financial accounting, Schemi e mappe concettuali di Cost Accounting

Scarica financial accounting e più Schemi e mappe concettuali in PDF di Cost Accounting solo su Docsity! FINANCIAL ACCOUNTING 1.ACCOUNTING Accounting: Accounting community: the Pathways Commission It has two fields: ® Financial accounting: it focuses on providing information for external for external decision makers e Managerial accounting: it focuses on providing information for internal decision makers -Business owners use accounting information to set goals, measure progress toward those goals, make adjustments when needed. -Investors analyse how their investment is performing (SEC: securities and exchange commission) -Creditors reviews accounting data to determine your ability to make the loan payment. -Local, state, federal government levy taxes. Certified Management Accountants (CMAs): professionals who specialise in accounting and financial management knowledge. They work for a single company, usually in public, private or governmental accounting. Ex: controllers, financial or business analysts, tax or cost accountants, auditors, bokkeeper. GOVERNING ORGANISATION -Financial Accounting Standards Board: the private organisation that oversees the creation and governance of accounting standards in USA. It works with governmental regulatory agencies like SEC. -Generally Accepted Accounting Principles: accounting guidelines, formulated in FASB. It based on a conceptual frameworks thet identifies the objectives and implementation of financial statements and creates the accounting practices. Its information must be relevant and have faithful representation. -Economis Entity Assumption: an organisation thet stands apart as a separate economis unit. -Stockholders: a person who owns stock in a corporation -Cost principle: that states that acquired assets and servicies should be recorded at their actual cost. -Going Concern Assumption: assemes that the entity will remain in operation for the future -Monetary unit assumption: requires the items on the financial statements to be measured in terms of a monetary unit. Infation is a rise in the price level. -International financial reporting standards: a set of global accounting guidalines formulated by IABS. -Audit: an examination of a company financial statement. -Sarbanes Oxley Act: reviewer of internal control and take responsability for the accuracy of financial reports 2A corporation has some rules: -separate legal entity (with state's permission) -continuous life and transferability of ownership -no mutal agency -limited liability of stockholders for the corporation’s debts -government regulation -organisation of a corporation (stockholders receive a vote for each share of stock, stockholders elect the members of the board of directors, directors appoint the officiers, chairperson, president) -corporate taxation (corporation is separate taxable entity) -separation of ownership and management -Business organisation: ® Sole proprietorship: single owner(proprietor), not separate taxable entities, small business . ip: more owners(partners), not taxed, professional organisation : separate legal entity(stockholders), separate taxable entity, small or multinational ® Limited Liability Company: members are liable for their actions, not taxed, alternative partnership ACCOUNTING EQUATION eZ ® Asset:economicreasources that are expected to benefit the business in the future Ex: cash, merchandise, inventory,furniture, land ® Liabilities: debts that are owed to creditors from business Ex: accounts payable, notes payable, salaries payable ® Equity: the owners’ claims to the asset of the business It represent the amount of assets that are left over after the company has paid its liabilities. It increases with owner contributions and revenues It decreases with expenses and distributions to owners 1. Contributed capital: owner contributions to a corporation (ex: common stock) 2. Retained earnings: equity earned by profitable operations thet is not distributed to stockholders -3 types of events that affect retained earnings: Revenues: amounts earned from delivering goods to customers (sales, service, rent) Expenses: the costs of selling goods (rent, salaries, utilities, advertising) Dividend: a distribution of a corporation’s earnings to stockholders (with cash or stock) -Net income: total revenues are greater that total expenses -Net loss: total expenses are greater than total revenues TRANSACTION -An accountant records only events that have dollar ammounts that can be measured reliably. -Transaction affect what a company has, owes, net worth. Look a transaction: ® Identify the accounts and the account type. ® Decide if each account increases or decreases. e Determine ifthe accounting equation is in bilance. -Accounts payable: a short term liability that will be paid in future. -Account receivable: the right to receive cash in the future for goods sold. FINANCIAL STATEMENTS -it had a heading with details about the reports (name of business, title of report, date of report) ADJUSTING ENTRY Adijisting entry: an entry made at the end of the accounting period that is used to record revenues to the period in which they are earned and expenses to the period in which they occur. They need to measure net income on income statement and assets or libilities on balance sheet. > Deferred revenues: Business earn the revenue only after completing the job. > Deferred expense: -Office supplie: -Depreciation: the process by which businesses spread the allocation of a plant asset's cost over its useful life. (as a business uses these assets, their value decline for ex. Property, plant, equipment)-(all plant asset are depreciated but not land because