Notes for Accounting II

分享一下财务分析的笔记
by Feiran Jia

4 Cash and Accounts Receivable

Reporting Cash in the Balance Sheet

1. Cash equivalents
2. Restricted Cash
3. Lines of Credit

Reconciling the Bank Statement

Bank Statement 银行对账单

A bank statement shows the account balance at the beginning of the month, the deposits, the checks paid, any other additions and subtractions duting the month, and the new balance at the end of the month.

Bank reconciliation 银行存款余额调节表

Explains the difference between cash reported on bank statement and cash balance in depositor’s accounting records.

Normal Differences between Bank Records and Accounting Records

1. Outstanding checks 在途支票： 公司签发并记录了支票，未送到银行兑现

2. Deposits in transit 在途存款： 储户已经记录现金收款，未到达银行。

3. Service Charge 服务费：银行通常为处理小额账户收取费用。

4. Charges for depositing NSF checks 存入 NSF支票的费用

   Not Sufficient Funds, 客户支票一存入银行，银行贷记储户账户。储户看作客户的应收帐款。

5. Credits for interest earned 赚取的利息贷项： 月底银行将利息计入储户账户，并在银行对账单中报告。

6. Miscellaneous bank charges and credits 杂项银行费用和贷项。

Balance per Bank + Deposits in Transit - Outstanding Checks ± Bank Adujustments = Adjusted Balance

Balance per Depositor + Deposits by Bank + Interest Earned (CM) - Service Charge - NSF Checks - (DM) ± Book Adjustments = Adjusted Balance

Updating the Accounting Records

Accounts Receivable

Uncollectible amounts 坏账 are loss of accounts receivable

Matching principle: expense should be matched with revenue

Allowance for Doubtful Accounts 坏账准备账户

Dr. Uncollectible Accounts Expense (bad debt exp. 估值)

​ Cr. Allowance for doubtful accounts (contra assert account)

Estimate Uncollectible Amount: Balance Sheet Approach

1. Estimated uncollectible accounts
2. The current balance in the allowance for doubtful accounts

Jan. 1, 2013, Co. A started its business. In January, Co. A earned $200,000 revenue, no cash was collected.

On 2 Feb. customer Mr. B went bankruptcy 破产, $500 is determined by Co. A to be uncollectible. //之前预测的收不回钱这件事真实发生了

In February, Co. A earned another $200,000 revenue, no cash was collected for either Jan. or Feb. revenue.

Co. A records uncollectible accounts expense the end of every month. Co. A estimate 6% of its AR will not be collected.

Write-off an uncollectible account receivable

• When an account receivable from a specific customer is determined to be uncollectible, it should be write off.

2 Feb.

Dr, Allowance 500

​ Cr. A.R. 500

28 Frb.

​ A.R. (199500+200,000)*6%

Dr. bad debt exp.

​ Cr. Allowance

Before Write-off After Write-off A.R 200,000|199,500 Allowance for doubtful account 12,000|11,500 Cash realizable value 188,000|188,000

Net Realizable Value Remains the Same

Recovery of an Account Receivable Previously Written Off

Mr. B, for whatever reason, paid back $500 to Co. A on Mar. 5.

GENERAL JOURNAL

DATE Account Titles Debit Credit 5/5 Accounts Receivable (Mr.B) 500 Allowance for Doubtful Accounts 500 Cash 500 Accounts Receivable (Mr. B) 500

Estimating the percentage: The Aging Schedule

Estimating Credit Losses — The Income Statement Approach

• Uncollectible accounts’ percentage is based on actual uncollectible accounts from prior years’ credit sales.

Net Credit Sales × % Estimated Uncollectible / Amount of Journal Entry

In the current year, EastCo had credit sales of $60,000.

Historically, 1% of EastCo’s credit sales has been uncollectible.

