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This is the quiz 1,2 for Chapter 15 & 16

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Chapter 15 & 16

Organizational Costs

Organizational costs are costs incurred to set up a business; such costs include legal fees and promoter’s fees.

Organizational costs are an intangible asset, where half of the costs may be expensed for tax purposes at a 10% declining-balance method.

The journal entry for organizational costs is:

Organizational Costs      XX

            Cash                         XX

 

Financial Statements for a Corporation

Income tax expense occurs in a corporation where net income means income after tax.

Statement of retained earnings replaces statement of owner’s equity in a proprietorship

It measures changes that result from net income, which increases retained earnings, and dividends, which decreases retained earnings.

Shareholder’s equity in a corporation is divided into share capital and retained earnings. Total shareholder’s equity is the sum of the two.

 

Investments

Shares are issued in exchange for cash and in this case the journal entry is:

Cash                                XX

            Common Shares       XX

Other assets can also be exchanges for common shares and the journal entry is:

Asset (cash, land, building, etc)       XX

            Common Shares                         XX

 

Preferred Shares

Preferred shares are another class of corporate shares and often include a preference of payment of dividends and distribution of assets in liquidation.

Different types of preferred shares are:

Cumulative preferred shares– entitle preferred shareholders to receive all their past as well as current dividends before the common shareholders may receive any dividends.

Non-cumulative preferred shares– entitle preferred shareholders to receive only their current dividends if declared and cannot claim any previous dividends which weren’t declared at the time.

Unpaid dividends/Arrears– they appear on the balance sheet when declared, but one must place a footnote to disclose the amounts.

Participating preferred shares– entitle the preferred shareholder to additional dividends including their stated amount

Convertible preferred shares– allow one to exchange preferred shares for a fixed number of common shares

Journal entry for issuing preferred shares is:

Cash                               XX

            Preferred Shares      XX

 

 

Dividends

Dividends are a distribution of earning and they decrease retained earnings as one pays dividends with cash from retained earnings.

There are three important dates that affect dividends:

Date of declaration-record the dividend as a liability

Date of record-nothing is recorded

Date of payment-record payment to shareholders

There are two methods when it comes to paying dividends which are:

Method 1

1. Retained Earnings                             XX

               Common Dividends Payable      XX

2. Common Dividends Payable            XX

                Cash                                           XX

 

Method 2

  1. Cash Dividends Declared                XX

          Common Dividends Payable      XX

  1. Common Dividends Payable           XX

                Cash                                            XX

  1. Retained Earnings                           XX

                Cash Dividends Declared           XX

Preferred Dividends– a fixed amount that must be paid before the common shareholder receives dividends. It is used as leverage for the common shareholders. It is a way to raise capital and one doesn’t lose control. The preferred shareholder earns a fixed return and any excess in profits is considered a return for common shareholders.

The journal entry for preferred dividends is:

1. Retained Earnings                             XX

                Preferred Dividends Payable      XX

2. Preferred Dividends Payable             XX

                Cash                                            XX

Shock Dividends– A corporation distributes additional shares from its own stock to shareholders and they do not receive any payment for doing so.  This transfers a portion of equity from retained earnings into contributed capital. This increases retained earnings.

This is done to keep the market price of stock affordable and conserves cash for the expansion of a business. It also provides evidence for management that a company is doing well.

The journal entry for declaring and distributing stock dividends is:

1. Retained Earning                                             XX

            Common Share Dividends Distributable      XX

2. Common Share Dividends Distributable         XX

            Common Shares                                            XX

 

Stock Splits

Distributing additional stock to shareholders according to their percentage ownership and calling in outstanding shares and replacing them with more than one new share for each old share is a stock split. There are no journal entries and only affect the shareholder’s equity as the number of shares increases or can decrease if it was a reverse stock split, which reduces the number of shares.

 

Repurchase of Shares

Corporations may choose to repurchase shares that may have retired or been cancelled from its outstanding share capital.

