Samenvatting
Summary Financial management year 1
Samenvatting H10, H11, H12, H13, H14, H15
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FIM ; Summary chapter 10- A current liability must be paid in a year or less. For some current liabilities, the exact
amount is known or can easily be calculated, such as the amount of sales tax payable,
interest owed (payable) on a note, or the amount of work still owed to a customer who
paid in advance (unearned revenue).
- For some, the current liability is known based on a contract, such as with the current
portion of long-term notes payable. Still others must be accrued and are known based
on a bill received or hours worked, such as accounts payable or salaries payable. The key
to all of these is the current liability amount is known, not estimated.
- Estimated current liabilities are owed, but the amount owed is based on an educated
guess–not an exact known amount. So, for example, estimated warranty claims are
recorded as a liability at the time a sale is made. The estimated expense and liability are
journalized at the time of sale because of the matching principle. So the sales revenue
and its related expense (estimated warranty claims) are reported (matched) in the same
time period on the income statement.
- Almost all businesses have employees and, therefore, have payroll. It is important to
remember that taxes the employee pays are deducted from the employee’s gross pay
before the employee gets his or her paycheck. The employer must also pay taxes based
on the gross pay of each employee. Each tax has its own unique purpose as well as its
own annual maximum.
- Recording payroll amounts requires five basic journal entries:
* The first entry records the gross payroll expense and liability.
* The second entry records the payment of net pay and the accrual of all employee paid
payroll liabilities.
* The third entry records employee benefits.
* The fourth journal entry records the employer payroll liabilities.
* The last journal entry records the payment of taxes to the taxing authorities.
- These payroll liabilities are all current liabilities of the company. Internal controls over
payroll focus on operational efficiency and insuring the payroll disbursements are valid
and accurate.
,Chapter 11
- Bonds are a type of long-term debt usually sold by borrowing smaller amounts from
more investors. Most bonds’ face or maturity value is $1,000. The bonds will have a
stated interest rate printed on the bond. This stated rate determines the amount of the
interest payments.
- The market rate on the date a bond is issued may differ from the bond's stated rate. If it
does, the bond will sell for a value other than its maturity or face value. If the market
rate is greater than the stated rate, the bond will issue at a price below maturity value
(discount). If the market rate is less than the stated rate, the bond will issue at a price
above maturity value (premium).
- Regardless of whether bonds are issued at a price other than face value, the cash paid
semiannually to bondholders is always the same amount because it is based on the
interest rate stated on the face of the bond.
- When bonds are issued at a discount, the market interest rate is greater than the stated
interest rate on the bonds, so interest expense is greater than the actual cash payments
for interest. Whether bonds are issued at face value, discount, or premium, the bond
maturity value is what the company must pay to the bondholders at the bond maturity
date.
- Bond discount or premium is amortized using the straight-line method or the effective-
interest method.
- Amortized discount increases interest expense. Amortized premium decreases interest
expense. When bonds are issued between interest payment dates, interest is accrued.
- Current liabilities are those liabilities due in a year of the balance sheet date or the
business operating cycle, whichever is longer. Long-term liabilities are those liabilities
due over a year from the balance sheet date.
Appendix 11A: We began this appendix with straight-line amortization to introduce the
concept of amortizing bonds. A more precise way of amortizing bonds is used in
practice, and it is called the effective-interest method.
- Generally accepted accounting principles require that interest expense be measured
using the effective-interest method unless the straight-line amounts are similar. In that
case, either method is permitted. Total interest expense over the life of the bonds is the
same under both methods; however, interest expense each year is different between the
two methods.
- The journal entry for the issuance of the bonds remains unchanged for the effective-
interest amortization of bond discount or premiums. Interest expense is debited for
market rate of interest times the carrying value of the bonds. Cash is credited for the
stated rate of interest times the bonds maturity value. The difference between the
interest expense and cash payment is the portion of the discount or premium on bonds
being amortized for this period.
- Appendix 11B : When retiring bonds before maturity, follow these steps:
1. Record partial-period amortization of discount or premium if the retirement date
does not fall on an interest payment date.
2. Write off the portion of Discount or Premium that relates to the bonds being retired.
3. Credit a gain or debit a loss on retirement.
, Chapter 12
Corporations have advantages and disadvantages A corporation’s bylaws state how
many shares it is authorized to issue. Shares may be issued electronically or
traditionally, on paper.
Stock types include common and preferred, par or no-par. Attributes such as voting
rights, dividends proportionate to ownership percentage, liquidation preferences, and
the right to maintain the same percentage of ownership (preemption) may apply. All
these factors, as well as others, affect the risk inherent in the stock.
Companies may issue their stock in exchange for cash or other assets. The issuance
entry always involves a credit to the stock account, whether common or preferred.
The amount credited to the stock account depends on whether the stock is par value
stock or no par value stock. If the stock has a par value, the number of shares issued
multiplied by the par value is recorded in the stock account. The premium received, if
any, is credited to Paid-in capital in excess of par. If the stock has no par, then the total
amount received goes to the stock account.
Stockholders’ equity always lists paid-in capital first and within that listing, preferred
stock amounts are listed before common stock amounts.
The steps of the closing process are the same as those you learned in Chapter 4. Net
income increases Retained earnings. Net loss decreases Retained earnings.
Once dividends are declared, they are an obligation (liability) of the corporation.
Preferred dividends are fixed and based on a stated percentage of par value or a flat
dollar amount. Preferred dividends, if cumulative, must be paid in full before any
dividends can be paid to common shareholders.
Market value is the value for which a person can buy or sell a stock on the open market.
Liquidation value is the value a preferred shareholder will receive if the corporation
goes out of business. Book value per share is the net equity divided between the
outstanding preferred and common shares.
Return on assets and return on equity ratios are both measures of how a company is
performing. Return on assets measures earnings based on average total assets
employed. Return on equity measures earnings for the common stockholders based on
average common equity invested.
Income tax payable is based on the tax return filed with the IRS. Income tax expense is
based on earnings reported on the income statement. Because of different choices a
company can make for its tax return versus its GAAP-based financial statements, these
earnings numbers are usually different. The difference between Income tax expense and
Income tax payable is either a deferred tax asset or liability.
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