ACCT 200 1st Edition Exam 3 Study Guide Lectures 16 22 Lecture 16 current short term liabilities due within a year Notes payable borrow money from bank etc sign document create interest expense interest rates are ALWAYS annual line of credit more expensive because its on demand fica tax gross payroll x fica rate Sales tax collected is not revenue it s a liability government collects monthly usually sometimes quarterly Contingent 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 amount Contingent gains Example might win money from suing but unsure don t record contingent gains until we get the money Warranties company must record warranty expense in the same period as the sale Warranty is expense and liability Lecture 17 Watch wording annuity lump sum future or present Bond bond issuer borrows money and regularly pays the interest Sold in 1000 increments Bonds spread the risk Lecture 18 Read and know different types of bond characteristics will be definition questions on exam Unsecured bonds are riskier than secured bonds and will have higher interest rates Callable bonds less interest can pay anytime as interest rates change Convertible bonds lender can t force shareholders to convert bonds to stock Market rate of interest determines if a bond is sold at face value or a premium or discount Interest payment is based on stated or contract rate of interest Use the tables based on the market rate of interest Concept 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 discount E 9 4 Face value of bond principal 25 000 000 Market 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 amount Face value contract rate 1 2 rate 25 000 000 03 750 000 2 Take present value calculations 25 000 000 PV table 2 2 5 20 periods 25 000 000 61027 750 000 PVA table 4 2 5 20 periods 750 000 15 58916 Add together to get total present value of the bond cash to be received by borrower Annuity equal annual or semiannual payments Tables on test will have the same titles and be in the same order as they are in the book If market rate of interest and contract stated rate are equal then total present value face value Bond issuer is borrower Always use table at market rate of interest for step 2 contract rate to calculate interest payment Lecture 19 Installment notes Make regular installment payments like car loan Each month pay 1 12 of annual interest rate Sell stock to investors don t owe them anything Selling bonds creates debt Why 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 good Lecture 20 private corporations can t become a shareholder just by contacting a broker like you can for public corporations right to receive dividends only if company declares them know corporations advantages and disadvantages Shareholders aren t affected if a corporation is sued Banks are less likely to lend to a sole proprietorship hardly ever know definitions of types of common stock BE 10 8 company has 1000 shares issued to shareholders During the year company repurchases its own stock 100 shares at 28 Record transaction should know it s a treasury transaction Treasury stock 2800 cash 2800 Effect on accounting equation Decreases asset cash decreases equity Treasury stock doesn t issue dividends accumulated deficit negative retained earnings treasury stock balance sheet Notes payable balance sheet Interest expense income statement Dividends only found in one place statement of stockholder s equity Cash balance sheet Dividends payable balance sheet Interest income income statement Dividends usually paid in cash but don t have to be can be property occasionally Have to give investors the same amount of money per share 3 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 outstanding 5 for 1 split 100 000 shares 5 par value After split 100 000 5 500 000 shares 5 1 par value Lecture 21 journal entry for stock dividends Dr dividends Cr common stock equity section on balance sheet shows ending balance as of the date of the balance sheet Statement of stockholder s equity starts with beginning balance and shows the activity for the year and get to the ending balance E 10 12 transaction how does it change my assets liabilities and equity Issue common stock cash increase asset equity increase Issue preferred stock cash increase asset equity increase Purchase treasury stock cash decrease equity decrease Declare a cash dividend increase dividends payable liability decrease retained earnings equity Pay cash dividend decrease cash decrease dividends payable Stock dividend no change in the end retained earnings decreased and common stock increased return on equity net income average stockholders equity BE 10 15 9043 sales 220 net income 2219 Beginning equity 1874 Ending equity Average equity 2219 1874 2 2046 5 220 2046 5 return on equity 1075 10 75 return on equity Earnings per share net income average shares outstanding Tells how much you earned per share of common stock Good to use with next ratio price earnings ratio Lecture 22 operating activity anything to do with the income statement changes in current assets or current liabilities Investing activity changes in long term assets purchase or sale of property plant equipment purchase or sale of long term investments Financing activity sale of common or preferred stock purchase of treasury stock borrowing money proceeds from borrowing money repayment of debt loans payment of cash dividends Need to know if each provides cash coming in or cash going out Non cash activity buying equipment with shares of stock converting debt into common stock buying equipment with debt only no cash E 11 4 Issue 20 million in bonds financing money Purchase of equipment 80 000 investing money Pay acct payable off 20 000 operating money Collect acct receivable of 15 000 operating money Exchange common stock for land 300 000 non cash transaction Pay a cash dividend of 10 000 financing money What is the cash flow from