For the current year, the estimate of uncollectible accounts expense is 600.
(60,000 × .01 = $600)

GENERAL JOURNAL

DATE Account Titles Debit Credit 31/12 Uncollectible Accounts Expense 600 Allowance for Doubtful Accounts 600

Notes Receivable and Interest Revenue

• Maker—the person who signs the note and thereby promises to pay.
• Payee—the person to whom payment is to be made.

Notes Receivable and Interest Revenue

On November 1, Hall Company loans $10,000 to Porter Company on a 3 month note earning 12 percent interest.

On December 31 st , Hall Company needs an adjusting entry to record the interest revenue on the Porter Company note.

DATE Account Titles Debit Credit 31/12 Interest Receivable 200 Interest Revenue 200 Feb. 1 Cash 10,300 Interest Receivable 200 Interest Revenue 100 Notes Receivable 10,000

5 Plant Assets

Capital Expenditures and Revenue Expenditures

• Capital Expenditure 我们做的都是这些
• Revenue Expenditure 只存在一个period

cost = Asset price + Reasonable and necessary costs （for getting the asset to the desired location / for getting the asset ready for use）

Special Considerations

Land

• Cost includes real estate commissions, escrow fees, legal fees, clearing and grading the property.
• What if land purchased together with an old building on it…

买地拆房子为了造房子，可以把这些花费放在land的cost里

Land Improvement

• Improvements to land such as driveways, fences, and landscaping are recorded separately. Subject to depreciation.

  路灯、栏杆等需要折旧，land不需要折旧

Building

• Costs incurred for remodeling prior to the building being put in use are considered part of the building’s cost.

Equipment

• Purchase price plus costs incurred to get the equipment in good running order are treated as part of the cost of the asset.
• Once the equipment has been placed in operation, maintenance costs are treated as expenses.

使用之前的可以debit到equipment 发生维修的是exp

lump-sum purchase

按照单买的比例

• The total cost must be allocated to separate accounts for each asset.
• The allocation is based on the relative Fair Market Value of each asset purchased

Depreciation

Def. The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.

Book Value shown on the balance sheet

• Cost – Accumulated Depreciation

Accumulated Depreciation

• Contra-asset
• Represents the portion of an asset’s cost that has already been allocated to expense.

Causes of Depreciation

• Physical deterioration
• Obsolescence

折旧方法

Straight-Line Depreciation

Depreciation Expense per Year = (cost -Residual Value)/ Years of Useful Life

Depreciation for Fractional Periods

• Nearest whole month
  
  • Round the calculation to the nearest month
• Half-year convention
  
  • Record only half year’s depreciation on all assets acquired during the year.

Declining-Balance Method

Depreciation Expense = Remaining Book Value Accelerated Depreciation Rate*

• The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of (1÷Useful Life).

Revising Depreciation Rates

On January 1st, equipment was purchased that cost $10,000, has a useful life of 5 years and no salvage value. Three years later, the useful life was revised to 8 years total (5 years remaining).
Calculate depreciation expense for the year ended December 31st of the fourth year, using the straight-line method.

Impairment of Plant Assets

If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value. 带来的价值是以下两个中高的那一个

1. market value
2. value in use 使用创造价值

Disposal of Plant and Equipment

• If Cash > BV, record a gain (credit).
• If Cash < BV, record a loss (debit).
• If Cash = BV, no gain or loss.

Disposal selling price $10,000

Dr. Cash 10,000

Dr. Acum Dep 80,000

Loss on Disposal 10,000

Cr. Truck 100,000

Disposal selling price $30,000

Dr. Cash 30,000

Dr. Acum Dep 80,000

Cr. Truck 100,000

Cr. Gain on Disposal 10,000

Another Example

Co. A Balance Sheet (Extracts) 31 Dec. 2013 Machine 12,000 Less Accumulated Dep (2,400)

Dr. Cash 8000

​ Accum.Dep 2700

​ Loss on Disposal 1300

Cr. Machine 12000

### Trading in Used Assets
for New Ones

6 Liabilities

• 负债应偿还日期：到期日（maturity date）
• Defined as debts or obligations arising from past transactions or events.
• Current Liabilities: Maturity ≤ 1 year
• Noncurrent Liabilities: Maturity > 1 year

Distinction Between Debt and Equity

The acquisition of assets is financed 
from two sources:

• Debt Funds基金、资金 from creditors 债权人, with a definite due date, and sometimes bearing interest.
• Equity Funds from owners.