it not have a definitive estimable useful life). * Siilarity to prepaid expenses: prepaid expire within a year but plant assets remain useful for several years. (a depreciation method that allocates an equal amount of depration each year)-(residual value is the expected value of a depreciable asset at the endof its life). * Accumulated depreciation account: the sum of all the depreciation expense recorded to date for a depreciable asset. It increase over time. It is a contra-asset(an asset account with a normal credit balance so it has the opposite of normal balance and is listed after its related account in the chart of accounts) * Bookvalue:a depreciable asset's cost minus accumulated depreciation. It rapresent the cost invested in the asset that the business has not yet expensed. > Accrued expenses: -Accrued salaries expense -Accrued interest expense: interest on this note is payable one year later so records interest payable (AMOUNT OF INTEREST:PRINCIPALx INTEREST RATE x TIME) > Accrued revenues: It created an account receivable. ADJUSTED TRIAL BALANCE Adjusted trial balance: (lista p.167) ADJUSTING ENTRIES ON THE FINANCIAL STATEMENT If it isn't recorded, ledger accounts will be incorrect. Deferred expense: cash payment-asset (if not entry: Income=exp understated/net overstated ; Balance=as over/eq over) Deferred revenue: cash receipts-liability (if not entry: Income=rev under/net under ; Balance=liab over/eq under) Accrued expense: expense incurried but not paid-liability (if not entry: Income=exp under/net over ; Balance=liab under/eq over) Accrued revenue: revenue earned but cash has not yet been collected-asset (if not entry: Income= rev under/net under ; Balance= ass under/eq under) HELP BY WORKSHEET Worksheet: Account name: listed in the same order as the chart of accounts Unadjusted trial balance: copied from the ledger before any adjustment Adjustment: entries that were made on a date Adjusted trial balance: account balances after adjustments (D+D , C+C, C-D , D-C) PHON ALTERNATIVE DEFERRED * Deferred expense: expense account in the payment/prepayment to asset Prepaid Expense * Deferred revenue: revenue account in the receipt/liability to liability Unearned Revenue 4.PREPARE A FINANCIAL STATEMENT -We prepared the financial statement from the adjusted trial balance: 1. Income statement: revenues, expenses, net (Net income increases aernings, Net loss decreases earnings) 2. Statement of retained earnings: how they changed in a period due to net and dividends (Ens of earnings makes liability+equity=asset, and make the equation) 3. Balance sheet: asset, liability and equity of the last day -Classified Balance Sheet: a balance that places each asset and liability into a specific category. It is presented in -Report form: lists the assets at the top and liabilities and equity below -Account form: assets on the left and liabilities and equity on the right > Assetsare shows in order of liguidity (measure of how quickly an item can be converted to cash). © Current Asset: asset that will be converted to cash, sold, or used up in 12 months or in a normal operating cycle (time span when cash is used to acquire goods, goods are sold, business collects cash from costumers). -EX. Cash, accounts receivable, office supplies, prepaid expenses. © Long term Asset: asset that won't be converted to cash or used up in a operating cycle. -Long term investments: in bond or stocks (debt or equity securities) in which the company intends to hold the investment for longer than a year. -Property, Plant, Equipment: long-lived, tangible assets like land or buildings used in the operation of a business. -Intangible Asset: asset with no fisical form that is valuable because of the special rights it carries, for example patents or copyrights. > Liabilities are classified in order in which they must be paid. © Current Liability: it must be paid with cash or goods in a operating cycle. -EX. Salaries payable, interest payable, unearned revenue. © Long term Liability: it doesn't need to paid in a year -EX. Notes payable > Equity is the amount of assets that is left over afetr the corporation has paid its liabilities. It is in part transferred from the end eranings balance on the statement of earnings. It reflects the contribution of stockholders with common stock. THE WORKSHEET HELP IN PREPARING FINANCIAL STATEMENTS * Income Statement: it includes revenues and expense accounts that comes from the adjusted trial balance. Each column will be totaled. * Balance Sheet: it includes asset and liability accounts and equity accounts expect revenues and expenses that comes from the adjusted trial balance. Each column will be totaled. * Net: NET=TOTAL REVENUES-EXPENSES. The balance is in the debit column of income statement and in the credit of balance sheet section. If expenses exceed revenues, the result is net loss. CLOSING PROCESS -Closing Process: * Temporary Account: it relate to a particular accounting period and is closed atthe end of the period (revenues, expenses, dividends). * Permanent Account: it is not closed at the end of the period (asset, liability common stock, earnings account). -Steps for closing temporary accounts (net income): 1. Make revenue accounts equal zero via the income summary account so it is transferred to credit side. 2. Make expense accounts equal zero via the income summary account so it is transferred to debit side. Each expense will be credited and the Income credited for amount of expenses. 3. Make the income summary account equal zero via the retained earnings account so it transfer net to earnings account. 4. Make the duvidends account equal zero via the retained earnings account so it transfer dividends to the debit side of earnings account. -Steps for closing temporary accounts (net loss): 1. 