Textbook Notes (362,789)
Canada (158,053)
Business (2,364)
BU227 (27)

BU227 - General Theory.docx

10 Pages
Unlock Document

Wilfrid Laurier University
Dwayne Moore

BU 227 FINAL EXAM REVIEW Part I: General Theory CHAPTER 7 TYPES OF ASSETS  Long lived assets used in the operation of a business are divided into categories: o Property, Plant, and Equipment (Tangible Capital or Fixed Assets) o Intangible Assets 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 EXPENDITURE AND 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 MEASURING AMORTIZATION  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  A taxpayer 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 INTANGIBLE ASSETS  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  Operating Activities: 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 Known Amount – 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 OF A CORPORATION  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 obtain Articles 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 FOR AVAILABLE 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 CONSOLIDATION ACCOUNTING  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  Investing Activities: 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 A company 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 company’s common shares o The
More Less

Related notes for BU227

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.