000 Equity in Affiliate Earnings (+R, +SE) 200,000 DIVIDENDS RECEIVED During 2015, I-News declared and paid a cash dividend of $1 per share to stockholders. Graham Holdings received $40,000 in cash ($1 × 40,000 shares) from I-News. Cash (+A) 40,000 Investments in Affiliates (-A) 40,000 In summary, the effects for 2015 were EFFECT ON CASH FLOWS LECTURE 6 INCOME TAXES INCOME TAXES Taxes are due in every country. They are the way through which the government finances its expenses (hospitals, infrastructures…). "Income taxes" are a sub-category of taxes. They are many and of various kinds: • Real estate (or on property in general) Ex. in Italy IMU • Registry • Stamp • VAT (imposed by EU legislation, applied to every transaction) • Income tax applied on the taxable income of individuals and companies Ex. in Italy IRPEF for individuals, IRES and IRAP for companies The procedure for calculating corporate income taxes is set according to procedures common to all countries in the world. In Italy, the highest-ranking law governing taxes is Article 53 of the Constitution. Income taxes are a cost to companies. The cost is debited, and a liability towards tax authority is credited. The cost and the debt arise from the simple fact of having generated a positive income. In other words, as the company has been able to earn money, it can contribute to public expenses by paying taxes. PAYMENT IN ADVANCE AND FINAL AMOUNT DUE During the administrative period, the payment of tax advances is required by law. The size of down payments and payment dates vary from country to country. In Italy, roughly, the advances are due on June 30th (40% of the amount of income tax expense of the precedent fiscal year) and November 30th (the balance). The income tax expense is computed as Taxable income x tax rate = income tax expense and it is registered at year-end with the following journal entry: Dec 31, 2019 Income tax expense (+Exp) 50,000 Income tax payable 50,000 At the date of payment of the advances, the JEs will be: June 30, 2020 (1st payment in advance) Income tax receivable (+A) 20,000 Cash (-A) 20,000 Nov 30, 2020 (2nd payment in advance) Income tax receivable (+A) 40,000 • Permanent when a cost or revenue is recorded in the general accounting and the tax legislation does not recognize it nor in the financial year in which it is recorded, nor in any future year. In other words, for the tax authorities these kinds of revenues or costs "do not exist". • Temporary when a cost or revenue is recorded in the general accounts and the tax legislation does not recognize it in the same period in which they are registered but will recognize it in the future. These misalignments between the accounting value and the tax value generate, alternatively: • Deferred tax asset (A) when there is an increasing temporary variation • Deferred tax liability (L) when there is a decreasing temporary variation SESSION 7&8 CHAPTER 12 – STATEMENT OF CASH FLOWS CASH FLOWS Net income is important, but cash flow is also critical to a company’s success. Cash flow permits a company to • expand operations • replace worn assets • take advantage of new investment opportunities • pay dividends to its owners Some Wall Street analysts consider it important to understand the various sources and uses of cash that are associated with business activity. The cash flow statement focuses attention on a firm’s ability to generate cash internally, its management of operating assets and liabilities, and the details of its investments and its external financing. It is designed to help both managers and analysts answer important cash-related questions such as these: • Will the company have enough cash to pay its short-term debts to suppliers and other creditors without additional borrowing? • Is the company managing adequately its accounts receivable and inventory? • Did the company generate enough cash flow internally to finance necessary investments, or did it rely on external financing? WHAT IS CASH? 1. Currency 2. Cash equivalents • Short-term, highly liquid investments • Readily convertible into cash • So near maturity that market value is unaffected by interest rate changes (i.e., they have original maturities of less than three months) Examples: T-bills, money market funds, commercial papers. CLASSIFICATIONS OF THE STATEMENT OF CASH FLOWS The statement of cash flows reports cash inflows and outflows in three broad categories: +/- CF FROM OPERATING ACTIVITIES Cash inflows and outflows directly related to earnings from normal operations. +/- CF FROM INVESTING ACTIVITIES Cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies. +/- CF FROM FINANCING ACTIVITIES Cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise. Each cash flow, in the end, if positive/negative is called net cash provided/used by … activities. The sum of the three cash flows will be the net increase/decrease of cash. If we add it to the beginning balance of cash, we get the ending balance of cash. CASH FLOWS FROM OPERATING ACTIVITIES (CFO) items taken from the INCOME STATEMENT There are two alternative approaches for presenting the operating activities section of the statement: • Direct method: reports the components of cash flows from operating activities as gross receipts and gross payments • Indirect method: starts with accrual net income and converts to cash flow from operating activities used by approximately 99 percent of large U.S. companies because less expensive than the direct method. US G.A.A.P. and IFRS allow both methods. The cash flows from operating activities are always the same, regardless of whether the direct or indirect method is used. CASH FLOW FROM INVESTING ACTIVITIES (CFI) Free cash flow= CFO – dividends – capital expenditures This measures a firm’s ability to pursue long-term investment opportunities. INTERPRETING THE CFO A common rule of thumb followed by financial and credit analysts is to avoid firms with rising net income but falling cash flow from operations. investors will not invest in a company if they do not believe that cash generated from operations will be available to pay them dividends or expand the company. Similarly, creditors will not lend money if they do not believe that cash generated from operations will be available to pay back the loan. Remark CONSTRUCTING THE CFI + sales - purchases CONSTRUCTING THE CFF + borrowing + issuance of bonds + issuance of stock • repayment of loan principal • repayment of bond principal • repurchase (retirement) of stock with cash • payment of cash dividends If debt or stock is issued for other than cash, it is not included in this section. INTERPRETING CFF The long-term growth of a company is normally financed from three sources: 1. Internally generated funds (cash from operating activities) 2. The issuance of stock 3. Money borrowed on a long-term basis The financing sources that management uses to fund growth will have an important impact on the firm’s risk and return characteristics. The statement of cash flows shows how management has elected to fund its growth. This information is used by analysts who wish to evaluate the capital structure and growth potential of a business. COMPLETING THE STATEMENT AND ADDITIONAL DISCLOSURES 1. Reconciliation of net income to cash flow from operations needed if the company uses the direct method for computing cash flow from operations 2. Noncash investing and financing activities important investing and financing activities with no cash flow effects Example purchase of a $100,000 building with a $100,000 mortgage given by the former owner does not cause either an inflow or an outflow of cash. 3. Cash paid for interest and income taxes needed if companies use the indirect method normally listed at the bottom of the statement or in the notes.