Current Liabilities

Current Liabilities： Accounts Payable

• Short-term obligations to suppliers for purchases of merchandise and to others for goods and services.
  
  • Merchandise inventory invoices
  • Office supplies invoices
  • Shipping charges
  • Utility and phone bills

Current Liabilities：Notes Payable

• When a company borrows money
• Current Portion of Notes Payable: The portion of a note payable that is due within one year, or one operating cycle, whichever is longer.
• Total Notes Payable = Current Notes Payable + Noncurrent Notes Payable

Accrued Liabilities 应计负债

• Accrued liabilities arise from the recognition of expenses for which payment will be made in the future. Accrued liabilities are often referred to as accrued expenses. 确认将在未来期间支付的费用而引起的
  
  • Interest payable 应付利息
  • Income taxes payable 应交所得税
  • Accrued payroll liabilities

Unearned Revenue liability 流动负债

• Cash is sometimes collected from the customer before the revenue is actually earned.
• Cash is received in advance => Deferred revenue is recorded =>(As the earnings process is completed) Earned revenue is recorded

Long Term Liabilities: Bond Basics

• Bonds usually involve the borrowing of a large sum of money, called principal.

• The principal is usually paid back as a lump sum at the end of the bond period.

• Individual bonds are often denominated 结算 with a par value 票面, or face value, of $1,000.

• Bonds usually carry a stated rate of interest, also called a contract rate or coupon rate.

• Interest is normally paid semiannually.

• Interest is computed as:

  ​ Principal × Stated Rate × Time = Interest

• Bonds are issued through an intermediary called an underwriter.

• Bonds can be sold on organized securities exchanges.

• Bond prices are usually quoted as a percentage of the face amount.

  For example, a $1,000 bond priced at 102 would sell for $1,020.

7 Stockholdesrs’ Equity

Rights of Stockholders

• Voting (in person or by proxy 代理人).
• Proportionate distribution of dividends.
• Proportionate distribution of assets in a liquidation 清算.

### Authorization and Issuance
 of Capital Stock

Authotized Shares

1. Issued Shares

• Outstanding Shares

  Outstanding shares are issued shares that are owned by stockholders.

  在股东手里,指已经发行给并由投资人持有的股份

• Treasury Shares 库存股

  Treasury shares are issued shares that have been reacquired by the corporation.

  在公司手里，库存股。股份有限公司已发行的股票，由于公司的重新回购或其他原因且不是为了注销的目的而由公司持有的股票。库存股股票既不分配股利，又不附投票权，一般只限于优先股，

2. Unissued Shares

Recording the issuance of capital stock

Par Value (stated value) Common Stock

=>

Record:

1. The cash received.
2. The number of shares issued × the par value per share in the Common Stock account.
3. The remainder is assigned to Additional Paid-in Capital. 缴入资本溢价

#### **Recording the issuance of capital stock
(Par value)**

Assume a corporation issues 10,000 shares of its $2 par value stock for $25 per share.

Description Debit Credit Cash 250,000 Common Stock 20,000 (2*10,000) Additional Paid-in Capital 230,000 Stockholders’ Equity with Common Stock Stockholders’ Equity Contributed capital: Common stock - $2 par value; 50,000 shares authorized; 10,000 shares issued and outstanding $ 20,000 Additional paid-in capital 230,000 Retained earnings 65,000 Total stockholders’ equity $ 315,000

#### Recording the issuance of capital stock
(No Par Value)

No-Par Common Stock

=>

Record:

1. The cash received.
2. All proceeds credited to Common Stock

Assume a corporation issues 10,000 shares for $25 per share.

