Liabilities and - PowerPoint Presentation

Slide1

Liabilities and Stockholders’ Equity

CHAPTER 8Slide2

Learning ObjectivesAfter studying this chapter, you should be able to:

Describe how businesses finance their operations

Describe and illustrate current liabilities, notes payable, taxes, contingencies, and payroll

Describe and illustrate the financing of operations through issuance of bonds

Describe and illustrate the financing of operations through issuance of stock

Describe and illustrate the accounting for cash and stock dividends

(continued…)Slide3

Learning ObjectivesAfter studying this chapter, you should be able to:

Describe the effects of stock splits on

the

financial

statements

Describe financial statement reporting of liabilities and stockholders’ equity

Analyze the impact of debt or equity financing on earnings per share

Financial Analysis:

Describe and illustrate

the

use

of the ratio of liabilities to total

assets and

the price-earnings ratio in assessing

a company’s

financial condition and

prospects

for

future performanceSlide4

Describe how businesses finance their operations LEARNING OBJECTIVE 1Slide5

Financing OperationsBusinesses must finance operations through one of the two ways:

________

Financing – includes all liabilities owed by a business

________

Financing – includes investments from owners of the business

Proprietorship or partnership:

obtains equity financing

from __________

__________

Corporation

:

obtains equity financing

by ____________________Slide6

Describe and illustrate current liabilities, notes payable, taxes, contingencies, and payrollLEARNING OBJECTIVE 2Slide7

LiabilitiesDebts owed to others

_______ liabilities – due within a short time, usually 1 year

_______ liabilities – due beyond 1 year

_______ liability –

in some cases a company incurs a liability if certain events occur in the futureSlide8

Notes PayableNotes payable are often issued to:

Satisfy an account payable

Purchase merchandise or other assets

______: Issuer of the note

______: party receiving the noteSlide9

Notes PayableAssume that a business issues a 90-day, 6% note for $1,000, dated August 1 to satisfy an account payableSlide10

Notes PayableAssume that a business issues a 90-day, 6% note for $1,000, dated August 1 to satisfy an account payableSlide11

Income TaxesIncludes federal income taxes and possibly state and local income taxes

Most corporations are required to pay ______ _____ taxes in four installments throughout the year

Taxable income

of a corporation is determined according to the

__________

Income

before taxes reported on the income statement is usually different from ______

incomeSlide12

Income TaxesAssume that a corporation, with a calendar-year accounting period, estimates its income tax expense for the year as $84,000

The effect on the accounts and the financial statements of the first of the four estimated tax payments of $21,000 (1/4 of $84,000) is as follows:Slide13

Taxable Income vs. Income Before Taxes

Taxable Income – determined according to __________________ (IRS Code)

Income Before Taxes – determined according to

__________________

Differences between the two may need to be allocated between various financial statement periodsSlide14

Accounting for Temporary DifferencesSlide15

Contingent Liabilities

Accounting Treatment of Contingent LiabilitiesSlide16

PayrollAmount paid to employees for services they provide during a period

______ – payment for managerial, administrative, or similar services

______ – payment for manual labor, both skilled and unskilled

Payroll and related taxes significantly impact the net income of most businessesSlide17

Recording PayrollAssume that McDermott Co. had a gross payroll of $13,800 for the week ending April 11. Assume that the FICA tax was 7.5% of the gross payroll and that federal and state withholding were $1,655 and $280, respectivelySlide18

Payroll Taxes

___________

become a liability when the related payroll is paid

to employees

The

liability

is relieved when the taxes are paid to the appropriate agencies

Employer Taxes

________

________

Employee Taxes

________

________Slide19

Recording Payroll TaxesThe effect on the accounts and financial statements of McDermott Co. of recording the payroll tax liabilities for the week follows:Slide20

Describe and illustrate the financing of operations through issuance of bondsLEARNING OBJECTIVE 3Slide21

BondsA form of interest-bearing note

Bonds include ______ that must be paid on a regular basis

Bonds’

_______ must

be repaid at maturity

____________: Contract between the company issuing the bonds and the bondholders

A bond issue is normally divided into several individual bonds

The most common face value is

_____

per bondSlide22

Calculating the Bond Issue PriceThe price that buyers are willing to pay for the bonds depends on three factors:

___________ of the bonds due at the maturity date

___________ to be paid on the bonds – stated in the bond indenture

This is called the

________

or

________

rate

_____/_____ rate of interestSlide23

Recording Bond IssuanceAssume that a business issues $100,000 of 6%, 5-year bonds, with interest of $3,000 payable semiannually. The market rate of interest at the time the bonds are issued is 6%

Issuance of bonds payable at face amount on January 1.Slide24

Recording Bond Issuance

Assume that a business issues $100,000 of 6%, 5-year bonds, with interest of $3,000 payable semiannually. The market rate of interest at the time the bonds are issued is 6%Slide25

Recording Bond Issuance

Assume that a business issues $100,000 of 6%, 5-year bonds, with interest of $3,000 payable semiannually. The market rate of interest at the time the bonds are issued is 6%Slide26

Bonds Not Issued at Face ValueMarket Rate = _______

Rate

Selling Price

= _______________

Discount on Bonds Payable

Market rate of interest

__

contract rate

Buyers are only willing to pay ____ than the face value for the bonds

Premium on Bonds Payable

Market rate of interest

__

contract rate

Buyers are willing to pay ____ than the face value for the bondsSlide27

Describe and illustrate the financing of operations through issuance of stockLEARNING OBJECTIVE 4Slide28