Nothing is gained on repurchasing shares, but Contributed Capital from Retirement of Common Shares may remain is shares are retired for less than the average of the issue price.

Retained earnings decreases when retired shares are retired for more than the average issue price.

The journal entry for repurchasing shares that were retired for more than the average issue price is:

Common Shares         XX

Retained Earnings      XX

            Cash                     XX

If there is a balance in Contributed Capital from Retirement of Common Shares, then this account is used for the extent of its balance.

The journal entry is:

Common Shares                                                                             XX

            Contributed Capital from Retirement of Common Shares      XX

            Common Shares                                                                       XX

 

Earnings per Share

The formula for basic earnings per share is:

 

Basic earnings per share = (Net income-preferred dividends) / Weighted average of outstanding common shares

 By: Niesanthan, Kuzie, Deep, Chris, Hanaga, Kojana

Historical Information
Walmart

IBM

Current Prices
Walmart
IBM

Calculations
Spreadsheet

Frequently Asked Questions

Can I combine ratios on one graph?

It depends on the ratio.  Some ratios it makes sense to analyze together (current and quick ratios).  Some ratios show the same information in different ways (debt and equity ratios).  For these ratios, you can combine them on the same graph.  Be careful that the axis are the same for both graphs.  For instance, the A/R Turnover ratio and the Days Sales Uncollected are closely related but are not measured in the same units – one is a ratio and one is in days.  They could be combined but you would need a left and right axis.

Can I combine my analysis of ratios?

Where it makes sense, yes.  Debt and equity ratios are inverses of each other and can be discussed at the same time.  The idea is to be clear and detailed but not repetitive.  If you find yourself repeating the same points, you could combine the analyses.

How long should it be?

As many pages as needed but no more so.  Quality not quantity!  Use the exemplars as a guide.

Do I have to do all the ratios?

You must do all that apply to your company.  If you are a service company you don’t have inventory and so you don’t have an inventory turnover ratio or a day’s sales in inventory.

I can’t find….

Current Assets Above Inventory…   This is simply the total of all assets listed above inventory on the balance sheet.  If you don’t have inventory, ask me in class what assets to look at.

Average Inventory…   take the current inventory, the previous year’s inventory and average the two.

Net Sales on Credit… Use total sales or total revenue

Cost of Goods Sold…  Find the closest expense (it may be total operating expenses) and make a note in your analysis that you couldn’t find the COGS number and explain what that means for your analysis.

I lost my ratio guide!

Here is another copy.

Below are examples of a ratio analysis at each level of performance.

Below Level 1 (Less than passing)

The ratio is increasing.

Level 1 (50%)

The ratio is increasing. This is a favourable trend for the company.

Level 2 (60%)

The accounts receivable turnover ratio shows how many times the company collects its accounts receivable during the year. Corus Entertainment’s ratio has increased over the past three years.  This is a positive development for the company.

Level 3 (70%)

The accounts receivable turnover ratio shows how many times the company collects its accounts receivable during the year. A higher ratio is preferable as it means the company is turning its accounts receivable into cash more often during the period. Corus Entertainment’s ratio has increased over the past three years.  This is a positive development for the company.  In 2006, Corus will collect its accounts receivable 4.8 times during the year.

Level 4 (80% to 100%)

The accounts receivable turnover ratio shows how many times the company collects its accounts receivable during the year. A higher ratio is preferable as it means the company is turning its accounts receivable into cash more often during the period.
Corus Entertainment’s ratio has increased over the past three years.  This is a positive development for the company.  In 2006, Corus will collect its accounts receivable 4.8 times during the year.
The increase is due to growing sales and declining accounts receivable. Both of these are favourable occurrences as they are selling more services and receiving more cash for those services allowing for better cash flow.

Textbook questions:

  • pg 787, #15-3
  • pg 788, 15-8,
  • pg 789, 15-10
  • pg790, 15-12
  • pg791, 15-13