1,2,4are similar 2. 3 is different. The closing entry to close Income summary would be a debit to Earnings and a credit to Income statement. Net loss decreases Earnings account. POST CLOSING TRIAL BALANCE -Post closing trial balance: It should include only permanent account. ACCOUNTING CYCLE -Accounting cycle: the process by which companies procedure their financial statement for a It takes place at two times: during the period (jounalise transactions and post to the account) and at the end (adjust the accounts, prepare the financial statements and close the accounts). (P.228 SCHEMA) CURRENT RATIO -Current ratio: it measures the company's ability to pay current liabilities from assets. For the rule of thumb, a strong current ratio is 1.50 and 1 is considerred low. MULTIPLE PERFORMANCE OBLIGATIONS RECORDED IN A PERPETUAL INVENTORY SYSTEM -Companies are required to identify the performance obligations associated with each contract. -A performance obligation is a contractual promise with a customer to transfer a distinct good or service. -When contracts involve multiple performance obligations, the company is required to allocate the transaction price to each performance obligation separately. MERCHANDISE INVENTORY TRANSACTIONS RECORDED IN A PERIODIC INVENTORY SYSTEM -Perpetual inventory systems are too expensive for smaller businesses. -Periodic inventory systems require physical counts of inventory to determine quantities on hand. -Merchandise Inventory is updated at the end of the period, during the closing process. 1. -The purchase of inventory is recorded in a Purchases Account and the payment in the Purchase Discounts. -Purchase discounts and returns and allowance are contra expense accounts. -The balance of Purchases is a gross amount because it not include subtraction fro discounts. Net purchases is the remainder after subtracting the contra accounts. 2. A sales of inventory involves recording only the Sales Revenue portion. Accounting for Sales discounts is the same but there are no entries for inventory. 3. The periodic inventory system requies also the cost of goods sold (sum of the amounts on the account) and it is posted on the income statement. 4. No need to record an adjusting entry for inventory shrinkage. Business makes a physical count of inventory at the end of the period. 6.MERCHANDISE INVENTORY -The accounting principles ( help accountants classify and report items on the financial statements) associated with merchandise inventory are: * The consistency principle: states that a business should use the same accounting methods and procedures from period to period. (If changes are made in accounting methods, these changes must be reported, generally in the notes to the financial statements.) * Thedisclosure principle: states that financial statements should report enough information for outsiders to make knowledgeable decisions about the company. (Information should be relevant and have faithful representation. Procedures are describe in footnotes to the financial statements) * The materiality concept: states that a company must perform strictly proper accounting only for items that are significant to the business's financial situation. (no report GAAP) * Conservatism: means business should report the least favorable figures in the financial statements when two or more possible options are presented. — Provide for all probable losses. — Record an asset at the lowest reasonable amount and a liability at the highest reasonable amount. — Record an expense rather than an asset. — Choose the option that undervalues your business. -Good inventory controls ensure that inventory purchases and sales are properly authorized and accounted for by the accounting system by: * Ensuring inventory is purchased with proper authorization. * Tracking and documenting receipt of inventory. * Recording damaged inventory properly. * Performing physical counts of inventory annually. MERCHANDISE INVENTORY COSTS DETERMINED UNDER A PERPETUAL INVENTORY SYSTEM * The inventory costing method: © The first-in, first-out method (FIFO): assumes the first units purchased are the first to be sold. = Costof Goods Sold is based on the oldest purchases. = EndingInventory closely reflects current replacement cost. = Costof goods available for sale is the total cost spent on inventory that was available to be sold during a period. © Last-in, first-out (LIFO) method: is the opposite of FIFO. As inventory is sold, the cost of the newest item in inventory is assigned to each unit as Cost of Goods Sold. = Costof Goods Sold closely reflects current replacement cost. = EndingInventory contains the oldest costing units. © The weighted-average method: computes a new weighted-average cost per unit after each purchase. = Weighted-average cost per unit is determined by dividing the cost of goods available for sale by the number of units available. = EndingInventory and Cost of Goods Sold are based on the same weighted-average cost per unit. © The specific identification method:_is an inventory costing method based on the specific cost of particular units of inventory. (for business that sell unique) FINANCIAL STATEMENTS AFFECTED BY USING DIFFERENT INVENTORY COSTING METHODS 1. Income statement * Costof Goods Sold is higher under LIFO than under FIFO when costs are rising. e Net income is lower under LIFO than under FIFO when costs are rising. © FIFO forattract investors. LIFO for pay lower income taxes. AVARAGE for a middle. 