Description Debit Credit Cash 250,000 Common Stock 50,000 Stockholders’ Equity with Common Stock Stockholders’ Equity Contributed capital: Common stock - 50,000 shares authorized; 10,000 shares issued and outstanding $ 250,000 Retained earnings 65,000 Total stockholders’ equity $ 315,000

Preferred Stock

A separate class of stock, typically having priority over common shares in …

• Dividend distributions (rate is usually stated).
• Distribution of assets in case of liquidation.

Other Features Include:

1. Cumulative dividend rights.
2. Usually callable by the company.
3. Normally has no voting rights.
4. Some preferred stock is convertible into shares of common stock.
5. 股利优先于普通股

Cumulative Preferred Stock

1. 可累加：Dividends in arrears must be paid before dividends may be paid on common stock.
2. 不可累加：Undeclared dividends from current and prior years do not have to be paid in future years.

**Common Stock and Preferred Stock
Balance Sheet Reporting**

Stock Splits 股票分割

• Companies use stock splits to reduce market price.

• Outstanding shares increase, but par value is decreased proportionately.

  ​

• No entry is needed.

• Disclose in notes

• Change the description in the balance sheet.

**Balance Sheet Presentation (2 for 1 split)
**

before

Stockholders’ Equity with Common Stock Stockholders’ Equity Contributed capital: Common stock - $2 par value; 10,000 shares issued and outstanding $ 20,000 Additional paid-in capital 230,000 Retained earnings 65,000 Total stockholders’ equity $ 315,000

after

Stockholders’ Equity with Common Stock Stockholders’ Equity Contributed capital: Common stock - $1 par value; 20,000 shares issued and outstanding $ 20,000 Additional paid-in capital 230,000 Retained earnings 65,000 Total stockholders’ equity $ 315,000

Treasury Stock

• No voting or dividend rights
• Contra equity account
• Treasury shares are issued shares that have been reacquired by the corporation.
• When stock is reacquired, the corporation records the treasury stock at cost.

**Recording Purchases of 
Treasury Stock**

Riley Corporation reacquires 1,600 of its common shares ($5 par value) in the open market at $90 per share.
Prepare the journal entry to record the purchase of treasury stock.

Description Debit Credit Treasury Stock 144,000 Common Stock 144,000

1,600 shares * 90=$144,000

Balance Sheet Reporting

• Treasury stock is an contra equity account, not an asset.
• Reduction of equity

Dividend Dates

Ex-Dividend Date

• A person who buys the stock before the ex-dividend date is entitled to receive the dividend that has been declared.

No entry

Date of Record

• Stockholders holding shares on this date will receive the dividend. (No entry)

No entry

Date of Payment

• Record the payment of the dividend to stockholders.

Description Debit Credit May 1 Dividends Payable 500,000 Cash 500,000

Stock Dividends

Distribution of additional shares of stock to stockholders.

1. No change in total stockholders’ equity.
2. No change in par values.
3. All stockholders retain same percentage ownership.

Entries to Record
 Stock Dividends

In accounting for a small stock dividend (less than 20%), the market value of the new shares is transferred from Retained Earning account to the paid-in capital accounts.

On June 1, Aspen Corporation has outstanding 100,000 shares of $5 par value common stock with a market value of $25 per share. The company declares a 10% stock dividend on this date. The dividend is distributable on July 15 to stockholders of record on June 20. Let’s look at the journal entries.

Date of Declaration

• Board of Directors declares the dividend.
• Do not record a liability.

Date of Payment

• Record the payment of the dividend to stockholders.

