Lutilsky - Accounting Lecture/predavanja BDIB
Lutilsky - Accounting Lecture/predavanja BDIB
Lutilsky - Accounting Lecture/predavanja BDIB
The act of gathering and reporting about the financial information of a company Accounting is a continual process of:
Accountancy
(profession) or accounting (methodology) is the measurement, statement, or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations, and public agencies.
Accounting
is a service activity. Its function is to provide quantitative information primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions, and in making reasoned choices among alternative courses of action.
It
is also the discipline of measuring, communicating and interpreting financial activity. Accounting is also widely referred to as the "language of business".
Accounting/accountancy
attempts to create accurate financial reports that are useful to managers, regulators, and other stakeholders such as shareholders, creditors or owners. The day-to-day record-keeping involved in this process that is known as bookkeping.
Internal Users - managers use it to plan, organize and run a business. External Users
An organizations financial statements provides managers with information to determine present and future decisions. Such actions include:
Granting credit Making investments Borrowing money Adhering to regulations Determining executive compensation Evaluating competition Evaluating potential litigation
Accounting planning
Bookkeeping Accounting control
Accounting analysis
Providing information
Financial
accounting
Cost
accounting
accounting
Managerial
At
the heart of modern financial accounting is the double-entry bookkeping system. This system involves making at least two entries for every transaction: a debit in one account, and a corresponding credit in another account. The sum of all debits should always equal the sum of all credits, providing a simple way to check for errors. This system was first used in medieval Europe, although claims have been made that the system dates back to Ancient Rome or Greece.
Organization (Entity)
Operates in an environment that makes decisions and takes actions to make it economically better or worse
Filter
Economic Concepts Accounting Conventions Institutional Context
Financial Reports
Balance Sheet Income Statement Cash Flow Statement
Sole
Proprietorship
Simple to establish Owner controlled Tax advantages Same as sole proprietorship except now with additional individual(s) the organization has a broader skill base (i.e., finance and marketing) Easier to transfer ownership or raise money No personal liability
Partnership
Corporation
Economic
Concepts The economic principles guiding the construction of accounting reports. Accounting Conventions The accounting rules that apply the economic concepts to practical situations. Institutional Context The environment that shapes the consequences of adopting specific accounting conventions.
The filters can be viewed as the financial process the organization goes through in producing the annual report, specifically the financial statements.
Economic Concepts
Financial Values
Attach to individual assets, liabilities, revenues and expense items by the accounting process
Financial Statements
Balance Sheet
Assets Liabilities Equity
Income Statement
Revenue Expenses Net Income
Wealth
Measured by equity at a point in time
Economic Income
Change in wealth measured by net income
Financial Statements
Balance
Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings Notes to the financial statements
The financial statements are part of a comprehensive financial report referred to as the annual report.
Asset Liabilities
Equity
Revenues Expenses
Financial
results
Shows
relationship between assets, liabilities and equities--on a particular date (i.e., point in time).
Assets
Assets
A probable future economic benefit obtained by entering into a transaction. The resources owned by the business.
The probable future sacrifice of economic benefits arising from an entitys obligation to transfer assets or provide services
Liabilities
for a past transaction. Creditors claims on total assets (obligations or debts of the business).
Stockholders'
Reports
success or failure of the company's operations during the period. all revenue and expenses for period-month, quarter, or year. If revenues exceed expenses, the result is a net income. If expenses exceed revenue, the result is a (net loss).
Summarizes
Revenues
increases in net assets resulting from an entitys operation over a period of time. Expenses decreases in net assets resulting from an entitys operation over a period of time.
Net
The Cash Flow Statement - describes the flow of cash into and out of an organization during an accounting period. These flows are classified in three categories:
Operating activities The change in cash resulting from actions intended to generate net income. Investing activities The change in cash resulting from actions taken to acquire or dispose of productive company assets.
Financing activities The change in cash resulting from payments to or receipts from suppliers of money to the firm (e.g., common shareholders or debt holders).
Indicates
amount invested by owners, amount paid out in dividends, and amount of net income or net loss for period.
changes in retained earnings balance during period covered by statement.
Shows
financial valuation depends on how well a market functions. In a well-functioning market, goods and services will be properly valued.
Competitive The market should reflect the true financial value. No chance for a seller to make abnormal profits. Low transaction costs The price paid to buy/sell the good requires few operational resources to complete the transaction. Organized and regulated The market in which the good is traded has standard definitions for making transactions and is open to new, efficient methods for improvement.
Wealth The sum of the financial values of all things an organization owns. Defined by the balance sheet (i.e., accounting identity) description: Assets = Liabilities + Equity
Economic income The change in an organizations wealth, excluding capital transactions with its owners.
This
measure describes an organizations success using its economic resources in a period. Reflected in the income statement (revenues minus expenses) for a period. Owner investments (issuing new shares of stock) are excluded because the increase in wealth attributable to them is NOT generated by use of the organizations resources!
Generally Accepted Accounting Principles known as GAAP are the commonly understood and accepted conventions for gathering, organizing, and reporting the financial history of an organization.
Generally GAAP applies to one or more of the following three broad areas:
Accounting Valuation - GAAP helps to specify the value of the items reported. It provides guidance and restrictions on the accounting values used in the financial statements.
Example: describes how Union Plaza values plant and equipment. Plant and equipment are carried at cost less accumulated depreciation and amortization.
Recognition How should an item be treated in the accounting records? Should an item be treated as an asset or an expense? For instance, does an advertising campaign have future benefits? Example: shows how Novell utilizes GAAP to guide their recognition. An advertising campaign is deemed to have no future value and the cost of advertising is expensed as incurred.
Disclosure The act of providing information about the organization and construction of its accounting reports. GAAP requires the disclosure of measurement methods, assumptions, etc., that add to the information content of the annual report.
Example: shows that Kmart values its inventory using LIFO and discloses the value of the inventory. It also discloses what the inventory would be valued if Kmart used an alternative method (FIFO).
Market richness Where the market for a good is a well-functioning one (i.e., it is competitive and experiences low transaction costs), GAAP will use market valuations to drive the accounting.
Complexity of the transactions When transactions are simple (e.g., exchange of cash for a Big MacTM , GAAP is simple. When transactions are complex (e.g., CEO compensation including a salary, bonus, pension plan and stock options), GAAP will be complex.
Form of the organization GAAP differs depending upon the type of business entity (e.g., sole proprietor, partnership, corporation, not-for-profit, governmental).
Croatian Association of Accountants and Financial Experts has approx. 30.000 members. In order to be an accountant, the Law does not define formal education requirements or diplomas, while auditors need to obtain the license from the Chamber of auditors (formed in 2006). An accountant does not need to have an university diploma or any form of certificate to prove his adequacy; he/she needs to follow the regulations set by the Law of accounting and by the profession itself.
Accountants have not yet obtained qualifications compliant with International federation of accountants education requirements it is an important notion for legislative authorities!
The basic division between types of companies according to the accounting regulations: A) Small companies: Total asset is not larger than 32.5 mil. Kn Max. revenue of 65 mil. Kn Have at most 50 employees B) Medium companies:
Total asset is not larger than 130 mil. Kn Max. revenue not larger than 260 mil. Kn Have no more than 250 employees C) Large companies: These have larger asset, revenues and more employees than the medium companies. Regardless to their asset, revenue and number of employees, large companies are also all banks, all other saving institutions, insurance companies, investment funds, leasing companies, and pension plans.
Defines the institutional accounting framework in Croatia. The newest one has been issued in 2007. It defines:
subjects that are obliged to use the law, bookkeeping documents, business books, list of assets and liabilities, financial reports, standards of their presentation, penalties, It foresees the usage of International financial reporting standards, and the act determines the Financial reporting council.
The Act functions in compliance with the Company act (largely influenced by the German legal system). The Act must be used by all private and legal entities who are working in the interest of obtaining profit and thus have an obligation to pay income tax, except: Government agencies Central and local state funds Health institutions, Religious institutions Political parties, Sindycates, Other non- profit institutions. Besides defining the bookkeeping documents, business books and financial reports the act also states that: most documents are to be kept within the company for 7 years, financial reports are to be kept in original form for at least 11 years.