2. Balance sheet © When costs are increasing, FIFO inventory will be the highest, and LIFO will be the lowest. (Ingnoring the effects on the income statement and balance sheet when using a specific identification method.) MERCHANDISE INVENTORY VALUED WHEN USING THE LOWER-OFCOST-OR-MARKET RULE -The lower-of-cost-ormarket (LCM) rule: (Under IFRS the market value is defined as Net Realizable Value or its sales price. If the historical cost is higher than sales price, the investory must be written down.) -Market value: the current replacement cost. * Ifitislessthan the historical cost, business must adjust the inventory value. * Ifthe merchandise inventory's market value is greater than cost, we won't adjust it for the conservatism principle. THE EFFECTS OF MERCHANDISE INVENTORY ERRORS ON THE FINANCIAL STATEMENTS -An error in inventory can lead to errors in other related accounts. Because the ending inventory number is used in other computations, when ending inventory is incorrect, other numbers will also be incorrect in the next period, such as: * Cost of goods sold * Gross profit e Net income - An inventory error cancels out after two periods. The overstatement of cost of goods sold in Period 2 counterbalances the understatement for Period 1. * Period1overstated: P1: cost under, gross+net over /P2: cost over, gross+net under * Period2 understated: P1: cost over, gross+net under /P2: cost under, gross+net over INVENTORY TURNOVER -A high turnover rate indicates ease of selling. A low turnover rate indicates difficulty of selling. DAYS' SALES IN INVENTORY -A lower days' sales is preferable because it indicates that the company is able to sell the inevntory quickly. MERCHANDISE INVENTORY COSTS DETERMINED UNDER A PERIODIC INVENTORY SYSTEM -Under a periodic inventory system: (for small business) * Inventoryis not tracked in the accounting system continuously. * Thebeginninginventory balance is carried until the end of the period. * Purchasesare accumulated during the period. * Theending inventory balance replaces the beginning inventory balance. -First-In, First-Out (FIFO) Method: amounts for Cost of Goods Sold and Ending Inventory are always the same for FIFO perpetual and FIFO periodic. * Ending Inventory will be calculated using the newest items in inventory. *. Costof Goods Sold will include the oldest unit costs. -Last-In, First-Out (LIFO) Method: amounts for Cost of Goods Sold and Ending Inventory are usually different for LIFO perpetual and LIFO periodic. * Ending Inventory will be calculated using the oldest items in inventory. *. Costof Goods Sold will include the newest unit costs. -Weighted-Average Method: amounts for Cost of Goods Sold and Ending Inventory are usually different for perpetual and periodic weighted average. * Ending Inventory and Cost of Goods sold are calculated using the average cost per unit. 8.RECEIVABLES TYPES OF RECEIVABLES -Receivable: . lt occurs when a business sells goods or services to another party on account. It is an asset. — Acreditoristhe party who receives a receivable. — Adebtoris the party to a credit transaction who is obligated to pay later. RATIO TO EVALUATE BUSINESS PERFORMANCE The balance sheet lists assets in the order of liquidity. Balance sheet data is useful by showing the relationships among asset, liabilities and equity. * Theacid-test ratio: used to measure a company's ability to pay its current liabilities. RATIO=(CASH+SHORT+TIME INTESTMENTS+NET CURRENT RECEIVABLES)/TOTAL LIABILITIES -It is more stringent than the current ratio. -Quick assets are cash, cash equivalents, short-term investments, and net current receivables. -The higher the acid-test ratio, the more able the business is to pay its current liabilities. -In general, an acid-test ratio of 1.00 or higher is considered safe. * Theaccountsreceivable turnover ratio: measures the number of times the company collects the average accounts receivable balance in a year. -The higher the ratio, the faster the cash collections. * Days’ sales in receivables: indicates how many days it takes to collect the average level of accounts receivable. -The number of days’ sales in receivables should be close to the number of days customers are allowed to make payment when credit is extended. -The shorter the collection period, the more quickly the organization can use its cash. 9.PLAN ASSET, NATURAL RESOURCES, INTANGIBLES Property, plant, and equipment (PP&E): (Ex: Land, Buildings, Equipment, Furniture, Fixtures, Automobiles) -Plant assets are different from other assets because plant assets are long-term. -The cost of a plant asset is allocated to an expense over the years that the asset is expected to be used. -Depreciation: the allocation of a plant assets cost over its useful life (follows the matching principle) -A plant asset is recorded at historical cost (the amount paid for the asset) and this follows the cost principle, which states that acquired assets and services should be recorded at their actual costs. -The actual cost: the purchase price plus taxes, commissions, and other amounts paid to get the asset ready for its intended use. * Land:the cost includes the following amounts paid by the purchaser: purchase price, brokerage commission, survey and legal fees, delinquent property taxes, title transfer fees, cost of clearing the land. -Land improvements: separate plant asset that are subject to depreciation (ex: fencing, paving, sprinkler systems, lighting, signs) - Capitalized: an asset account was debited because the company acquired an asset. -Land and land improvements are two entirely separate assets: land improvements are depreciated. * Buildings: the cost depends on whether the company is constructing the building itself or is buying an existing one. * Machinery and Equipment: the cost include purchase price (less any discounts), transportation charges, insurance while in transit, sales tax and other