Reasons for Stock Dividends

• Management often finds stock dividends appealing because they allow management to distribute something of perceived value to stockholders while conserving cash which may be needed for other purposes.
• Stockholders like stock dividends because they receive more shares, often the stock price does not fall proportionately, and the dividend is not subject to income taxes (until the shares received are sold).

Financial Statement Analysis

Tools of Analysis

1. Dollar & Percentage Changes

2. Trend Percentages: Trend analysis is used to reveal patterns in data covering successive periods.

3. Component Percentages

Financial Statement Base Amount Balance Sheet Total Assets Income Statement Revenues

4. Ratios

​

Tools Dollar Change = Analysis Period Amount - Base Period Amount Percentage Change = Dollar Change ÷ Base Period Amount Trend Percentages = Analysis Period Amount / Base Period Amount × 100% Component Percentages = Analysis Amount / Base Amount × 100%

Different types

• Short term liquidity
• Long term credit risk
• Profitability
• Market price

Can provide clues to underlying conditions that may not be apparent from an inspection of the individual components.
Single ratio by itself is not very meaningful.

Liquidity Ratios

• Measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.

WHO CARES?

• Short-term creditors such as bankers and suppliers
• Current ratio
• • The ability to pay current liabilities with current assets

• Acid-test ratio (quick ratio)

• • the ability to pay current liabilities if they come due immediately
• Working capital
• Receivable turnover
• • the no. of times, on average, receivables are collected during the period.
  • The higher the better!

• Average collection period

• • average days taken to collect receivables.
  • The lower the better!

• Inventory turnover
  the no. of times, on average, the inventory is sold during the period

• Average days to sell inventory

  average days taken to sell inventory

• Operating cycle

Liquidity Ratio Current ratio = Current Assets ÷ Current Liabilities Quick ratio = Quick Assets ÷ Current Liabilities Working capital = Current Assents - Current Liabilities Accounts receivable turnover rate = Net Sales ÷ Average Accounts Receivable Days to collect average accounts receivable = 365 Days ÷ Account Receivable Turnover Rate Inventory turnover rate = COGS ÷ Average Inventory Days to sell the average inventory = 365 Days ÷ Inventory Turnover Rate Operating cycle = Days to Sell Inventory + Days to Collect Receivables

Long term credit risk ratio

• Measure the ability of the enterprise to survive over a long period of time

  WHO CARES?

• Long-term creditors and stockholders

• Debt ratio

  • the % of total assets provided by creditors
  • the higher the ratio, the greater the risk

• Interest Coverage

  • the ability to meet interest payments as they come due
  • the greater the cover, the less risk of default

Long term credit risk ratio Debt ratio = Total Liabilities ÷ Total Assets Interest Coverage ratio = Income before Interest and Taxes ÷ Annual Interest Expense

Profitability Ratios

• Measure the income or operating success of an enterprise for a given period of time

  WHO CARES? Everybody
  WHY? A company’s income affects:

• its ability to obtain debt and equity financing

• its liquidity position

  • its ability to grow

• Gross profit rate

• Net profit rate (Net income as a percentage of net sales)

• EPS

• Return on Assets (ROA)
  Productivity of assets

• Return on Equity (ROE)

  Rate of return earned on equity

• Return on common stockholders’equity

  • how much profit is earned for each dollar invested by common stockholder

Profitability Ratios Gross profit ratio = Gross Profit ÷ Net Sales Net income as a percentage of net sales = Net Income ÷ Net Sales Earnings per share = (Net Income - Preferred Dividends)/ Average Number of Common Shares Outstanding Return on assets = Operating Income / Average Total Assets Return on equity = Net Income/ Average Total Equity Return on common stockholders’ equity = (Net Income - Preferred Dividends)/ Average Common Stockholders’ Equity

Market Price

• Price/earnings ratio (P-E)
  
  • investor’s assessment of a company’s future prospects

Market Price Price-earnings ratio = Current Stock Price ÷ Earnings per Share