The international financial reporting standards are to be used in all EU Countries, and thus in those who want to join the EU, like Croatia. In Croatia, only large companies, financial institutions and those listed on the Zagreb stock exchange are obligatory to use the IFRS.
In other words, only entities of public interest are obligatory to use IFRS.
Smaller companies must use the standards defined by the croatian Financial reporting council that is controlled by the Ministry of finance. - Croatian Financial Reporting Standards Both sets of accounting standards are to be published in the Narodne novine (National newspapers) before they are put into use.
FINA
(financial agency)
Receives all financial statements and reports from every profit & non-profit institution in Croatia, Publishes standardized summary financial statements of all companies (it includes only the key financial figures without the audit report). ***NOTE: Ensuring public availability of full financial statements is not common practice in Croatia.
HNB
(Croatian national bank), HANFA (Croatian financial services supervisory agency) and the MoF (Department for financial systems of the Ministry of finance) are responsible for financial
reporting of the financial sector:
HNB responsible for the development and implementation of financial reporting requirements applicable to the banking sector, HANFA responsible for the rest of the financial sector
Management
Notes
Auditor's
- ability to pay near-term obligations capital resources - ability to fund operations and expansions results of operation - profitability and efficiency
Provide Does
Examples:
Description of accounting policies or explanation of uncertainties and contingencies (e.g. Exhibits 1.4 and 1.5) Company statistics (e.g., market share, percentage of international sales, etc.)
Auditor,
a professional accountant who conducts an independent examination of the financial accounting data presented by a company.
Auditor
gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP.
Different
countries have developed their own accounting principles over time, making international comparisons of companies difficult. To ensure uniformity and comparability between financial statements prepared by different companies, a set of guidelines and rules are used. Commonly referred to as Generally Accepted Accounting Principles (GAAP), these set of guidelines provide the basis in the preparation of financial statements.
Recently there has been a push towards standardizing accounting rules made by the International Accounting Standards Board ("IASB"). IASB develops International Financial Reporting Standards that have been adopted by Australia, Canada and the European Union (for publicly quoted companies only), are under consideration in South Africa and other countries. The United States Federal Accounting Standards Board has made a commitment to converge the U.S. GAAP and IFRS over time.
generally accepted accounting concepts generally accepted principles generally accepted standards
Concepts (or conventions, assumptions) are theoretical basis and their appliance is taking into consideration formulation of accounting principles. Concepts by the IFRS are:
Concepts
- monetary
Monetary Unit Money is the unit used to measure economic activity. Economic Entity This concept provides a context or point of view for the economic events (i.e., transactions) captured by the financial statements. In short, it answers the questions, Whose asset is it?; Whose liability is it?
Time Period A business can be divided into artificial time periods. The most commonly used time periods for public corporations is quarterly and annually.
Going Concern - A company is expected to carry out its operations into the foreseeable future.
Principles
are based on concepts and they are further determining accounting and its basic characteristics for accounting policies.
Principles by the GAAP are: Cost principle (trokovno naelo) Objecivity principle (naelo objektivnosti) Realization principle (naelo realizacije) Matching principle (naelo sueljavanja prihoda i rashoda) Materiality principle -substance over form principle (sutina vanija od forme)
Full-disclosure principle (naelo potpunosti) Consistency principle (naelo konzistentnosti) Conservatism principle (naelo opreznosti)
truly presentation principle substance over form principle neutrality principle prudence principle full disclosure principle
comparability principle.
Relevance
decisions.
Reliability
bias.
Comparability
- ability to compare information of different companies. - companies must use the same accounting principles and methods from year to year.
Consistency
Cost Principle Assets acquired are recorded at cost. Full Disclosure Principle Information that would effect an investor or creditors view of the company should be disclosed.
- if item doesnt make a difference, GAAP doesnt have to be followed - in gray areas choose guide which does not overstate assets or income
Conservatism
They
are further concretization of accounting principles in a view of methods in recording accounting data, providing accounting information and presentations of financial statements and its elements.
IFRS
International financial reporting standards precondition for globalization NS national standards made for national levels and their specifics in accounting
They
are part of company business policies With accounting policies company can deliberate influence the elements in financial statements Freedom of choices is given through accounting standards
Companies
have obligation of presenting their accounting policies through notes Accounting policies could influence financial statements, like: - amortization, - Inventories, - Revenues.
Current Assets Long-Term Investments Property, Plant, and Equipment Other Assets
Current Liabilities
Long-Term Liabilities Stockholders' Equity
ASSETS
NON CURRENT CURRENT
- license - patents - concession - other rights - goodwill - advance payments for intangible assets
land buildings plants equipments motor cars advance payments for tangible assets
bought securities given deposits given loans other long term investments
- account receivables
is expected to be realized within more than 1 year after the balance sheet date
CURRENT
INVENTORIES
- raw materials - production inventories - work in progress - merchandise inventories - advance payments for inventories
RECEIVABLES
FINANCIAL
CASH
- bought securities - given deposits - given loans - other short term investments
The probable future economic benefit an entity obtains by entering into a transaction
Assets that are expected to be converted to cash or used in the business within a short period of time, usually one year. Current assets are listed in order of liquidity. Examples:
Cash - Money in the form of cash or bank deposits (e.g., checking and/or money market account). Short-term investments - An entitys investment in another entitys stock or debt (i.e., bonds). Sometimes referred to as Marketable Securities. These assets yield a higher return (dividends, appreciation or interest) than is available through checking and money market accounts.
Inventories - The goods an entity has on hand is referred to as a finished good. The material that it needs to make the goods is referred to as raw materials. The raw material in process of being completed (i.e., finished) is referred to as work in process.
Prepaid expenses The amounts an entity has already paid for services/goods to be delivered in the future (e.g., car insurance).
Accounts Receivable - The amounts due from customers for goods they purchased on credit. Because all customers do not pay their bills, the balance is reduced by an allowance (an estimate of what will not be collected).
Example - OshKosh December 29, 2001: Total Accounts receivable $ 32,542 Less: Allowance ( 7,075) Net accounts receivable $ 25,467
Assets that are expected to benefit the business over a long period of time. Non-current assets are usually listed in order of importance to the entity. Examples:
Property, Plant, and Equipment - The land, buildings, equipment, furniture and fixtures that are used in operating the business.
SOURCES OF ASSETS
EQUITY
NON CURRENT LIABILITIES CURRENT LIABILITIES
SOURCES OF ASSETS
EQUITY NON CURRENT LIABILITIES CURRENT LIABILITIES
owners equity legal reserves statutory reserves revalorization reserves other reserves retention (retained earnings) - net income - loss
accounts payables salaries payables received short term loans issued short term securities issued checque income tax liabilities VAT liabilities dividend payables received advanced payments
Liabilities The probable future sacrifice of economic benefits arising from an entitys obligations to transfer assets or provide services as a result of a past transaction or event.
Liabilities that are expected to be paid by the business within a short period of time, usually one year. Current liabilities are listed in order of liquidity. Examples:
accounts payable accrued liabilities short-term borrowings dividend payable unearned revenue
Accounts payable The amount an entity owes to suppliers for goods previously delivered. Sometimes referred to as trade payables or trade accounts payable.
Accrued liabilities - The amounts an entity owes for taxes, rent, wages, etc. More detail is offered in the Notes to the Financial Statements. Example: OshKosh A summary of 12/29/01 accrued liabilities follows:
Compensation Workers compensation Income taxes Other Total $ 7,181 8,900 5,182 17,140 $38,403
Short-term borrowings Monetary amounts due within one year for repayment of bank loans, notes payable and other commercial paper.
Dividends payable The amount owed by a corporation to its shareholders when dividends declared by the board of directors have not yet been paid.
Unearned revenues The monetary amounts received by an entity that accepts up-front payments of cash in exchange for future delivery of its products. Example: Your advance cash payment for a threeyear subscription to Fortune Magazine requires their sacrifice of future economic benefits (they are liable) to provide the magazine. It is termed unearned as it represents a service (i.e., the subscription) that has NOT yet been completed (i.e., delivered to your door). It will be earned as delivery takes place.
warranties employee benefit plan liabilities leases bonds payable long-term obligations
Warranties The entitys obligation to replace defective merchandise within a specified time period.