taxes, purchase commission, installation costs, testing costs (prior to use of the asset). * Furniture and fixtures: the cost include purchase price (less any discounts), all other costs to ready the asset for its intended use. - Accountants divide spending on plant assets after the acquisition into two categories: * Capital expenditures increase the asset’s capacity or efficiency or extends the asset’s useful life. It includes extraordinary repairs, which are repairs that extend the asset’s useful life. -ex:major engine, modification for new use, addition to storage capacity (debit an asset) * Operating expenses (or Revenue expenditures) are expenses incurred to maintain the asset in working order. They are debited to an expense account. -ex: repair of transmission, lubrification, paint job, replacement (debit an expense) -Treating a capital expenditure as an expense or vice versa creates an error: * Overstated Repairs and understated net income on the income statements. * Understated retained earnings and truck account on the balance sheet. (Incorectly capitalizing an expens ecreates the opposite error) DEPRECIATION -Depreciation matches the expense against the revenue generated from using an asset. All assets, except land, wear out as they are used. Some assets may become obsolete before they wear out. An asset is obsolete when a newer asset can perform the job more efficiently. -Depreciation of a plant asset is based on three main factors: 1. Capitalized cost: all items paid for the asset to perform its intended function. 2. Estimated useful life: how long the company expects it will use the asset. It may be expressed in time and it is shorter than the actual life. It is estimated with the company's experience. 3. Estimated residual value: the expected value of a depreciable asset at the end of its useful life. It is the amount the ccompany expects to receive when the company disposes of the asset. It isn't depreciated because the company expects to receive the amount. -Mathods of depreciaton: (work diffrently in how they derive the yearly depreciation amount) 1. Straight-line method: allocates an equal amount of depreciation to each year. -Depreciation expense is reported on the income statement. Accumulation depreciation (sum of all expense recorded to date for the depreciable asset) is the contra asset that is reported in the balance sheet after the truck account. -As an asset is used, accumulated icreases and book value decreases -At the end of its estimated useful life, the asset is depreciated. -B0OK VALUE OF PLANT= DEPRECIABLE ASSET'S COST-ACCUMULATED DEPRECIATION (Generates reveue evenly over time/equal amount each period) 2. Units-of-production method: allocates a varying amount of depreciation each year based on the asset’s usage. -When a plant asset’s usage varies by year, the units-of-production method better matches expenses with revenues. (Depreciates due to wear and rather tan obsolescence/more usage causes larger d) 3. Double-declining-balance method: multiplies an asset’s decreasing book value by a constant percentage that is twice the straight-line depreciation rate. -An accelerated depreciation method expenses more of the asset’s cost near the start of an asset's life and less at the end of its useful life. The main accelerated method of depreciation is the double-declining-balance method. (Produces more revenue in early years/higher d in early years) -Partial-year Depreciation: when a business purchases an asset during the year (other than January 1), it should record depreciation for only the portion of the year that the asset was used in the operations of the business. The half-month convention is used for assets purchased during the month (Record depreciation for the entire month if the asset was purchased on or before the 15th. Do not record depreciation in the purchase month if the asset was purchased after the 15th.) -Changing Estimates of a Depreciable Asset: As the asset is used, the business may change its estimated useful life or estimated residual value. If this happens, the business must recalculate depreciation expense. (Current year and future depreciation expense are recalculated — Prior years are not restated). Property, plant, and equipment are reported at book value on the balance sheet. Companies may report plant assets as a single amount, with the cost and the related accumulated depreciation disclosed in the notes. DISPOSALS OF PLANT ASSETS Eventually, an asset wears out or becomes obsolete. Regardless of the type of disposal, there are four steps: 1. Bring the depreciation up to date. 2. Remove the old, disposed-of asset and associated accumulated depreciation from the books. 3. Record the value of any cash received (or paid). 4. Determine the amount of any gain or loss. The business then has several options: * Discardthe plant asset: dispose of the asset for no cash that is fully depreciated and has no residual value. The business simply removes the asset and contra asset Accumulated Deprreciation(2). No need to bring the depreciation up to date(1) because the asset is already depreciated. No cash is received or paid(3) and no gain or loss is recognised(4). -Loss on Disposal: a normal debit balance which includes gains and losses on the sale of plant assets. * Sellthe plant asset: -When a business sells an asset for book value, no gain or loss is recorded because the cash received is equal to the book value of the asset sold. -When a business sells an asset for more than its boook value, a gain is recorded. -When a business sells an asset for less than its book value, a loss is recorded. -Gain on Disposal: normal credit balance. * Exchangethe plant asset for another asset SO: the company has decreased net income over the life of the asset by recording depreciation expense each year prior to the disposal. When the company records the disposal, the company will record a gain, a loss or neither. Gain increase net and loss decrease net. Over the life of the asset, company records a net decrease in net equal to the net cost of the asset.The net cost of the asset is the amount paid for the asset when is was purchased less the cash received at disposal. 