Stock

_______

– total number allowed to issue

_______

–

shares issued to

shareholders

_______

– shares currently in the hands of stockholdersSlide29

Shares of StockCan be issued with or without assigning a monetary amount:

_____: monetary value stated on stock certificate

_____: some states might require a stated value

Legal Capital

Minimum stockholder contribution required by some statesSlide30

Stock RightsRight to _____ in matters concerning the corporation

Right to share in distributions of ______

Right to share in assets on ______ Slide31

Common

Stock

Preferred

Stock

Common and Preferred Stock

Each share has

________

rights

Each share has ________ rights

Has preference rights over __________

______ rights stated in monetary terms or as % of parSlide32

Issuance of StockThe price at which stock sells depends on a variety of factors:

The financial condition, earnings record, and dividend record of the corporation

Investor expectations of the corporation’s potential earning power

General business and economic conditions and prospectsSlide33

Issuance of StockAssume that a corporation issues 2,000 shares of $1 par value common stock for $55 per shareSlide34

Reacquired Stock____________

Stock that a corporation

has

issued

and then reacquired

Balance

at year-end is reported as a _______ of stockholders’ equity

A corporation may reacquire (purchase) its own stock for a variety of reasons

To provide shares for ______ to employees

To reissue as bonuses to ______

To support the __________ of the stockSlide35

Describe and illustrate the accounting for cash and stock dividendsLEARNING OBJECTIVE 5Slide36

Dividends_____ dividend: When a board of directors authorize the distribution

of cash to stockholders

_____ dividend: When a board of directors authorize the distribution of its stock

to the stockholdersSlide37

Cash DividendsCash distribution of earnings by a corporation to its ___________

Most common form of dividend

Usually three conditions:

_____

_________

______________

Formal action by the ___________Slide38

Dates in Dividend Announcement

_______________________________

_________________________

___________________________Slide39

Cash DividendsAssume a company declares the following cash dividend on December 1 for payment on February 2:Slide40

Stock Dividends Distribution of stock to __________

No

distribution of cash or other assets

Requirements:

________

_________

Formal action by ___________

Amount transferred for small stock dividends (<25% of outstanding shares) is

_________

per shareSlide41

Stock Dividends To illustrate, assume a stockholder owns 1,000 of a corporation’s 10,000 shares outstanding. If the corporation declares a 6% stock dividend, the stockholder’s proportionate interest will not change, as shown below:Slide42

Describe the effects of stock splits on the financial statementsLEARNING OBJECTIVE 6Slide43

_____ _____Process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares

Major objective is to _____ the stock’s market price per share in order to attract more investors Slide44

Stock SplitsSlide45

Describe financial statement reporting of liabilities and stockholders’ equity LEARNING OBJECTIVE 7Slide46

Reporting Liabilities and Stockholders’ EquityLiabilities

_______ liabilities are due within 1 year

_______ liabilities are due beyond 1 year

Stockholders’ Equity

Part of the

balance sheet

Details

of the changes in stockholders’ equity are disclosed in a separate statement Slide47

Balance SheetSlide48

Statement of Stockholders’ EquitySlide49

Analyze the impact of debt or equity financing on earnings per shareLEARNING OBJECTIVE 8Slide50

Earnings Per ShareMeasures the income earned by each share of _________

Major profitability measure reported in the financial statements

_________ – _____________

_______________________

Earning per Share =Slide51

Effect of Alternative Financing Plans

Plan

1:

100% financing from issuing common stock, $10 par value

Plan

2:

50% financing from issuing 4% preferred stock, $50 par value

50% financing from issuing common stock, $10 par value

Plan

3:

50% financing from issuing 6% bonds

25% financing from issuing 4% preferred stock, $50 par value

25% financing from issuing common stock, $10 par valueSlide52

Financial Analysis: Describe and illustrate the use of the ratio of liabilities to total assets and the price-earnings ratio in assessing a company’s financial condition and prospects

for future performance

LEARNING OBJECTIVE 9Slide53

Ratio of Liabilities to Total AssetsUseful in assessing a company’s financial condition and risk

Indicates the percent of a company’s total _____ that are financed with _____

A high ratio indicates the company is financing its operations with a high percent of debt.

Also,

a high ratio indicates that the company may not be able to easily

borrow additional

funds

___________

___________

=

Ratio of Liabilities to Total AssetsSlide54

Ratio of Liabilities to Total AssetsThe following data (in millions) were taken from two of Lowe’s recent financial statements

Year 1

($

______

÷

$

______

)

Year 2

($

______

÷

$

______

)

Ratio of Liabilities to Total Assets

_______

_______Slide55

____________

=

Ratio of Liabilities to

Stockholders’ Equity

________________

Ratio of Liabilities to

Stockholders’ EquitySlide56

Ratio of Liabilities to Stockholders’ EquityThe following data (in millions) were taken from two of Lowe’s recent financial statements

Year 1

($

_____

÷

$

______

)

Year 2

($

_____

÷

$

______

)

Ratio of Liabilities to Stockholders’ Equity

______

______Slide57

Price-Earnings RatioIndicates the market’s assessment of the future earnings potential of a company

_____________________________

=

Price-Earnings Ratio

_____________________________Slide58

Price-Earnings Ratio

The higher a company’s price-earnings ratio, the more

favorable

the market’s assessment of the future earnings potential and growth of the company

Year 2

Year 1

$1.43

$38.44

$1.42

$26.35

Market Price per Share of Common Stock

Earnings per Share of Common Stock

Year 1

($

_____

÷

$

_____

)

Year 2

($

_____

÷

$

_____

)

Price-Earnings Ratio

______

______Slide59

End of Chapter 8