ACCT 200 1st EditionExam 3 Study Guide: Lectures: 16-22Lecture 16current/short-term liabilities due within a yearNotes payable – borrow money from bank etc, sign document, create interest expenseinterest rates are ALWAYS annual!line of credit more expensive because its on-demandfica tax=gross payroll x fica rateSales tax collected is not revenue, it’s a liability – government collects monthly usually; sometimes quarterlyContingent liabilities:Example: slip on wet floor at Mcdonald’s and break your leg and sue; probable they will lose lawsuit so they have to record the liability and disclose the estimable amountContingent gains:Example: might win money from suing but unsure – don’t record contingent gains until we get the moneyWarranties:company must record warranty expense in the same period as the sale!!!!!!Warranty is expense and liabilityLecture 17Watch wording: annuity/lump sum, future or presentBond: bond issuer borrows money and regularly pays the interestSold in $1000 incrementsBonds spread the risk Lecture 18Read and know different types of bond characteristics – will be definition questions on examUnsecured bonds are riskier (than secured bonds) and will have higher interest ratesCallable bonds – less interest; can pay anytime as interest rates changeConvertible bonds – lender can’t force shareholders to convert bonds to stockMarket rate of interest determines if a bond is sold at face value or a premium or discountInterest payment is based on stated or contract rate of interestUse the tables based on the market rate of interestConcept is when you have a low interest rate you can offer your bond at a premium so that effectively the bondholders earn 8% because of your discountE 9-4Face value of bond (principal)=25,000,000Market rate of interest=5% annually (2.5% per half year)Contract/stated rate of interest=6% annually (3% per half year)Semi annual interest, 10 year bond (20 periods because it’s 2 payments per year)2 steps to value the bond:1. Figure out interest payment amountFace value*contract rate (1/2 rate)25,000,000*.03=750,0002. Take present value calculations25,000,000*PV table 2, 2.5%, 20 periods=25,000,000*.61027750,000*PVA (table 4) 2.5%, 20 periods=750,000*15.58916Add together to get total present value of the bond (cash to be received by borrower)Annuity – equal annual or semiannual paymentsTables on test will have the same titles and be in the same order as they are in the bookIf market rate of interest and contract/stated rate are equal, then total present value=face valueBond issuer is borrowerAlways use table at market rate of interest for step 2; contract rate to calculate interest paymentLecture 19Installment notes:Make regular installment payments like car loanEach month pay 1/12 of annual interest rateSell stock to investors – don’t owe them anythingSelling bonds creates debtWhy wouldn’t a company always sell stock? More stock you sell, more owners, mess up earnings per share ratio which makes your company not look as goodLecture 20private corporations – can’t become a shareholder just by contacting a broker like you can for public corporationsright to receive dividends – only if company declares themknow corporations advantages and disadvantagesShareholders aren’t affected if a corporation is suedBanks are less likely to lend to a sole proprietorship (hardly ever)know definitions of types of common stockBE 10-8company has 1000 shares issued to shareholdersDuring the year, company repurchases its own stock – 100 shares at $28Record transaction (should know it’s a treasury transaction)Treasury stock 2800 cash 2800Effect on accounting equation:Decreases asset (cash), decreases equityTreasury stock doesn’t issue dividendsaccumulated deficit=negative retained earningstreasury stock – balance sheetNotes payable – balance sheetInterest expense – income statementDividends – only found in one place (statement of stockholder’s equity)Cash – balance sheetDividends payable – balance sheetInterest income – income statementDividends: usually paid in cash but don’t have to be; can be property occasionally Have to give investors the same amount of money per share3 important dates:Declaration (set up liability), record (no journal entry), payment (pay off liability)stock split: changes par value of stock, changes number of shares issued and outstanding5 for 1 split:100,000 shares, $5 par valueAfter split: 100,000*5=500,000 shares/5=$1 par value Lecture 21journal entry for stock dividends:Dr dividends Cr common stockequity section on balance sheet shows ending balance as of the date of the balance sheetStatement of stockholder’s equity starts with beginning balance and shows the activity for the year and get to the ending balanceE 10-12transaction – how does it change my assets, liabilities, and equity?Issue common stock – cash increase (asset), equity increaseIssue preferred stock – cash increase (asset), equity increasePurchase treasury stock – cash decrease, equity decreaseDeclare a cash dividend – increase dividends payable (liability), decrease retained earnings (equity)Pay cash dividend – decrease cash, decrease dividends payableStock dividend – no change in the end (retained earnings decreased and common stock increased)return on equity=net income/average stockholders’ equityBE 10-159043 sales220 net income2219 Beginning equity1874 Ending equityAverage equity=(2219+1874)/2=2046.5220/2046.5=return on equity=.1075=10.75% return on equityEarnings per share=net income/average shares outstandingTells how much you earned per share of common stockGood to use with next ratio – price-earnings ratioLecture 22operating activity – anything to do with the income statement, changes in current assets or current liabilitiesInvesting activity – changes in long term assets – purchase or sale of property, plant, equipment;purchase or sale of long term investmentsFinancing activity – sale of common or preferred stock, purchase of treasury stock, borrowing money (proceeds from borrowing money), repayment of debt/loans, payment of cash dividendsNeed to know if each provides cash coming in or cash going outNon-cash activity – buying equipment with shares of stock, converting debt into common stock, buying equipment with debt only (no cash)E 11-4Issue 20 million in bonds – financing, money +Purchase of equipment $80,000 – investing, money -Pay acct