11. CURRENT LIABILITIES AND PAYROLL CURRENT LIABILITIES OF KNOWN AMOUNTS Liabilities: -They have three main characteristics: * Theyoccurasa result of a past transaction or event. * Theycreatea present obligation for future payment of cash or services. * Theyare an unavoidable obligation. They can split in two categories: * Currentliabilities: must be paid either with cash or with goods and services within one year or within the entity’s operating cycle. © Accounts payable: occur because the business receives the goods before payment has been made. © Salestax: is a current liability because the retailer must pay the state in less than one year. Companies collect sales tax and then forward it to the state at regular intervals. © Income tax payable: the amount of taxes that the corporation owes but has not yet paid. Calculated on a corporate tax return, referred to as a Form 1120. © Unearned revenue: arises when a business has received cash before providing goods or performing work. © Short-term note payable: represents a written promise by a business to pay a debt, usually involving interest, within one year or less. Businesses occasionally borrow cash from banks. A bank requires a business to sign a promissory note stating that the business will pay the principal plus interest at a specified maturity date. * Long-termliabilities: do not need to be paid within one year or within the entity's operating cycle. When a long-term debt is paid in installments, the business reports the current portion of notes payable as a current liability. The remainder is classified as long- term. No journal entry is needed to reclassify the current portion. RECORD PAYROLL -Payroll: the major expense that creates liabilities for a business. Types: * Salary: paid in annual, monthly or weekly rate. e Compensation: paid in hourly rate. * Commission: paid asa percentahe of the sales amount. * Bonus: paidd over and above base salary. * Benefits: extra compensation. -Two pay amounts are important for accounting purposes: * Gross pay: the total amount of salary, wages, commissions, and bonuses earned by an employee during a pay period. * Net pay:the amount an employee gets to keep. Net pay is also called take-home pay. -Employee Payroll Withholding Deductions: * Required Deductions: State and local income tax, Social Security tax, Other deductions required by state or local law © Withholding for Employee Income Tax: the income tax deducted from gross pay is called income tax withholding. The amount withheld depends on the employees gross pay and the withholding allowances claimed. (Number of children and unemployed spouse may lower the amount of tax withheld.) © Withholding for Employee Social Security Tax: the law requires employers to withhold Social Security tax from employees’ paychecks. Social security tax contributes to payment for: Pensions, Disability and illness, Accidents on the workplace, Unemployment * Optional Deductions: Insurance premiums, Retirement plan contributions, Charitable contributions © Optional Withholding Deductions: some companies withhold payroll deductions and then pay designated organizations according to employee instructions. Examples include: Insurance premiums, Retirement savings, Union dues, Gifts to charities -Employers must pay payroll taxes: these taxes are not withheld from employees’ gross earnings but instead are paid by the employer. They are additional expenses the employer must compute, on top of gross salaries. CURRENT LIABILITIES THAT MUST BE ESTIMATED -A business may know that a liability exists but not know the exact amount. It must estimate the amount of the liability and report it on the balance sheet. * Warranties: an agreement that guarantees a company's product against defects. The time period of warranties varies by product and company. The matching principle requires businesses to record Warranty Expense in the same period that the company records the revenue related to the warranty. The expense is incurries when the company makes a sales and its estimated cost is 3% of sales. Costumers that make claims must be honored through the warranty offered by the company. CONTINGENT LIABILITIES -Contingent liability: a potential liability that depends on a future event. For a contingent liability to be paid, some event must happen in the future. How businesses record contingent liabilities is based on the likelihood of events occurring in the future: * Remote: little chance, don't disclose (ex: frivolous lawsuit) * Reasonably possible: greater chance, describe in a note to statement (ex: significant law) * Probable:ifthe amountofthe expense or loss cannot be estimated, describe in a note; if the ammount of the expense or the loss can be estimatedì, record a liability. (ex: warranty) 12. LONG-TERM LIABILITY LONG-TERM NOTES PAYABLE AND MORTGAGES PAYABLE -Long-term liabilities: These liabilities are reported in the longterm liability section of the balance sheet. -Common long-term liabilities: * Long-term notes payable: An amortization schedule details each loan payment's allocation between principal and interest and the beginning and ending balances of the loan. Interest is computed as beginning balance multiplied by interest rate multiplied by