Employee benefit plan liabilities The sacrifice of cash that an entity must make for pensions, retirement health care and other retirement benefits.
Lease The sacrifice of cash that an entity must make to secure equipment or for the use of property to conduct operations
Bonds payable The amount due to bond purchasers under terms of the bond issue. Long-term borrowings Monetary amounts for bank loans, notes payable and other commercial paper that does not have to be repaid within one year.
Stockholders' Equity The difference between total assets and total liabilities. Stockholders equity arises from the contributions of owners.
Risk capital, liable capital, proprietorship, net worth After all liabilities are paid, ownership equity is the remaining interest in assets Equity = Assets - Liabilities At the start of a business, owners put some funding into the business to finance assets (equity capital) Bankruptcy creditors have the first claim on the proceeds, ownership equity is paid at the end Shareholders equity when the owners are shareholders
Owner s equity
Paid in capital comes from the shareholders through the purchase of the companys stock
Net worth of a company is reflected in its balance sheet as owners (shareholders') equity Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its inception, as well as the retained earnings for the duration of its operation Net worth can be used to determine creditworthiness because it gives a snapshot of the company's investment history Market price per share equity per share
Common Stock Shareholders investment in the entity through acquisition of stock. Ownership of a share entitles the holder to a vote on major corporate decisions and a residual claim to the entitys assets in the event of liquidation. The amount recorded in this account represents the legal capital per share that must be retained in the business.
Additional paid-in-capital The amount paid by the investor for a share of stock in excess of its par value.
Preferred Stock Another vehicle available to corporations for raising owner contributions. A preferred owner typically is not allowed to vote on major corporate issues. In the event of liquidation, these shareholders receive the stated value of their shares.
Retained Earnings - equity (net income) generated from operations less what has been returned to the shareholders in dividends. The adjective retained reveals that these earnings have not been distributed to shareholders in the form of dividends.
Transaction Analysis
Transaction Analysis determines if and how the transaction impacts the financial statements.
External events
Internal events
External events occur between the company and some outside party. It involves an exchange of assets, liabilities, or stockholders' equity between a company and an outside party
Internal events are economic events that occur entirely within one company. For example the act of hiring of an employee.
1.
2. 3.
Analyze - determine how the transaction affects the balance sheet (i.e., increase or decrease assets, liabilities etc.). Journal - accounting record where the transactions are recorded in chronological order.
Posting - transferring of information from the journals to the general ledger accounts (i.e., T - Accounts)
Account
An individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders Equity item. Three parts :
1) the Title of the account 2) a left or Debit side 3) a right or Credit side
T - Account
TITLE
DEBIT CREDIT
If the greater sum is on the left, the account has a Debit Balance
If the greater sum is on the right, the account has a Credit Balance
DEBITS
Increase Assets
Decrease Assets
Increase Liability and Equity Accounts
The term normal balance for an account is the side (i.e., debit or credit) that is increased.
Normal Debit Balance: Assets Normal Credit Balance: Liabilities Stockholders Equity
Lets Practice
Transaction Analysis
each transaction in terms of its effect on the accounts. the debit and credit effects on specific accounts for each transaction.
Record
On January 1, $40,000 is invested in Rhody Corporation in exchange for common stock. How does this affect the accounting equation?
A +
Assets
SE +
increase Stockholders equity increases What asset account and stockholders equity account is affected?
Cash (debit)
$40,000
Also on January 1 Rhody purchases $20,000 of equipment for cash. How does this affect the accounting equation?
A + Assets
= =
SE
Equipment (debit)
$20,000
Cash (credit)
$20,000
On January 5 Rhody purchases inventory of $14,000 on account. How does this affect the accounting equation?
A +
Assets
L +
SE
increase Liabilities increase What asset account and liability account is affected?
Inventory
(debit)
$14,000
On March 6 Rhody buys $4,000 of supplies for cash. How does this affect the accounting equation?
A + Assets
= =
SE
Supplies (debit)
$4,000
Cash (credit)
$4,000
On April 1 Rhody pays $12,000 to insure its cars for the next year. How does this affect the accounting equation?
A + +
Assets
SE
$12,000
Cash (credit)
$12,000
On September 1, Rhody receives $18,000 in advance for services to be performed in the future. How does this affect the accounting equation?
A +
Assets
L +
SE
increase Liabilities increase What asset account and liability account is affected?
Cash (debit)
$18,000
(credit)
Note: Debits are always written first and you always indent the credit.
October 1, 2004, Rhody lends the Minutemen Corporation $10,000 in the form of a note receivable. The note is due on September 30, 2005, and carries an interest rate of 9%. How does this affect the accounting equation?
A + Assets
SE
$10,000
Cash (credit)
$10,000
Note: Debits are always written first and you always indent the credit.
Remember every journal entry will be posted to the appropriate account. For example, based on the entries made, the T-Account for cash would have an ending debit balance of $12,000 (see next slide).
40,000
CASH
18,000 58,000
Balance
12,000 (Debit)
Income statement
Income statement reports about the revenues and expenses for a specific period of the time. Dinamic statement
As a minimum, the face of the income statement shall include line items that present the following amounts for the period:
Revenue is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
Expenses (cost) are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence's of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
Income Concepts
Net Income (Loss) The increase (decrease) in net assets; resulting from operations; over a period of time. Net Assets The excess of an entitys economic resources (assets) over its obligations (liabilities).
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Revenue
Revenues increase in net assets resulting from an entitys operation over a period of time. Alternative Names for Revenue:
Sales Used by merchandising entities and manufacturing concerns. Sales of Services or Total Billings Used by service firms.
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Revenue (continued)
Interest Revenue Used by financial institutions that earn revenues by lending money and charging interest.
Commissions, Asset Management and Portfolio Service Fees Used by brokerage firms (e.g., Merrill Lynch) for fees charged for the different financial services performed for customers.
Premium Revenue Used by insurance companies.
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13
Income Statement
Reports success or failure of the company's operations during the period.
Summarizes all revenue and expenses for period of time --month, quarter, or year. If revenues exceed expenses, the result is a net income. If expenses exceed revenue, the result is a (net loss).
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Retained Earnings
Retained earnings is net income minus dividends paid since the formation of the business. It is net income that is retained in the business not paid to shareholders.
The balance in retained earnings is part of the stockholders' claim on the total assets of the corporation.
15
Retained Earnings
Example: A balance of $100,000 in retained earnings does not mean that there should be $100,000 in cash. The income resulting from the excess of revenues over expenses may have been used to purchase other assets--buildings, equipment, etc.
16
Revenue (R) - Expenses (E) = NI One should view the retained earnings statement as the bridge that connects the income statement with the balance sheet.
17
Matching Principle
Requires that expenses be recorded in the same period in which the revenues they helped produce are recorded.
18
19
Expense Concepts
Expenses The resources consumed in the process of earning revenues. This consumption results in a decrease in net assets over a period of time. Examples of expenses: Cost of sales The expense associated with the cost of merchandise sold to customers by a merchandiser. Rent expense The cost of renting offices or warehouses. Depreciation The cost of using long-term assets such as Property, Plant and Equipment.
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Depreciation
Depreciation - is the rational and systematic process of allocating the cost of a plant asset over its useful (service) life. By expensing an assets cost over its useful life results in a better match of the expense to the periods the asset is expected to generate revenue.
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Decrease Revenues
CREDITS
Normal Balance
The term normal balance for an account is the side (i.e., debit or credit) that is increased.
Normal Debit Balance:Expenses, Dividends Normal Credit Balance: Revenues
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Transaction Analysis
24
Transaction Analysis
Recall the basic steps in the recording process are: Analyze each transaction in terms of its effect on the accounts.
Record the debit and credit effects on specific accounts for each transaction.
25
Recording A Transaction
On October 17 Rhody receives $40,000 in cash for services performed.
How does this affect the accounting equation?
26
Recording A Transaction
A +
SE +
Assets increase Stockholders equity increases via retained earnings (i.e., revenue) What asset account and indirectly what Stockholders equity account is affected?
27
Recording A Transaction
Cash (debit) $40,000 Service Revenue (credit) $40,000
Note: The income statement account revenue is directly affected. However, this indirectly affects stockholders equity Recall: Debits are always written first and you always indent the credit.
