CH 9 Contingent Liabilities Potential liability that depends on future outcome of past events Obligations due within one year or within the operating cycle if longer than a year A Current liabilities of known amount include 1 Accounts payable 2 Short term notes payable 3 Sales tax payable 4 Accrued liabilities 5 Payroll liabilities 6 Unearned revenues 7 Current portion of long term debt Short term notes payable Due within one year Used to borrow cash or purchase asset Company must accrue interest expense and interest payable at the end of the period Accrued Liabilities Result from expenses incurred but not yet paid Salaries and Wages Payable Interest Payable Income Taxes Payable Payroll Liabilities called employee compensation Major expense of most companies Many different forms Salary Wage Commission Bonus Unearned Revenues deferred revenues and revenues collected in advance Business receives cash before earning revenue Results in a liability Obligation to provide goods or services Current Portion of Long Term Debt current maturity or current installment Amount of principal payable within one year B Current Liabilities That Must Be Estimated Estimated Warranty Payable Warranty period may extend for 90 days to a year Company must record warranty expense in same period that business records sales revenue expense recognition principle Contingent Liabilities Potential liability that depends on future outcome of past events Accounting could be Accrue Disclose or Neither if unlikely 1 Accrue if the loss expense is probable AND the amount can be reasonably estimated 2 Disclose if it is reasonably possible less than probable but more than remote that a loss expense will occur 3 If the loss expense is unlikely to occur there is no need to report or disclose Interest Rates Bond Prices Bonds always sold at market price Bond s present value Two interest rates set bond price Stated interest rate coupon rate Market interest rate effective interest rate Stated rate usually differs from market rate Types of Bonds Term Secured Serial Unsecured Three main ways to finance operations 1 Retained earnings 2 Issuing equity stock 3 Issuing bonds or notes payable Ch 10 Stockholders Equity The main purpose of Stockholders Equity is to report reasons for changes in the equity account Paid in Capital contributed capital Amount of equity stockholders have contributed Retained Earnings Increased by earnings through profitable operations and Reduced by dividends declared Classes of Stock Common Basic form of stock Has four basic rights Shareholders benefit most if corporation succeeds Take more risk Preferred Advantages Receive dividends first Receive assets first in liquidation Shareholders earn a fixed dividend Few corporations issue Par Value and No Par Arbitrary amount assigned to share of stock Usually set low to avoid legal issues No par stock May have a stated value Authorized Maximum number of shares the company can issue under its charter Issued Number of shares the company has issued to its stockholders Outstanding Number of shares that stockholders own number of shares in the hands of stockholders TREASURY STOCK Treasury Stock called contra stockholders equity Increases assets and equity Issued shares reacquired by the company Reasons Make shares available for employee stock purchase plans Plan to buy low and sell high Avoid takeover Increase earnings per share Use in share repurchase program How Is Treasury Stock Recorded Recorded at cost Not par value Classified as a contra stockholders equity account Debit balance ACCOUNT FOR RETAINED EARNINGS DIVIDENDS AND SPLITS Retained Earnings Net income Less net losses Less declared dividends Accumulated over corporation s lifetime Dividends Distribution by a corporation to its stockholders Usually take one of three forms Cash Stock or Noncash assets Company must have both Enough Retained Earnings to declare the dividend Enough Cash to pay the dividend Board of directors has authority to declare a dividend Company not obligated to pay dividend until declared Three relevant dates Declaration date the date when a cash dividend becomes a legal obligation Date of record no entry Payment date Stock Dividends Increase stock account and decrease Retained Earnings Total equity is unchanged Size of stock dividend 25 or less recorded at market value Greater than 25 recorded at par value Stock Splits Increase in shares with a proportionate reduction in par value Decreases market price of shares No accounts affected Statement of Cash Flows Financing transactions that affect both cash and equity fall into three main categories Issuance of stock Treasury stock Dividends Chapter11 Operating and Other Expenses Largest operating expenses include salaries wages utilities and supplies The lower the cost relative to sales the more efficiently management is operating the business Cutting costs can either help or hurt the bottom line Operating Income Earnings Improving operating earnings in relation to net sales reflects increasing earnings quality Operating income is a function of all of its individual ingredients Sales revenue Cost of goods sold Gross margin gross profit Operating expenses Earnings per share EPS Earnings per share of common stock Preferred stockholders have first claim on dividends Preferred dividends Must be subtracted from net income and all income subtotals starting with income from continuing operations to compute EPS Not subtracted from discontinued operations or extraordinary items Dividend Yield on Common Stock Dividend per share of common stock Market price per share of common stock Book Value Per Share of Common Stock Total stockholders equity Preferred equity Number of shares of common stock outstanding basic Management s Responsibility Issues report on and declares responsibility for internal control over financial reporting States it has conducted an assessment of internal controls based on developed frameworks Internal controls determined to be effective Internal controls audited by outside auditors Earnings Per Share Dilution When preferred is converted to common EPS is diluted reduced Corporations with complex capital structures present two sets of EPS figures 1 Basic EPS Based on actual outstanding common shares 2 Diluted EPS Based on outstanding common shares plus additional shares that can arise from conversion of preferred stock into common stock or other dilutivesecurities Auditor s Report CPAs examine financial statements of publicly