time. Interest expense decreases each year, as this expense is based on the principal, which decreases with each installment payment. -The principal payment stays the same and the total ones changes. The interest change. * Mortgages payable: long-term debts that are backed with a security interest in specific property. Mortgages payable are similar to longterm notes payable except that mortgages payable are secured with specific assets, and long-term notes payable are not. The total ones has a portion due in one year and a portion due in more than one year from the balance sheet. -The principal payment varies and the total ones stays the same. The interest change. BONDS -Bonds payable: . By issuing bonds, companies can borrow dollars from investors rather than depending on a loan from one single bank. Each investor can buy a specified amount of the company's bonds. Each bondholder gets a bond certificate that shows the company's name. -Bond certificate has: * Facevalue: the amount a borrower must pay back to the bondholders on the maturity date. * Maturity date: the date on which the borrower must pay the principal amount to the bondholders. * Statedinterest rate: the interest rate that determines the amount of cash interest the borrower pays and the investor receives each year. -Types of Bonds: * Termbonds: bonds that all mature at the same time. * Serial bonds: bonds that mature in installments at regular intervals. * Secured bonds: bonds that give bondholders the right to take specified assets of the issuer if the issuer fails to pay principal or interest. * Debentures: unsecured bonds backed only by the creditworthiness of the bond issuer. -Bond prices: a bond can be issued at any price agreed upon by the issuer and the bondholders. A bond can be issued at face value, a discount or at a premium. The issue price of a bond doesn't affect the required payment at maturity. The most known bond market is the NYSE. * Adiscounton bonds payable: occurs when the issue price is less than face value. * Apremiumonbonds payable: occurs when the issue price is above face value. -Money earns interest over time: * Timevalue of money: the recognition that money earns interest over time. * Present value: the amounta person invests now to receive a greater amount in the future. * Future value: the value of an investment at the end of a specific time frame. -Bond interest rates: * Thestatedrate:the rate printed on a bond that the borrower pays each year and it doesn't change. * The market interest rate (effective interest rate): the rate that investors demand to earn for loaning their money. It varies constantly. -difference between lower price and face value: discount - difference between higher price and face value: premium -Issuing Bonds Versus Issuing Stock: Borrowing by issuing bonds payable carries a risk: The company may be unable to pay offthe bonds and the related interest. However, debt is a less expensive source of capital than stock and does not affect the ownership percentage. Financial leverage: earning more income on borrowed money than the related interest expense. Without cash to make the interest payment, a company decleares bankruptcy. BONDS PAYABLE ACCOUNTED FOR USING THE STRAIGHT-LINE AMORTIZATION METHOD -Bonds are a long-term liability. Journal entries are required to record the issuance of bonds at: * Facevalue: starting record cash(debit)/bonds payable(credit), then record semiannual interest expense(debit)/cash(credit). * Discount: record cash+discount on bond(debit)/bonds payable(credit) © Discount on Bonds Payable: a contra account to Bonds Payable. © CARRING AMOUNT OF BONDS=BOND PAYABLE-DISCOUNT/+PREMIUM ACCOUNT EFFECTIVE INTEREST AMORTIZATION METHOD -Effective-interest amortization method: computes interest expense based on the carrying amount of the bond and the market rate at issuance. * Fora bonddiscount: the excess of the calculated interest expense over the interest payment. The interest expense is calculated using the carrying amount of the bonds and the market interest rate. * Fora bond premium: the interest expense is calculated using the carrying amount of the bonds and the market interest rate, similar to the method used for discounted bonds. 13. SHAREHOLDERS EQUITY A CORPORATION -Corporation: a business organized under state law that is a separate legal entity. Corporations dominate business activity in most of the world. Characteristics: * Separatelegalentity *. Numberofowners * No personal liability ofthe owner(s) * Lack of mutual agency * Indefinite life * Taxation * Capital accumulation Advantages: * Raise more money than partership * Continuous life * Transfer is easy * No mutual agency among stockholders and corporation * Stockholders have limitadet liability Disadvantages: * Governmentregulation is expensive * start-upcostare high * Doubletaxation * Ownership and management are separated. -Authorized stock: the maximum number of shares of stock a corporation may issue. -Issued stock: stock that has been issued but may or not be held by stockholders. -Capital stock: a stockholder’s ownership. -Categories of stocks: * Authorized: maximum nurber of shares that can be issued. * Authorised and Issues: may or not be held by stockholders. * Authorised, Issues and Outstanding: held by stockholders. -Stock certificate has: company name, stockholder name, number of shares owned -A stockholder has four basic rights: * Vote: each share of basic ownership in the corporation carries one vote. * Dividends: stockholders receive a proportionate part of any dividend declared and paid. * Liquidation: stockholders receive their proportionate share of any assets remaining after liquidation. * Preemptive right: stockholders have