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Recording A Transaction
On November 5 Rhody pays its employees $5,000 for work performed.
How does this affect the accounting equation?
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Recording A Transaction A = L + SE -
Assets decrease Stockholders equity decreases via retained earnings (i.e., wage expense) What asset account and indirectly what Stockholders equity account is affected?
30
Recording A Transaction
Salary Expense (debit)$5,000 Cash (credit) $5,000
Note: The income statement account expense is directly affected. However, this indirectly affects stockholders equity Recall: Debits are always written first and you always indent the credit.
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Recording A Transaction
On November 22 Rhody performs services and bills the client $15,000 for the services
How does this affect the accounting equation?
32
Recording A Transaction A + = L + SE +
Assets increases Stockholders equity increases via retained earnings (i.e.,revenue) What asset account and indirectly what Stockholders equity account is affected?
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Recording A Transaction
Accounts Receivable (debit)$15,000 Revenue (credit) $15,000 Note: The income statement account revenue is directly affected. However, this indirectly affects stockholders equity Recall: Debits are always written first and you always indent the credit.
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Recording A Transaction
On December 12 Rhody pays a dividend to its stockholders.
How does this effect the accounting equation?
35
Recording A Transaction
A -
SE -
Assets decrease Stockholders equity decreases via retained earnings (i.e., dividends) What asset account and indirectly what Stockholders equity account is affected?
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Recording A Transaction
Dividends (debit) Cash $500 (credit) $500
Note: The retained earnings statement is directly affected. However, this indirectly affects stockholders equity Recall: Debits are always written first and you always indent the credit.
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T-Account
Remember every journal entry will be posted to the appropriate account. For example, based on the entries made, the T-Account for revenue would have an ending credit balance of $55,000 (see next slide).
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T - Account
10/17 11/22 Balance REVENUE 40,000 15,000 55,000 55,000 (Credit)
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40
Debit
$46,500 4,000 15,000 10,000 14,000 12,000 20,000
Credit
42
43
Jan. 1
Sept.1
Dec. 31
Mar.1
Transaction Period
44
45
Accruals
Each of these classes has two subcategories.
46
and
Unearned revenues.
47
Prepayments
Cash has been spent but the item acquired has not been used or consumed or
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Prepaid Expenses
Prepaid expenses - expenses have been paid in cash and are recorded as assets until they are used or consumed.
Prepaid expenses expire with the passage of time (i. e., rent or insurance) or they are consumed (i. e., supplies or depreciation).
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Prepaid Expenses
Recall on April 1, Rhody paid $12,000 for a one-year insurance policy. Original Entry: Prepaid Insurance (debit) $12,000 Cash (credit)
$12,000
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Prepaid Expenses
Adjusting Entry: Insurance Expense (debit) $9,000 Prepaid Insurance (credit)
Calculation: $12,000 x 9 = $9,000 12
$9,000
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Prepaid Expenses
Recall on January 1, Rhody paid $20,000 for equipment. The equipment has a useful life of 5 years.
Original Entry: Equipment (debit) $20,000 Cash (credit) $20,000
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Prepaid Expenses
Adjusting Entry: Depreciation Expense (debit) $4,000 Accumulated Depreciation (credit) 4,000
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Unearned Revenues
Revenues received in cash and recorded as liabilities before they are earned.
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Unearned Revenues
Recall On September 1, Rhody received $18,000 for rent from one of its tenants. The lease is for 1 year. Original Entry: Cash (debit) $18,000 Unearned rent revenue (credit) 18,000
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Unearned Revenues
Adjusting Entry: Unearned rent revenue (debit) $6,000 Rent revenue (credit) $6,000
Calculation:
$18,000 x 4 = $6,000 12
56
and
Accrued expenses
57
Accrued Revenue
Accrued revenues are revenues that have been earned but not yet received in cash.
58
Accrued Revenues
Recall on October 1, 2004, Rhody lent the Minutemen Corporation $10,000 in the form of a note receivable. The note is due on September 30, 2005, and carries an interest rate of 9%.
Original Entry: Note Receivable (debit) $10,000 Cash (credit) $10,000
59
Accrued Revenues
Interest receivable is the amount of income a company receives for the use of its money. Information needed to compute interest income: Face value of note Interest rate (expressed as annual rate) The length of time note is outstanding
60
Accrued Revenues
Adjusting Entry: Interest Receivable (debit) $225 Interest income (credit) $225
Calculation: $10,000 x 9% = $900 x 3 = $225 12
61
Accrued Expenses
Accrued expenses are expenses that have been incurred but not yet paid in cash and there is no original entry.
62
Accrued Expenses
Rhody pays its workers every 2 weeks on Friday. The total payroll is $80,000 every two weeks. The employees work only Monday - Friday. Assume that the last payday in December is the 26th and that the next payday is January 9. What adjusting entry must be made at the end of December? Original Entry:
NO ENTRY
63
Accrued Expenses
December/January
TH
21
28
22
29
23
30
24
31
25
1
26
2
27
3
10
Green days in 2004 - (3) Red days in 2005 (7) The 26th and 9th are paydays
64
Accrued Expenses
Adjusting Entry: Salary expense (debit)$24,000 Salary payable (credit) $24,000
Calculation:
$80,000 x 3 days = $24,000 10 days
65
66
Credit
9,000
4,000
$127,000
$127,000
Retained Earnings on 1/1/04 + Net Income (From Income Statement) - Dividends Retained Earnings on 12/31/04
71
$20,000 (4,000)
LIABILITIES Accounts Payable Salary Payable Unearned Service Revenue Total Current Liabilities STOCKHOLDERS EQUITY Common Stock Retained Earnings (FROM Retained Earnings Statement) TOTAL LIABILITIES & STOCKHOLDERS EQUITY
72
Temporary/Permanent Accounts
The computer will zero out all temporary accounts (i.e., income statement accounts revenue and expenses) and the dividend account. The income statement accounts are zeroed out because an income statement is limited to a period of time (i.e., one year).
The permanent balance sheet accounts are never zeroed out since they continue forever (i.e., going concern concept).
73
Common-Sized Financials
A common-sized statement recast, either the balance sheet or the income statement as a percentage of a selected number. For the balance sheet, that number is assets, and for the income statement, that number is sales. Thus, all assets should be stated as a percentage of total assets and all expenses should be stated as a percentage of sales.
74
Rhody Corporation Common-Sized Income Statement January 1, 2004 - December 31, 2004
Revenue: Service Revenue Rent Revenue Interest Income Total Revenue Expenses: Salaries Expense Insurance Expense Depreciation Expense Total Expenses Net Income
100.00%
Rhody Corporation Common-Sized -Balance Sheet January 1, 2004 - December 31, 2004
ASSETS Cash Accounts Receivable Note Receivable Interest Receivable Supplies Inventory Prepaid Insurance Total Current Assets Office Equipment Accum. Depreciation TOTAL ASSETS LIABILITIES Accounts Payable Salary Payable Unearned Service Revenue Total Current Liabilities STOCKHOLDERS EQUITY Common Stock Retained Earnings TOTAL LIABILITIES & STOCKHOLDERS EQUITY $ 46,500 15,000 10,000 225 4,000 14,000 3,000 $92,725 20,000 (4,000) $108,725 42.77% 13.80% 9.20% .02% 3.68% 12.88% 2.76% 85.28% 18.39% (3.68)% 100.00%
76
3. The reasons for the difference between net income and net cash provided (used) by operating activities
4. The investing and financing transactions during the period.
Financial Statements
Balance Sheet
Assets Liabilities Equity
Income Statement
Revenue Expenses Net Income
Wealth
Measured by equity at a point in time
Economic Income
Change in wealth measured by net income
investing
financing
Operating Activities
Operating activities captures the effects operating transactions (i.e., normal revenues and expenses transactions) have on the companys cash flow.
Operating Activities
Income Statement Information Needed:
Net income
Balance Sheet Information Needed: Change in Current Assets Change in Current Liabilities
Investing Activities
Investing activities - captures a companys purchase and sale of assets and its use of cash to acquire a long-term investment position in another company and the sale of these investments.
