ACCTG 211 1st Edition Exam 2 Study Guide Lectures 12 19 ACCTG 211 STUDY GUIDE Lecture 12 I Stockholder s Equity a Consists of two parts i Contributed Capital 1 Par or stated Value of Stock 2 APIC Additional Paid in Capital a Amount over par value of stock b Also called paid in capital in excess of par value PICEPV ii Retained Earnings 1 Beginning R E Net income Dividends Ending R E II Sources of Paid in Capital a Outstanding b Issued i If Issued Outstanding 1 Treasury stock exists ii If Issued Outstanding 1 Treasury stock does not exist c Authorized d Generally i Authorized Issued Outstanding e Limit i Authorized Issued Outstanding III Common Stock a Basic voting stock of the corporation b Initial Public Offering i First time stock is offered for sale to the public IV Par Value and Accounting a Par Value is the nominal value of a stock i Has no correlation with market value b Serves as the basis for legal capital i The amount the company must have invested in the business 1 Cannot be distributed to shareholder s a in order to protect creditors V Issuance of Common Stock a When a stock is issued i Credit C S ii Debit Cash 1 of shares X par value b If the stock is being sold for more than par value i Credit APIC ii Debit Cash 1 of shares X APIC Value Par Value VI Preferred Stock a Preferential treatment for dividend and liquidation distribution b Cumulative i Preferential treatment extends to past dividends if dividends were not fully distributed to preferred shareholder s in prior periods ii EX A company has 1 000 shares at 100 par 6 cumulative preferred stock outstanding and pays 20 000 in dividends in 2014 and they did not declare dividends in 2013 1 1 000 X 100 X 06 6 000 a Preferred stock holders will get 6 000 for 2014 and another 6 000 from 2013 because it is cumulative b Common stock holders will get the remaining 8 000 c Non Cumulative i No such preferential treatment exists ii Ex Previous Example but non cumulative stock 1 Preferred stock holders will get 6 000 and common stock holders will get the remaining 14 000 VII Accounting for Cash Dividends a Dividends are not expenses but CONTRA EQUITY b Dividends are paid to outstanding shares only c To pay a cash dividend the company must have i Retained earnings ii Cash iii No outside restrictions 1 Legal etc d Important dates of Cash Dividends i Declaration Date 1 Debit Dividends 2 Credit Dividends Payable ii Date of Record 1 No Journal Entry iii Date of Payment 1 Debit Dividends Payable 2 Credit Cash VIII Treasury Stock a A corporation s own stock that was issued but has been reacquired and is still being held by the corporation b T S is a contra equity account c T S is recorded at cost IX Accounting for Treasury Stock a Reacquiring Common Stock i Debit Treasury Stock ii Credit Cash b Sell Treasury Stock Above Cost i Debi Cash ii Credit Treasury Stock iii Credit APIC Treasury Stock X Stock Splits vs Stock Dividends a Stock Split i Changes the number of outstanding shares with an inverse effect on both the par value and the market price 1 No journal entry and no change in stockholder s equity ii EX 1 Before 1 000 stocks at 4 par value 2 After 2 000 stocks at 2 par value 3 This would be a forward split if it went the opposite way it is a reverse split b Stock Dividends i More stock is being issued ii Essentially reallocated R E to common stock 1 Debit R E 2 Credit Common Stock 3 Credit APIC Par Value Lecture 13 I Example of Unit 6 a Abby Music Company had the following stockholders equity section on its December 31 2011 balance sheet i Preferred stock 150 par 6 cumulative ii Common stock 2 par 2 250 000 400 000 iii Common stock APIC 1 020 000 iv Retained Earnings 5 325 000 v Total Shareholders Equity 8 995 000 b Required C S Common Stock P S Preferred Stock i C S of shares total value par value 200 00 ii P S of shares total Value par value 15 000 c How many shares of C S are currently issued and outstanding i 200 000 issued and outstanding because there is no treasury d How many shares of P S are currently issued and outstanding i 15 000 issued and outstanding because there is no treasury e What was the average selling price of a share of C S i C S APIC Total Value C S Total Value of C S shares 1 7 10 f There is a 2 1 Stock split for C S what is the new equity section look like i There are now 400 000 shares for a par value of 1 g On January 1 2012 Abby declared and paid a 10 common stock dividend when the market value of each share of common stock was 5 What does the new equity section look like i This means that 20 000 shares were issued because 200 000 X 10 at a par value of 5 1 Debit R E Earnings 100 000 2 Credit C S Par 40 000 3 Credit C S APIC 60 000 Lecture 14 II Statement of Cash Flows Basics a Cash comes from i Operating 1 Income Statement ii Financing 1 Long Term Liabilities and Equity iii Investing 1 Long Term Assets III Two Different Methods of Preparing SOCF a Direct Method i CFFO is the difference between cash inflows and cash outflows related to operating activities b Indirect Method i CFFO can be derived by reconciling accrual based net income to cash based CFFO ii More often used IV Direct Method of SOCF a Find Cash Collections i Beginning A R Credit Sales Cash Collections Ending A R b Determine Purchases i Beginning Inventory Purchases COGS Ending Inventory c Determine Cash Payments i Beginning A P Purchases Cash payments Ending A P d Determine Expenses i Check to see if there are any accrual accounts related to selling expenses 1 If not it was paid entirely in cash ii Figuring Out Accrual Accounts 1 EX Prepaid accounts a Beginning Prepaid account Prepayments Expense Ending Prepaid Account 2 EX Accounts Payable a Beginning A P Expense Cash Payments Ending A P V Strategies for either method a Depreciation i Just account for the cash associated with the sale 1 NOT the gain or the loss b Dividends i Beginning R E Plus Net Income Minus Dividends Equals Ending R E Lecture 15 VI Indirect Method a Not cash flows reconciling items VII Four Steps for Indirect Method Operating Section a Step 1 Start with Net Income accrual based b Step 2 Add Back Depreciation Expense or Amortization Expense or Depletion Expense i eliminate the effect of depreciation c Step 3 Add Back Loss or Back out Gain on Sale of L T …