a right to maintain their proportional ownership. -Corporations issue different classes of stock: e Commonstock: represents basic ownership. There must be at least one voting class of stock. There is no limit as to the number of classes. Each class af stock has a separate account in the ladger. * Preferredstock: gives owners certain advantages over common stock for exemple right to receive dividends and assets before the common stockholders , the amount of preferred dividend is printed on the certificate, preferred stockholders take less investment risk. -Stock may carry a par value or may be no-par stock: * Parvalue: an aount assigned by a company to a share of its stock. The par value of preferred stock may be higher per share than common stock par values. * No-parvalue: stock that has no amount assigned to it. It has the advantage of having no confusion between the par value and the market value. * Stated value stock: no par stock that has been assigned an amount similar to par value. It rapresent the minimum amount that the corporation can issue the stock for. -Stockholders' equity: a corporation’s equity. -The two basic sources of stockholders' equity are: * Paid-in capital: represents amounts received from stockholders for stock. * Retainedearnings: equity earned by profitable operations that is not distributed to stockholders. THE ISSUANCE OF STOCK -Companies raise capital by issuing stock. A company can sell its stock directly to stockholders, or it can use the services of an underwriter (a firm that handles the issuance of a company's stock to the public, usually assuming some of the risk by agreeing to buy the stock if the firm cannot sell all of the stock to its clients). Stocks of public companies are bought and sold on a stock exchange. -Issue price: the amount a corporation receives from issuing stock. *ISSUING COMMON STOCK AT A PREMIUM=ISSUE PRICE-PAR VALUE (the amount above par at which a stock is issued) © Paid in Capital in Excess of Par: amounts received from stockholders in excess of par value. It is an equity account. TREASURY STOCK -Treasury stock: a company's stock that it has previously issued and later reacquired. -Companies purchase treasury stock to: * Increase net assets by buying low and selling high * Supportthe company's stock price * Avoidatakeover *. Reward valued employees with stock -The basics of accounting for treasury stock: * The Treasury Stock account has a normal debit balance. Treasury Stock is a contra equity. * Treasury stock is recorded at cost, without reference to par value. * The Treasury Stock account is reported beneath Retained Earnings on the balance sheet as a reduction to equity. -Retirement of Stock: * Acorporation may retire its stock by canceling the stock certificates. * Retiredstock cannotbe reissued. * To repurchase previously issued stock for retirement, we debit the stock accounts and credit Cash. © This removes the retired stock from the company's books. © It also reduces total assets and total stockholders’ equity. DIVIDENDS AND STOCK SPLITS -A profitable corporation may make distributions to stockholders in the form of dividends. -Dividends can be paid in the form of cash, stock, or other property. -Legal capital: the portion of stockholders’ equity that cannot be used for dividends. - Three dividend dates are relevant: * Declaration date: The board of directors announces the intention to pay the dividend, and a liability is created. * Dateofrecord:the date the corporation records the stockholders that will receive dividend checks. * Paymentdate:the date the dividend is paid to the stockholders. Preferred stock dividend in arrears: a dividend that has not been paid for the year. Preferred stock can be: * Cumulative preferred stock: Preferred stock whose owners must receive all dividends in arrears plus the current year dividends before the corporation pays dividends to the common stockholders * Noncumulative preferred stock: Preferred stock whose owners do not receive passed dividends -Stock dividendi: a distribution of a corporation’s own stock to its shareholders. Stock dividends have the following characteristics: * They affect only stockholders’ equity accounts. * They haveno effect on total stockholders’ equity. * They haveno effect on assets or liabilities. -A company issues stock dividends in order to: * Continue dividends but conserve cash * Reduce the market price per share of its stock *. Reward investors -Ihere are three dates for a stock dividend: Declaration date — Record date — Distribution date * Asmall stock dividend is less than 20% to 25% of issued and outstanding stock. © Itis debited forthe market value of the dividends shares. © Common stock dividend distributable is credited for the dividend par value. © Paid-In capital in excess of par is credited for the excess. * A large stock dividend is greaterthan 20% to 25% of issued and outstanding stock. -Stock split: an increase in the number of issued and outstanding shares of stock coupled with a proportionate reduction in the par value of the stock. * Astocksplit increases the number of issued and outstanding shares of stock. * Astocksplit decreases the par value and the market value per share, whereas stock dividends do not affect par value per share. -The split is recorded in a memorandum entry, an entry in the journal that notes a significant event but has no debit or credit amount. TABELLA STOCK VALUE * Market value: Price at which a person can buy or sell a share. Most important to shareholders. * Liquidation value: Amount guaranteed to preferred if company liquidates. * Book value: Amount of equity per share of stock Subtract preferred equity from total equity to compute book value of shares.