Investing Activities
Income Statement Information Needed : Gain(Loss) of Assets Balance Sheet Information Needed : Change in Long-Term Assets
Property Plant and Equipment Long-Term Investments
Financing Activities
Financing activities - captures a company borrowing and repaying long-term loans and selling or buying back shares of its own stock. In addition, it reflects any dividends paid by the company.
Financing Activities
Income Statement Information Needed: None Balance Sheet Information Needed: Change in Long-Term Liabilities Change in Stockholders Equity
Retained Earnings Stmt Information:
Dividends Paid
Cash Method
+
Noncash expenses (e.g, depreciation)
- Expenses Incurred
+
-
Net Income
By
1. Get net income from the income statement. 2. Add to net income for items that did not affect cash (i.e. depreciation and amortization). 3. Add (subtract) the changes in the current asset and current liability accounts. An increase (decrease) in current assets is a decrease (increase) in cash flow. Whereas, an increase (decrease) in current liabilities is an increase (decrease) in cash flow.
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
By
Add (subtract) the changes in the noncurrent asset accounts (i.e., property, plant, and equipment) . An increase (decrease) in property, plant, and equipment is a decrease (increase) in cash flow.
Analysis of Impact
The purchase of equipment is a cash outflow and the sale of the equipment is a cash inflow. However,
the sale of equipment also affects the accrual basis income statement, since the $5,000 gain ($25,000 sales price - $20,000 book value) on the sale is included in net income. Since we are creating a cash flow statement, the gain must be removed from net income (see operating activities section) and the cash flow from this transaction (e.g., $20,000) is reported in the investing activities section.
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
Cash flows from operating activities:
Net income Depreciation & amortization Increase in Accounts receivable Increase in Accounts payable Gain on sale of equipment Net cash flow from operations $200,000 15,000 (13,000) 10,000 (5,000) $207,000 $ 25,000 (40,000) (15,000)
By
Add (subtract) the changes in the noncurrent liabilities accounts (i.e.,long-term debt) and add (subtract) the changes the stockholders equity accounts. An increase (decrease) in long-term debt is an increase (decrease) in cash flow.
Analysis of Impact
The borrowing of money from the bank is a financing transaction that increases the amount of cash Rhody has available. Thus, this is a $40,000 increase in Rhodys cash flow from financing. The payment of $8,000 in
dividends is a financing transaction that reduces Rhodys cash flow.
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
Net cash flow from operations Net cash flow from investing $207,000 (15,000)
Net Increase (Decrease) in Cash Cash at beginning of period Cash at end of period
Rhody Company Comparative Balance Sheet With Change in Accounts December 31, 2004
Assets Cash Accounts Receivable Prepaid Expenses Land Building Accumulated depreciation-building Equipment Accumulated depreciation-equipment Total 2004 $56,000 20,000 4,000 130,000 160,000 (11,000) 27,000 (3,000) $383,000 2003 $34,000 30,000 0 0 0 0 10,000 0 $74,000 Change Increase/Decrease $22,000 increase 10,000 decrease 4,000 increase 130000 increase 160,000 increase 11,000 increase 17,000 increase 3,000 increase
Rhody Company Comparative Balance Sheet With Change in Accounts December 31, 2004
Liabilities and Stockholders Equity Accounts payable Bonds payable Common stock Retained earnings Total 2004 $59,000 130,000 50,000 144,000 $383,000 2003 $4,000 0 50,000 20,000 $74,000 Change $55,000 increase 130,000 increase No Change 124,000 increase
Rhody Company Income Statement For the Year 1/1/04 through 12/31/04
Additional Information
In 2004, the company declared and paid a $15,000 cash dividend. The company obtained land through the issuance of $130,000 of long-term bonds. An office building costing $160,000 was purchased for cash; equipment costing $25,000 was also purchased for cash. During 2004, the company sold equipment with a book value of $7,000 (original cost $8,000 less accumulated depreciation $1,000) for $4,000 cash.
By
1. Get net income from the income statement. 2. Add to net income for items that did not affect cash (i.e. depreciation and amortization). 3. Add (subtract) any loss (gain) on sale of assets or investments. 4. Add (subtract) the changes in the current asset and current liability accounts. An increase (decrease) in current assets is a decrease (increase) in cash flow. Whereas, an increase (decrease) in current liabilities is an increase (decrease) in cash flow.
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
79,000 $218,000
By
By
The land of $130,000 was purchased through the issuance of long-term bonds. Although the exchange of bonds payable for land has no effect on cash, it is a significant noncash investing and financing activity that must be disclosed.
By
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
Cash flows from operating activities:
Net income Depreciation & amortization Loss on sale of equipment Decrease in Accounts receivable Increase in Prepaid expenses Increase in Accounts payable Net cash flow from operations $139,000
15,000 3,000 10,000 (4,000) 55,000
79,000 $218,000
(181,000)
By
Study the balance sheet to determine changes in non-current liabilities and stockholders equity.
Changes in each non-current liability and stockholders equity are analyzed using selected transaction data to determine the effect, if any, the changes had on cash.
By
The net increase in Retained Earnings of $124,000 is a result of net income of $139,000 and the $15,000 payment of dividends that decreased Retained Earnings.
Net income is the starting point of the cash flow statement and is presented in net cash provided by operations. Payment of the dividend is a cash outflow that is reported as a financing activity.
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
Net cash flow from operations Net cash flow from investing $218,000 (181,000) $15,000 (15,000)
Net Increase (Decrease) in Cash Cash at beginning of period Cash at end of period Noncash investing and financing activities:
Issuance of bonds payable to buy land
$130,000
Cash Flow
All companies go through business phases. The whole business might not go through each phase, but a segment of the business or a product line of the business will experience these phases.The phases are often referred to as the: introductory phase growth phase maturity phase decline phase. The phase a company is in will affect its cash flows.
Introductory Phase
To support asset purchases, the company needs to issue stock or debt. Since the operations are just starting,
Expect:
cash from operations to be negative cash from investing to be negative. cash from financing to be positive.
Growth Phase
The company is striving to expand its production and sales. Expect:
cash from operations to generate a small amount of cash cash from investing to be negative. cash from financing to be positive.
Growth Phase
The companys sales and production begin to level off. Thus, investing will consist of replacing some long-term assets and selling others.
Decline Phase
The companys sales and production begin to decline. Note: This phase is not true of all companies, but will certainly affect a segment of a company. Expect:
cash from operations to be minimally positive.
cash from investing to be neutral or negative. cash from financing to be negative (paying back loans).
Accrual-based measures allow too much management discretion. One disadvantage to the cash-based measures is that no published industry averages are readily available for comparison.
Liquidity
Recall that liquidity is the ability of a business to meet its immediate obligations and that one measure of liquidity is the current ratio.
A disadvantage of the current ratio is that it uses year-end balances of current assets and current liabilities (may not be representative of a company's position during most of the year.)
Solvency
Recall that solvency is the ability of a firm to survive over the long term. One measure of solvency is the debt to total assets ratio.
Solvency
A measure of solvency that uses cash figures Is the cash debt coverage ratio. Cash Provided By Operations Average Total Liabilities This ratio measures a company's ability to repay its liabilities from cash generated from operations.
Notes
The notes shall: (a) present information about the basis of preparation of the financial statements and the specific accounting policies; (b) disclose the information required by IFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement; and (c) provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement, but is relevant to an understanding of any of them.
RECEIVABLES
CASH
INVENT ORIES
FINANCIAL ASSETS
(CURRENT ASSETS)
It is expected that it will be realized or it is held for sale or for consumption in regular business performance; Primarily is held for trading; It is expected that it will be realized in the 12 month period from the balance-sheet date; Cash or cash equivalent, except if it has limited possibility of exchange or liabilities settlement for period of at least 12 month from the balance-sheet date.
Short term assets 2
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Receivables
Financial assets
Cash
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S0 x procuration of inventories
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consumption of inventories
Si x
4
occur in several
forms:
Inventories of merchandise; Inventories of raw materials and materials; Production inventories (work in progress); Inventories of finished goods; Inventories of spare parts; Inventories of small inventory; Advances for inventories.
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Are held for sale in regular business performance by subjects that are performing commercial services ( wholesale and retail sale).
