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BU227 - General Theory

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Carolyn Mac Tavish

BU 227 FINALEXAM REVIEW Part I: General Theory CHAPTER 7 TYPES OFASSETS • Long lived assets used in the operation of a business are divided into categories: o Property, Plant, and Equipment (Tangible Capital or FixedAssets) o IntangibleAssets MEASURING COST • The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use • Buildings (construction): o Architectural fees, Building Permits, Contractor’s Charges, Materials, Labour, Overhead, Cost of Interest • Buildings (purchase): o Purchase Price, Brokerage Commissions, Sales and Other Taxes, Repairing/Renovating • Machinery and Equipment: o Purchase Price (less discounts), Transportation Charges, Insurance in Transit, Sales and Other Taxes, Purchase Commission, Installation Costs, Expenditures (testing), Special Platforms • Land: o Purchase Price, Real Estate Commission, Survey Fees, Legal Fees, Property Taxes, Expenditures (grading and clearing) • Land Improvements: are all improvements located on the land but subject to decay o Paving, Fences, Sprinkler Systems, Lighting in Parking Lot  Land improvement costs are not included in the cost of the land, but carried as a separate asset • Leasehold Improvements: appears on the company’s balance sheet as “Leasehold Improvements” o Amortized over the term of the lease CAPTIAL EXPENDITUREAND IMMEDIATE EXPENSE • Does the expenditure increase capacity or efficiency or extend useful life? o Yes – Capital Expenditure, record as an asset o No – Expenses, record as an expense MEASURINGAMORTIZATION • To measure amortization for a capital asset, we must know cost, estimated useful life, estimated residual value, and the amortization method • Straight-Line Method: o (Cost – Residual Value) / Useful Life, in years • Double Declining Balance Method: o 2 x (Straight-Line Rate per Year) • Units of Production Method: o (Cost – Residual Value) / Useful Life, in terms of units of production AMORTIZATION FOR TAX PURPOSES • Many businesses use the straight-line method for reporting property, plant, and equipment on the balance sheet and amortization expense on the income statement • Ataxpayer can use on method for accounting purposes and another method for tax purposes • An asset can be used after it is fully amortized • The asset and its amortization account remain in the ledger with no additional amortization entries INTANGIBLEASSETS • No physical form o Patents, Trademarks Copyrights, Franchises, Leaseholds, Goodwill • Amortization expense for an intangible asset can be written off directly against the asset account rather than held in an accumulated amortization account • Assets with an indefinite useful life, including goodwill, are not amortized but are subject to an impairment test every period o Patents – are federal government grants that give the holder the right to produce and sell an invention o Copyrights – of literary compositions, musical compositions, films, software, and other works of art o Trademarks (Trade Names or Brand Names) – assets that represent distinctive identifications of a product or service o Franchises and Licenses – privileges granted by private business or government to sell a product or service REPORTING ON THE CASH FLOW STATEMENT • Investing Activities: o Acquisitions and sales of capital assets • OperatingActivities: o Amortization Expense (added to) _____________________________________________________________________________ _ CHAPTER 8 CURRENT LIABILITIES • Obligations due within one year or within the company’s normal operating cycle if it is longer than one year o KnownAmount – Accounts Payable, Notes Payable (short term), HST Payable, Sales Tax Payable, Accrued Expenses, Payroll Liabilities, Unearned Revenues, Current Portion of Long Term Debt  Accounts Payable – are amounts owed to suppliers for goods or services purchased on account  Short Term Notes Payable – are notes payable due within one year; in addition, business must pay interest expense  HST Payable – 13% consumption tax charged on almost all business transactions • Only the ultimate consumer pays HST; HST registrants who are not final consumers can deduct HST paid from HST collected and only remit the difference to the federal government  Accrued Liabilities – liabilities incurred but not yet paid (salaries/wages payable, interest payable, income taxes payable)  Current Portion of Long Term Debt – is the amount of the principal that is payable within one year • At the end of the year, a company reclassifies the amount of its long term debt that must be paid during the upcoming year o Estimated Amount – Warranty Payable, Contingent Liabilities  Contingent Liabilities – are a potential liability that depends on a future event arising out of past events • Record an actual liability if it is likely that the loss will occur and the amount can be reasonably estimated • Report a