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Chapter 7

ACC100 - Chapter 7, 8, 11, 12

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Ryerson University
ACC 100
Else Grech

ACC100 – Final Exam Notes Chapter 7 • Accounts Receivable o Legal right to collect cash from a customer o Has a future economic benefit = $$$ o Is the result of a credit sale to a customer • Credit sales o Disadvantages:  Slows inflow of cash  Risk of uncollectible accounts • Valuation of Accounts Receivable o 2 issues:  Cannot overstate the value of the accounts receivable on the balance sheet  Question: if we overstate assets, what are we in violation of?  Need to show bad debt expense in the same year as the related revenue  Question: if we don’t overstate assets, what are we in violation of? • Potential uncollectible accounts receivable balances – how can we account for them? o Some accounts receivables will be uncollectible o Don’t know exactly WHICH customers will be uncollectible o Management uses their knowledge (based on past experience, current economic times and industry averages) to GUESS what will go bad in the future o Helps us: determine a conservative value for accounts receivable on the Balance Sheet and determine the Bad Debt Expense on the Income Statement o Call the Allowance method! • Applying the allowance method: o Step 1: Management estimates how much of the year end accounts receivable balance will go back in the next 12 months o Step 2: Management records the amount they estimated in the CURRENT year, against the CURRENT income (matching principle) • Approaches to allowance method: o Percentage of net credit sales (Income Statement approach)  Under this method, the bad debt expense and allowance for doubtful accounts balances on the year-end financial statements are DIFFERENT o Percentage of accounts receivable (Aging method, Balance Sheet approach)  Under this method, the bad debt expense and the allowance for doubtful accounts balances on the year-end financial statements are DIFFERENT Chapter 8 • Acquisition cost of property, plant, and equipment: o Purchase price – discount + duty + transportation charges + installation costs o Acquistion cost only includes ONE TIME COSTS ONLY, not RE- OCCURING COSTS • Depreciation of property, plant, and equipment: o Match cost of assets with periods benefited using:  Straight-line depreciation  Accelerated methods = higher amount of deprecation in early years • Double declining depreciation o = (1 / useful life) x 2 o NOTE: Initially ignore residual value o Final year’s depreciation = amount needed to equate book value with salvage value o Double the straight-line rate on a declining balance (book value) • Reasons for choosing depreciation methods: o Straight-line method  Simplicity  Reporting to shareholders  Comparability  Bonus plans o Accelerated method  Technological rate of change and competitiveness  Comparability • Disposal of capital assets: o Record depreciation up to date of disposal o Compute gain or loss on disposal o Proceeds > Book Value = Gain o Proceeds < Book Value = Loss o In order to determine if you have a gain or loss on sale, you have to look at what the BOOK VALUE of the asset is at the exact time of the sale (You get that information from your depreciation calculations) o Calculate book value FIRST, THEN compare that value to the selling price Chapter 11 • Issuing shares o First issue normally through initial public offering (IPO) o Share price set by company o Once issued, shares of publicly held companies trade on organized exchanges at prices determined between buyers and sellers (no direct impact on company) • Sale of preferred shares: o Share capital can consist of preferred and common shares o Preferred shares listed first in share capital section o Preferred usually do not have voting rights o Accounting for preferred share similar to common shares • Shares issued for Cash o Exchange of cash for certificate of shares • Shares issued for Noncash Consideration o Record at fair market value of consideration given or received, whichever is more readily determinable o Title to land, building, etc. o Exchange of noncash considerations for certificate of shares • Dividends: o Distributed by a corporation to its shareholders on a pro rata (equal) basis (every shareholder gets the same amount) o They are normally in the form of:  Cash  Stock (common shares) • Cash Dividends: o For a cash dividend to occur, a corporation must have:  1. Retained earnings  2. Adequate cash  3. Dividends declared by board of directors o There are 3 important dates with regards to cash dividends:  Date of declaration of cash dividends  Counting of the number of shareholders on record  Payment of cash dividends o Record dividends when declared, not paid o Allocation of cash dividends:  1. Distribute dividends in arrears, if any, to preferred  2. Distribute current dividends to preferred  3. Distribute remainder to common (or to both if preferred is participating) • Stock dividends: o Issue of additional shares proportionately to existing shareholders o Reasons:  Insufficient cash  Market price reduction  Nontaxable to recipients • Stock splits: o Results in additional issuance of shares o Reduces average issue price per share o No change in Shareholder’s Equity accounts (no journal entry) o Not recorded in accounts o Splits reduce market value per share and make shares more affordable to a wider range of investors • Shareholder’s Equity defined: o Contributed capital  $$$ received from the sale of shares to shareholders o Retained earnings  $$$ of net income earned but not paid out as dividends  Retained and reinvested for future growth o SHE = Contribute Capital + Retained Earnings • Number of shares: o Authorized  Maximum amount of sha
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