Evaluation:
INITIAL EVALUATION per purchasing cost AFTERWARDS EVALUATION per purchasing cost or
per net market value, depending on what is lower (IAS 2 Inventories, art. 9.)
14.11.2012 Short term assets 6
1)
Per purchasing cost Per selling price (purchasing cost + difference in price)
2)
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Purchasing price
Depending costs
discounts
Purchasing cost
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(1a)
Transportation costs
(3)
(3)
(1b)
Customs
(1c)
(3)
(1d)
Irreversible taxes
(3)
VAT receivables
(1a) (1b)
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Purchasing price
Depending costs
Purchasing cost
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10
(1a)
Transportation cost
(3)
(3)
(1b)
Customs
(1c)
(3)
(3)
VAT receivables
(1a) (1b)
14.11.2012 Short term assets 11
Merchandise wholesale and decrease of inventories ( for merchandise inventories held per
ACCOUNT RECEIVABLES (1) SP+VAT VAT PAYABLES VAT(1) REVENUES FROM SOLD MERCHANDISE SP (1)
MERCHANDISE INVENTORIES
SX PC (2)
There are some methods for determening those costs. They are: FIFO, LIFO, HIFO and AVERAGE COST. By Croatian Law: FIFO method and average cost.
13
FIFO method: first in, first out. LIFO method: last in, first out. HIFO method: highest in, first out. Average costs: total value in HRK dividing with total quantity of raw material.
14
Merchandise wholesale and decrease of inventories (for merchandise inventories held per
ACCOUNTS RECEIVABLES (1) SP+VAT VAT PAYABLES VAT (1) REVENUES FROM SOLD MERCHANDISE SP (1)
MERCHANDISE INVENTORIES
SX SP without VAT (2)
RASHODI OD PRODAJE (TROKOVI NABAVE ROBE) (2) SP without VAT (2a) DIFFERENCE IN PRICE (2a) DIP of sold SX merchandise
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15
2)
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16
According to regulation this calculation must be in shops. Calculation per selling price can be managed as
Calculation in margin system, Calculation with known selling price or as Calculation in discount system.
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INVENTORIES IAS 2
17
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18
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19
EXPENSES FROM SOLD MERCHANDISE (COSTS OF PURCHASED MERCHANDISE) (2) SP+ VAT (2a) (2b)
SX
costs x
costs x
costs
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21
Note: Inventories of raw and material, production inventories and finished goods inventories will be explained in detail within PRODUCTION.
Inventories of spare parts and inventories of small inventory, package and cartyres PLEASE READ IN YOUR BOOKS.
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S0 x
decrease of receivables
increase of receivables
Si x
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23
Include receivables with maturity under one year. Most often that are receivables from:
related companies; customers (accounts receivables); participation interests; employees; government; and other short term receivables.
Short term assets 24
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Occur as a consequence of goods and services delivery. That asset is REAL in its appearance and is treated as transient form of asset from material form to cash.
There are:
ACCOUNTS RECEIVABLES (DOMESTIC) ACCOUNTS RECEIVABLES IN ABROAD.
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25
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26
The most common that are VAT RECEIVABLES by ingoing invoices. Except that receivables from government can also occur also for:
overpaid personal income tax on salaries; overpaid contributions from and on salaries; overpaid income tax;
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27
S0 x
increase of assets
decrease of assets
Si x
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28
Occurs as a consequnce of invested money of certain business subject on the period up to one year. Money is invested in form of:
Given short term loans to other business subjects, Investemnts in short term securities (investment in
commercial bills, investemnt in treasury bills, investment in short term bonds), Investemnt in shares and stakes in related companies, Given deposits on the period within one year, Other short term investments.
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S0 x increase of cash
decrease of cash Si x
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30
Payments between business subjects are made CASHLESS above cash at bank account. Cash is divided on cash in bank and cash in register.
Cash at bank account, Currency account, Letter of credit, Other cash assets.
Short term assets 31
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X (1)
(1) Cash withdrawal from cash at bank account and payment on cash register
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32
(1) X
X (2)
(1) Cash withdrawal from cash register and payment on cash at bank
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33
similar party issues to a seller of goods or services which provides that the issuer will pay the seller for goods or services the seller delivers to a third-party buyer
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34
(1) X
(1) Letter of credit opening
X (2)
(2) Payment to a supplier from open letter of credit
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35
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kratkotrajna imovina
36
Is
not aimed for sale and has characteristic of permanency is expected that it will be realized into money in period longer than one business year its value gradually on new effects
It
Transfers
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LONG-TERM ASSETS
INTANGIBLE
expenditures for
development patents licence software concession franchise trademarks goodwill Advance payment for intangible assets
TANGIBLE
land and forest
buildings machines and equipment tools plant and office inventory furniture transport vehicles long-term biological assets advanced payment for tangible assets tangible assets in preparation other tangible assets
FINANCIAL
stakes (shares) by related companies given loans to related companies participate intersts investments in securities given deposits other long-term financial assets
RECEIVABLES
receivables from related companies
receivables from slaes on credit other receivables
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softwer
Trade mark
franchise
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Intangible assets that is not in physical format Assets acquired because of its usage in business performance Heavily predictible life cycle Heavily measurement of future economic benefits from its usage Heavily transferabillity of those assets Sometimes does not exsist the possibility of individual sale because that asset is specific for certain company
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INTERNAL DEVELOPMENT EXTERNAL ACQUIRING (PURCHASE OR OTHER RELATIONS WITH OTHERS) Examples of external acquiring:
Separete acquiring of long-term intangible assets (for instance, licence purchase), Acquiring of long-term intangible assets as a part of business acquisitions (for instance, value of goodwill of acquired company), Acqisition of long-term intangible assets by using government injections (for instance, government injection in form of import allowance), Acquiring of long-term intangible assets by asset exchange (exchange of patents between two companies)
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INTERNAL DEVELOPMENT For internaly developed positions of long-term intangible assets purchasing cost is detemined on the basisi of all investments (costs) that have occured during creating, production or preparation of that position for its usage. In internally developed intangible assets which is not recognized as balance sheet position following positions are included: internally developed trademarks, signs, publication names, lists of buyers and other similar positions. ACQUIRED ASSETS IS CAPITALIZED IF FOLLOWING REQUIREMENTS ARE FULFILLED: IF IT IS SEPARABLE, IF IT HAS LIMITED TIME OF USAGE.
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MRS
38 INTANGIBLE ASSETS
CFRS
Determines issues of recognition, measurement and recording of long-term intangible assets as well as IAS 38, but in shorter form
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Expenditures for research and development Patents Licence Software Concession Franchise
Trademarks
Other rights Goodwill (externally acquired) Advances for intangible assets
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The exsistance of long-term intangible assets which should give certain future economic benefits can not be proved in research phase Examples of those activities are activities which goal is acquiring new knowledge In the moment of research work and acquiring of new knowledges when it is not sure in which activity new knowledge will be applied
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2.
EXPENDITURES FOR DEVELOPMENT are recognized as intangible assets if following requirements are fulfilled: Technical feasibility of intangible assets which is finished in order to be available for usage or sale; Intention for finishing of intangible assets and its usage or sale; Possibility of usage or sale of intangible assets; Way in which intangible assets will give promising economic benefits. Business subject needs to prove market exsistance for the production of intangible assets or for intangible assets itself, or for usefulness of intangible assets in case that it is used 21.11.2012 internally;
Subject needs to prove market existance for intangible assets production or for intangible assets itself, or for usefulness of intangible assets in case that is is used internally; Avalilability of appropriate technical, financial and other sources for finishing of development and usage or sale of intangible assets; Possibility of reliable cost detrmining which can be credited to intangible assets development
IF ABOVE MENTIONED REQUIREMENTS ARE NOT SATISFIED, DEVELOPMENT COSTS ARE PERIOD EXPENSES!
