Financial Accounting Final Kelly Walker Mississippi State University

2-5 years

long-term notes usually have liabilities that last how long?

principal

flows from the lender to a company

payments

flow from the company to the lender

line of credit

preapproved financing arrangement with a lending institution in which a business can borrow money up to the approved limit by simply writing a check

amortization

systematic and periodic allocation of the costs of intangible assets to expense of their useful lives

amortization

periodically transferring the discount on a note or a bond to interest expense

installment notes

obligations that require regular payments of principal and interest over the life of the loan

lines of credit

Normally used for short-term borrowing to finance seasonal business needs

principal

Long-term borrowing of a large sum of money

bond certificate

Debt security used to obtain long-term financing in which a company borrows funds from a number of lenders, called bondholders; usually issued in denominations of $1,000.

bondholder

the party buying a bond (the lender or creditor)

stated interest rate

rate of interest specified in the bond contract that is the percentage of face value used to calculate the amount of interest paid in cash at specified intervals over the life of the bond

secured bonds

Bonds that have specific assets of the issuer pledged as collateral

unsecured bonds

Bonds backed only by the issuer's credit standing; also called debentures.

semiannually

when is interest on a bond paid?

principal x stated rate x time

how do you compute interest paid?

as a percentage of the face amount

how are bonds quoted?

unpaid principal balance x interest rate

how do you calculate the amount applied to interest?

cash payment - amount applied to interest

how do you calculate amount applied to principal?

unpaid principal balance from ` - amount applied to principal

how do you calculate unpaid principal balance?

face value

A bond issued at 100 would be considered what?

a premium

A bond issued at greater than 100 would be considered what?

a discount

A bond issued at less than 100 would be considered what?

bond issue date

the bond holders give the company the market value, or selling price of the bond issue

after the bond issue date

At regularly scheduled dates during the life of the bond, the company pays the bondholders interest

on the bond maturity date

the company pays the bondholder investors the bond's face value

Longer term to maturity than notes payable issued to banks;

Bond interest rates are usually lower than bank loan rates

What are some advantages of bonds?

term bonds

mature on a specified date in the future

serial bonds

mature at specified intervals throughout the life of the total issue

convertible

bonds that bondholders can convert to ownership interests in the corporation

callable

bonds that the issuer, at its option, may pay off prior to maturity

term and serial;

callable and convertible;

secured and unsecured

What are the characteristics of bonds

Cash

Bonds Payable

what are the entries to record a bond issues

Interest Expense

Cash

How do you record a bond interest payment

Bonds Payable

Cash

How do you record a principal repayment of a bond?

Cash-Debited

Discount on bonds payable-Debited

Bonds Payable-Credited

How do you record a bond issued at a discount?

operating

recording an interest payment on a bond is classified as what kind of activity

financing

recording a principal repayment on a bond is classified as what kind of activity

face value

amount to be paid to the bondholder at bond maturity; base for computing periodic cash interest payments

carrying value

face amount of a bond liability less any unamortized bond discount or plus any unamortized bond premium

discount / years

straight line method formula

bond payable amount plus premium or minus discounts

how do you calculate varying value?

discount

if stated rate is less than market rate

premium

if stated rate is larger than market rate

bond redemptions

companies may redeem bonds with a call provision prior to the maturity date

financial leverage

principle of increasing earnings through debt financing by investing money at a higher rate than the rate paid on the borrowed money

(net income + interest expense + income tax expense) / interest expense OR EBIT/ interest expense

how do you calculate the times interest earned ratio?

earnings before interest and taxes

what does EBIT stand for?

Sole Proprietorship

A business owned by one person

partnership

a business owned by two or more people

corporation

a separate legal entity created by the authority of a state government

large, publicly-traded corporations

what kinds of corporations are more heavily regulated

Sole Proprietorships and partnerships

few laws govern the operations of what?

corporations

what is subject to regulations?

SEC Acts of 1933 and 1934;

Sarbanes-Oxley Act of 2002;

exchange listing requirements

what regulations do corporations have to follow

Separate legal entity;

Limited liability of stockholders;

Continuous life;

Easily transferable ownership rights;

Ability to raise capital

Advantages of corporations

Governmental regulation;

Corporate double taxation

disadvantages of corporations

stockholders;

board of directors;

president;

Vice Presidents (production, marketing, finance, personnel)

What is the corporate management structure?

1. Owner/investor contributions

2. Retained earnings

The ownership interest (equity) in a business is composed of:

par value

arbitrary value assigned to stock by the board of directors; like stated value, designates legal capital

legal capital

amount of assets that should be maintained as protection for creditors; the number of shares multiplied by the par value

no-par stock

States do not require a par value to be stated in the charter

authorized stock

number of shares of stock a corporation has state approval to issue

issued stock

stock a company has sold to the public

outstanding stock

Shares of stock a corporation has issued that are still owned by outside parties, i.e., all stock that has been issued less any treasury stock the corporation has repurchased.

treasury stock

Stock previously issued to the public that the issuing corporation has bought back. Contrast with outstanding stock.

market value

the amount that each share of stock will sell for in the market

cumulative

most preferred stock is what?

1. Buy and sell stock

2. Share in the distribution of profits

3. Share in the distribution of assets in the case of liquidation

4. Vote on significant matters that affect the corporate charter

5. Participate in the election of directors

common stockholder have the right to:

dividends in arrears

must be paid before dividends may be paid on common stock

undeclared dividends

from current and prior years do NOT have to be paid in future years

Cash-D

Common Stock, par-C

Paid-in-capital in excess of par, common-C

Entries for issuing par value stock

contra-equity account

how is treasury stock recorded?

Employee Stock Option Plans (ESOPs);

Preparation for a merger;

To increase earnings per share;

Supporting the stock price;

To avoid a hostile takeover

Why would a company buy its own stock?

declaration date

the date on which the board of directors declares a dividend; record liability

date of record

date that establishes who will receive the dividend payment

payment date

date on which the dividend is paid; record payment of cash

date of record

which cash dividend date requires no journal entry

- No change in total Stockholders' Equity

- No change in par value

- All stockholders retain the same percentage of ownership

Distribution of additional shares of stock to stockholders results in:

stock split

Corporate action that proportionately reduces the par value and increases the number of outstanding shares; designed to reduce the market value of the split stock.

stock dividends

proportionate distribution of additional shares of the declaring corporation's stock

Price/Earnings (P/E) Ratio

what is the most commonly reported measure of a company's value

market price / annual earnings

how do you calculate the P/E ratio?