contingency in the notes to the financial statement if the loss is likely and the amount cannot be estimated • There is no reason to report a contingent loss that is unlikely to occur _____________________________________________________________________________ _ CHAPTER 9 CHARACTERISTICS OFACORPORATION • Separate legal entity • Continuous life and transferability of ownership • Limited liability • Separation of ownership and management • Corporate taxation • Government regulation • Advantages: o Can raise more capital than a proprietorship or partnership can o Continuous life o Ease of transferring ownership o Limited liability of shareholders • Disadvantages: o Separation of ownership o Corporate taxation o Government regulation • Organizing a Corporation: o Incorporators obtainArticles of Incorporation and then Set Bylaws • Authority Structure: o Shareholders o Board of Directors o Chief Executive Officer (CEO) o Chief Operating Officer (COO) • Shareholders’Rights: o Right to sell shares o Vote o Dividends o Liquidation o Pre-emption • Shareholder’s Equity: owner’s equity in a corporation has two main components o Contributed Capital o Retained Earnings • Capital Shares: corporate ownership is evidenced by a share certificate, which may be for any number of shares o Outstanding shares are those actually in the hands of shareholders o Common Shares – the most basic form of capital issued by every corporation o Preferred Shares – a class of shares that has several preferences over common shares ISSUING SHARES • Corporations need money to operate from sources other than borrowing • They sell shares directly to the shareholders or use the service of an underwriter o Accounting for preferred shares follows the pattern illustrated for common shares REPURCHASING SHARES • Repurchased shares are shares that a company has issued and later reacquired o Issuing shares grows a company’s assets and equity o Repurchasing shares shrinks assets and equity RETAINED EARNINGS, DIVIDENDS,AND SPLITS • Retained Earnings: carries the balance of the business’net income less its net losses and less any declared dividends accumulated over a corporation’s lifetime • Dividend: is a corporation’s return to its shareholders of some of the benefits of earnings • Stock Split: is an increase in the number of authorized, issued, and outstanding shares • Cash Dividends o Three relevant dates are Declaration Date, Date of Record, and Payment Date  As part of the declaration, the corporation announces the record date, which follows the declaration date by a few weeks. The shareholders on the record date will receive the dividend. There is no entry for the date of record  When a company has issued both preferred and common shares, the preferred shareholders receive their dividends first • Stock Dividends: o To continue dividends but conserve cash o To reduce the per market share price of its shares • Stock Split: is an increase in the number of authorized, issued, and outstanding shares, coupled with a proportionate reduction in the share’s par value o Decreases the market price of shares • Share Values: o Market value o Redemption Value o Liquidation Value o Book Value REPORTING ON THE CASH FLOW STATEMENT • Financing Activities: o Issuance and Repurchase of Shares, Dividends _____________________________________________________________________________ _ CHAPTER 10 ACCOUNTING FORAVAILABLE FOR SALE INVESTMENTS • The investor usually holds less than 20% of the voting shares and would normally play no important role in the investee’s operations • Available for sale investments are accounted for using the cost method CONSOLIDATIONACCOUNTING • Consolidated Statements: combine the balance sheets, income statements, and other financial statements of the parent company with those of its subsidiaries o Assets, liabilities, revenues, and expenses of each subsidiary are added to the parent’s accounts REPORTING ON THE CASH FLOW • InvestingActivities: o Acquisitions and sales of property, plant, and equipment o Acquisitions and sales of temporary and long term investments _____________________________________________________________________________ _ CHAPTER 11 EVALUATING QUALITY OF EARNINGS • Refers to the characteristics of an earnings number that make it most useful for decision makers o The quality of earnings takes into consideration how net income is generated o Income from continuing operations is considered of higher quality than gains from selling off assets because it is a better predictor of future earnings • Another factor to consider is how early the business begins to record revenue o Acompany that capitalizes costs that should be expensed may not be as profitable as its financial statements show CONTINUING OPERATIONS • The topmost section of the income statement reports income from continuing operations o Income from continuing operations can be used in estimating the value of a c
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