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Costs which ocurr related with research activity, and which could be capitalized are:
Material and service costs which are used or spent in creating of intangible assets Salaries, wages and other costs of employees that are directly included in creating of that asset, Fees for legal rights registering, Depreciation of patents and licences which are used for creating of tangible assets
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Concession is an agreement by which concession provider (government or other unit) is obliged to divide certain economic rights to concessionaire for ceratin fee Concessions are usually divided on public interests (building of roads, bridges) and on concessions which are related to natural resources exploatation (water, oil, gass, etc.) Concession payment according to contract is recorded as intangible long-term assets and through depreciation calculation is divided on periods of concession
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Patent is exclusive right of uage of own inovation after patent registration by competent governement institution. By patent registering, inovation is protected from incompetent usage, the owner of the patent retain exclusive right of usage, offer or selling that patented inovation Patent can be ycquired externally (purchase from others) or developed internally
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If patent is developed internally it a result of research and development activities and in that case is recognized through positions of development Patent can be separate position of long-term intangible assets if it is acquired externally In that case patent is recorded per purchasing cost which consists of purchasing price enlarged for depending purchasing costs (fees for legal services, administartive fees and similar)
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Licence is redeemed right of usage of foreign patented inovation. Licence purchase means, for instance, purchase of production rights of certain product on certain period of time. Franchise is exclusive right in case when one company pays to other company fee for certain business for certain period of time, purpose and field. For example, franchise in fast-food industry For recording of patents, licences and franchise it is important to know if the fee is payed in advance for several periods (business years) or it is payable in rates. In first case patent, licence or franchise are recorded as long-term intangible assets.
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Trademark represents symbol of certain company by which this company is different from other companies and similar products. Trademark has promotion goals and is needed to be patented in order to protect it from fraud Trademark can be:
developed internally it is not recognized as intangible assets, Item of purchase it is recognized as intangible assets.
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Goodwill is company reputation which can be a result of companys reputation or monopolistic position or competitive strenght. Goodwill cant be seperatly identified and valued . Goodwill is esential part of the whole company and its value and couldnt be measured as seperate item. Internally acquired goodwill isnt capitalized.
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Goodwill is recorded only when there is a transaction that involves the purchase of an entire business. Goodwill is the excess of cost over the fair market value of the net assets (assets less liabilities) acquired. Goodwill is not amortized but it must be written down if its value is determined to have declined (been permanently impaired).
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Acquisition
Usage
Alienation
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Acquisition at market, Acquisition under business combinations, Acquisition under governement support, Acquisition by exchange for some other type of asset, Internally acquired.
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At
beginning:
under cost principle (acquisition cost)
After
Cost model acquisition cost minus amortization and minus losses for write offs of value (value adjustments); or Revalorization model under fair value
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Acquisition
cost are:
Purchasing price after all deductions of discounts, Dependable costs of acquisition, customs, Excise duties.
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Account payables
(1) (2)
LTIA in preparation
Purchasing (1) price + (2) Dependable cost
(1) + (2)
LTIA in usage
Acquisition cost
Vat receivables
(1)
(2)
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acquisition
Usage
Alienation
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Amortization Is the allocation of the cost of an asset expense over its useful life in a rational and systematic manner. Depreciation is a process of cost allocation, not a process of asset valuation. Why depreciable asset? Because the usefulness to the company and revenue producing ability of each asset will decline over the asset useful life. Asset which amortize must satisfiy following terms:
a)
b)
c)
It is expected that this asset will be used in business activity for a longer period That asset must have usefull life That asset is held by the company for production, selling goods or providing services, or for renting or for administrative purposes.
Amortization will started after that asset has started to be used (next month).
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Basis for amortization is acquisition cost; Period of amortization period of usage (usefull life) AMORTIZATION METHODS 1) TIMELINE METHODS
a) b) c)
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Amortization cost
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acquisition
usage
alienation
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Some forms of LTIA are not transferable or reneweable or there isnt a possibility of independent valuation (goodwill, trade mark and similar). Some forms are acquired under special terms and because of that it sales is limited (concession).
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Write down (value adjustment) is necessary if in afterwards valuation estimates that recovarable amount is lower than book-keeping value.
Recovarable amount is higher amount between fair value and value in usage. Book-keeping amount is acquisition cost minus accumulated depreciation.
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28.11.2012
Intangible
Tangible
land and forest buildings machines and equipment tools plant and office inventory furniture transport vehicles long-term biological assets advanced payment for tangible assets tangible assets in preparation other tangible assets
Financial
Receivables
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Disclosure framework
IAS 16 Property, plant and equipment IAS 36 Imapairment of asset IAS 40 Investment property IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' CFRS 6 Long term asset CFRS 7 Investment property CFRS 8 Non-current Assets Held for Sale and Discontinued Operations
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Asset in material form (touchable, tangible) is those which: Is used in production, delivering goods or for providing services, for renting or in administrative purposes; It will remain in the same form for a period longer then 1 year and it will not be spent in one production cycle.
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Accounting process
Acquisition
Usage
Alienation
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Acquisition of LTTA
Acquisition on market; Internally deployed; Exchange; Business combinations; Government support; Financial leases; Surpluses; Donations.
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Accounting recording
Account payables
(1) (2)
LTTA in preparation
Purchasing (1)
(1) + (2)
LTTA in usage
Acquisition costs
VAT receivables
(1)
(2)
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Cost includes all costs necessary to bring the building to working condition for its intended use :
Preparation of building site; Projects and other documentation based on which building was build (architect, geodesist etc.) Necessary licenses for water, heating, telephone, etc. Costs for arrangement of surfaces ment for usage (acess roads, enviroment etc).
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has a character of invoices Used when is a longterm period of building Method for gradation of finishing buiding
After every ethap there is a settlement by temporary situation,
Afterwards recognition:
Cost method After initial recognition as asset, property, plat and equipment should be shown under cost reduced for accumulated depreciation and accumulated losses from value adjustments, Revaluation method or revalorization (under fair value) Property, plant and equipment whose fair value could be reliable measured should be recognized under revaluated amount fair value on the date of revaluation reduced for latter accumulated depreciation and latter accumulated losses from value adjustments.
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Advance paymemt
Given advances for LTTA
Money
S0 X
Taken advances
Money
Payables for takn advances
S0 X
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SURPLUS
(1)
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INVENTORY DEFICIT
VALUE CORRECTION (1) (1) S0 X
ASSET S0 X
DEFICIT (1)
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Accounting process
Acquisition
Usage
Alienation
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Amortization of LTTA
Amortization Is the allocation of the cost of an asset expense over its useful life in a rational and systematic manner. Depreciation is a process of cost allocation, not a process of asset valuation. Why depreciable asset? Because the usefulness to the company and revenue producing ability of each asset will decline over the asset useful life. Asset which amortize must satisfiy following terms:
a) b) c) It is expected that this asset will be used in business activity for a longer period That asset must have usefull life That asset is held by the company for production, selling goods or providing services, or for renting or for administrative purposes.
Amortization will started after that asset has started to be used (next month).
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Depreciation recording
Accumulated depreciation of LTTA Depreciation cost
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Timeline methods
o PROPORTIONAL amount of depreciation is the same in useful life o DEGRESSIV MEHOD amount of depreciation declines in useful life o PROGRESSIV METHOD amount of depreciation inclines in useful life.
Proportional method
n = estimated number of effects in total useful life n1 = actual number of effects in one period
Accounting process
Acquisition
Usage
Alienation
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Alienation processes:
Sale Disposal Donations Inventory surplases
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SALES
Accumulated depreciation Expenses of sold LTTA carrying amount .
LTTA in usage
S0
AC
DEP
S0
CA
Account receivables
VAT payables
SP and VAT
VAT
SP
donation
LTTA in usage
Accumuated depreciation
Carrying amount
S0
AC
DEP
S0
CA
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27
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INTANGIBLE
TANGIBLE
FINANCIAL
stakes (shares) by related companies given loans to related companies participate intersts investments in securities given deposits other long-term financial assets
RECEIVABLES
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TERM definitions
Financial asset is considered to be all financial instrumemt which could be measured and recognized. LTFA are all financial investments for a period longer than 1 year. By investments and holding financial asset they could gain certain benefits which depends about the type of investments like interest rate, dividends , etc.
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Disclosure framework
IAS 32 FINANCIAL INSTRUMENTS IAS 39 FINANCIAL INSTRUMENTS IFRS 7 FINANCIAL INSTRUMENTS: disclosure CFRS 9 FINANCIAL ASSET
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LT RECEIVABLES
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LT RECEIVABLES
Comprehend receivables with the maturity date longer then 1 year.
FORMS:
Receivables from related companies, receivables from sales on credit, other receivables
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Equities
Corporation
Is a legal entity that is formed through a corporate charter and can operate in various states (must have a license from each state in which it does business), but is incorporated in only one state.
Classified by purpose and ownership Purpose - profit or nonprofit Ownership - publicly or privately held
Transparency 13-2
Corporation
Corporate charter The legal document establishing a corporation under the laws of its appropriate jurisdiction. It specifies the types of equities and their terms, number of shares that can be issued (authorized), and the par value of these issues.
Transparency 13-3
Ownership
Publicly Held Corporation May have thousands of stockholders and its stock is regularly traded on national securities markets. Privately Held Corporation May have few stockholders and does not offer its stock for sale to general public.
Transparency 13-4
Characteristics of a Corporation
Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital Continuous life Corporation management Government regulations Additional taxes
Transparency 13-5
Stockholders cannot bind corporation unless the stockholder is acting as an agent of the corporation.
Transparency 13-6
Transparency 13-7
Transparency 13-8
Continuous Life
Corporation is separate legal entity; thus, a corporation is continuous and is not affected by withdrawal, death, or incapacity of any stockholder.
Transparency 13-9
Corporation Management
The corporation establishes by-laws upon incorporation. Stockholders manage corporation indirectly through board of directors. Board of directors formulates operating policies selects officers to execute policy and to perform daily management functions.
Transparency 13-10
Stockholder Rights
Vote on the election of Board of Directors Can share in corporate profits through dividends assuming declared Entitled to keep the same percentage of ownership if new shares are offered for sale. Entitled to pro rata share (based on ownership percentage) of the assets in liquidation
Transparency 13-11
Transparency 13-13
Transparency 13-14
Stock Terms
Authorized Stock Maximum amount of stock a corporation is allowed to sell as authorized by corporate charter. Amount must be disclosed on balance sheet. Issued Stock Number of shares originally sold to stockholders.
Outstanding Stock Number of shares held by stockholders (i.e.,shares issued minus shares reacquired treasury stock).
Transparency 13-16
Par Value
Par value is the legal capital per share that must be retained in the business.
NOTE: Par value has NO relationship to the market value of the stock.
Transparency 13-17
Transparency 13-18
NOTE: Since the stock is issued at par, there is no additional paid-in capital
Transparency 13-20
Transparency 13-21
Treasury Stock
Treasury stock is a corporation's issued and outstanding stock that has been reacquired by the corporation and held in treasury for future use.
Transparency 13-23
Increase trading of company's stock in securities market in hopes of enhancing market value.
Have additional shares available for use in acquisition of other companies.
Transparency 13-24
Transparency 13-25
32,000
32,000
Transparency 13-26
Treasury Stock
The Treasury Stock account is debited for the cost ($32,000) of the shares (i.e., contra equity account).
The original amount of Common Stock is not affected because the number of issued shares does not change.
Treasury stock is considered a contra equity account (i.e., it has a debit balance when the normal balance is a credit) and thus reduces the stockholders' equity section of the balance sheet.
Transparency 13-27
Preferred Stock
A type of stock that has contractual preferences over common stock. Preferred stockholders do not have voting rights.
Preferences
Dividends Assets in the event of liquidation
Transparency 13-29
Preferred Stock
Assume Rhody issues 1,000 shares of $100 par value preferred stock for $12 cash per share. Cash 120,000 Preferred Stock Additional Paid-in Capital - PS
100,000 20,000
Transparency 13-30
Dividend Preferences
Preferred stockholders have the right to the distribution of corporate income before common stockholders. Therefore, common shareholders will not receive any dividends until preferred stockholders have received their dividends.
Generally, the per share dividend amount is stated as either a percentage of the par value or as a specified amount.
Transparency 13-32
Dividends in Arrears
Unpaid prior-year dividends are referred to as dividends in arrears and are not considered a liability. No liability exists until the dividend is declared by the board of directors. However, the amount must be disclosed in the notes to the financial statements. Thus, this is an example of an unrecorded economic liability.
Transparency 13-34
Dividends in arrears ($7,000 x 2) $ 14,000 Current-year dividends 7,000 Total preferred dividends $ 21,000
Transparency 13-35
Dividend
A dividend is a distribution by a corporation to its stockholders on a pro rata basis. Pro rata means that if you own 10% of the common shares, you will receive 10% of the dividend. However, dividends are reported on a per share amount. Dividends come in two forms: cash stock.
Transparency 13-36
Cash Dividend
A cash dividend Is a pro rata distribution of cash to stockholders.
Transparency 13-37
Transparency 13-38
Transparency 13-39
49,000
NOTE: We dont pay dividends on treasury stock, since that, in essence, would be paying dividends to ourselves.
Transparency 13-40
Transparency 13-41
49,000
49,000
Transparency 13-43
A Stock Dividend
A stock dividend Is a pro rata distribution of the corporation's own stock to stockholders. Results in a decrease in retained earnings and an increase in paid-in capital.Thus, it does not decrease total stockholders' equity or total assets. Is often issued by companies that do not have adequate cash to issue a cash dividend.
Transparency 13-44
Stock Dividends
Assume you own 2% of Rhody (3,920 of its 196,000 shares of outstanding common stock) and it declares a 10% stock dividend. Rhody would issue an additional 19,600 shares (196,000 x 10%) and you would receive 392 (2% x 19,600) shares. After the stock dividend your ownership interest would remain at 2% (4,312 /215,600). Note: You now own more shares of stock, but your ownership interest has not changed.
Transparency 13-45
To emphasize that a portion of stockholders' equity has been permanently reinvested in business and is unavailable for cash dividends.
Transparency 13-46
Transparency 13-47
Transparency 13-48
Note: Although total stockholders' equity remains the same, a stock dividend rearranges the composition of stockholders' equity.
Transparency 13-50
Stock Split
Is the issuance of additional shares of stock to stockholders accompanied by: A reduction in the par or stated value. An increase in number of shares. A stock split does not have any effect on total paid-in capital, retained earnings, and total stockholders' equity
Transparency 13-52
Stock Split
Assume that instead of issuing a 2% stock dividend, Rhody issues a 2-for-1 stock split on its 196,000 shares of common stock. EFFECTS OF STOCK SPLIT No journal entry is necessary. Par Value per Share decreases and number of shares outstanding increases
Transparency 13-53
Transparency 13-55
Retained Earnings
Retained earnings represents the net income that is retained in the business. Retained earnings is net income minus dividends paid since the formation of the business. The balance in retained earnings is part of the stockholders' claim on the total assets of the corporation.
Retained Earnings
For example, a $100,000 balance in retained earnings does not mean that there should be $100,000 in cash.
Transparency 13-57
Transparency 13-58
Stock Options
Generally, compensation expense is not recorded upon issue of the stock options. This is permitted as long as the stock price equaled or was lower than the exercise price at the time the options were issued. However, the entity must disclose in the pro forma the effect the stock options would have had on net income and diluted EPS if it was recognized as an expense.
Transparency 13-59
Stock Options
On December 1, 2004, Rhody issues 5,000 stock options to the company president. At the time, the fair market value of the stock ($15) is equal to the exercise price ($15). What would Rhody record as compensation expense at the date of issuance?
Transparency 13-60
Stock Options
Rhody would not make a journal entry to record compensation expense. When the stock options are exercised, it would record the entry for the issuance of the stock. However, it must make a footnote disclosure in the financial statements to reflect the effect this would have had on net income and EPS.
Transparency 13-61
Stock Options
On March 1, 2006, the president of Rhody exercises his option to buy the 5,000 shares of stock when the fair market value of the stock is $30. Recall that the exercise price was $15 and the par value of Rhody stock is $1. How does Rhody record the effect of the issuance of stock?
Transparency 13-62
Stock Options
Rhody would make the following journal entry:
Cash $75,000* Common Stock 5,000 Additional paid-in capital 70,000 * ($15 exercise price x 5,000 shares)
Transparency 13-63
Transparency 13-64
Net Income
Transparency 13-65
Transparency 13-66
Net Income - Preferred Stock Dividends Average Number of Shares of Common Stock Outstanding
Transparency 13-67
Transparency 13-69