Financial Reporting for Fixed Assets and Intangible Assets

In the income statement, depreciation and amortization expense should be reported separately or disclosed in a note. A description of the methods used in computing depreciation should also be reported. In the balance sheet, each class of fixed assets should be disclosed on the face of the statement or in the notes. The related

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Financial Analysis and Interpretation: Fixed Asset Turnover Ratio

A measure of a company’s efficiency in using its fixed assets to generate revenue is the fixed asset turnover ratio. The fixed asset turnover ratio measures the number of dollars of sales earned per dollar of fixed assets. It is computed as follows: To illustrate, the following data (in millions) were taken from recent

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Exchanging Similar Fixed Assets

Old equipment is often traded in for new equipment having a similar use. In such cases, the seller allows the buyer an amount for the old equipment traded in. This amount, called the trade-in allowance, may be either greater or less than the book value of the old equipment. The remaining balance—the amount owed—is

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Current Liabilities

When a company or a bank advances credit, it is making a loan. The company or bank is called a creditor (or lender). The individuals or companies receiving the loan are called debtors (or borrowers). Debt is recorded as a liability by the debtor. Long-term liabilities are debts due beyond one year. Thus, a

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Payroll and Payroll Taxes

In accounting, payroll refers to the amount paid to employees for services they pro­vided during the period. A company’s payroll is important for the following reasons: Payroll and related payroll taxes significantly affect the net income of most companies. Payroll is subject to federal and state regulations. Good employee morale requires payroll to be

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Accounting Systems for Payroll and Payroll Taxes

Payroll systems should be designed to: Pay employees accurately and timely. Meet regulatory requirements of federal, state, and local agencies. Provide useful data for management decision-making needs. Although payroll systems differ among companies, the major elements of most payroll systems are: Payroll register Employee’s earnings record Payroll checks 1. Payroll Register The payroll register

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Employees’ Fringe Benefits

Many companies provide their employees benefits in addition to salary and wages earned. Such fringe benefits may include vacation, medical, and retirement benefits. The cost of employee fringe benefits is recorded as an expense by the employer. To match revenues and expenses, the estimated cost of fringe benefits is recorded as an expense during

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Contingent Liabilities

Some liabilities may arise from past transactions only if certain events occur in the future. These potential liabilities are called contingent liabilities. The accounting for contingent liabilities depends on the following two factors: Likelihood of occurring: Probable, reasonably possible, or remote Measurement: Estimable or not estimable The likelihood that the event creating the liability

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Financial Analysis and Interpretation: Quick Ratio

Current position analysis helps creditors evaluate a company’s ability to pay its cur­rent liabilities. This analysis is based on the following three measures: Working capital Current ratio Quick ratio Working capital and the current ratio were discussed in Chapter 4 and are computed as follows: While these two measures can be used to evaluate

Nature of a Corporation

Most large businesses are organized as corporations. As a result, corporations generate more than 90% of the total business dollars in the United States. In contrast, most small businesses are organized as proprietorships, partnerships, or limited liability companies. 1. Characteristics of a Corporation A corporation is a legal entity, distinct and separate from the

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Paid-In Capital from Issuing Stock

The two main sources of stockholders’ equity are paid-in capital (or contributed capi­tal) and retained earnings. The main source of paid-in capital is from issuing stock. 1. Characteristics of Stock The number of shares of stock that a corporation is authorized to issue is stated in its charter. The term issued refers to the

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Accounting for Dividends

When a board of directors declares a cash dividend, it authorizes the distribution of cash to stockholders. When a board of directors declares a stock dividend, it au­thorizes the distribution of its stock. In both cases, declaring a dividend reduces the retained earnings of the corporation. 1. Cash Dividends A cash distribution of earnings

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Treasury Stock Transactions

Treasury stock is stock that a corporation has issued and then reacquired. A corporation may reacquire (purchase) its own stock for a variety of reasons, including the following: To provide shares for resale to employees To reissue as bonuses to employees, or To support the market price of the stock The cost method is

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Reporting Stockholders’ Equity

As with other sections of the balance sheet, alternative terms and formats may be used in reporting stockholders’ equity. Also, changes in retained earnings and paid-in capital may be reported in separate statements or notes to the financial statements. 1. Stockholders’ Equity on the Balance Sheet Exhibit 4 shows two methods for reporting stockholders’

Stock Splits

A stock split is a process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares. A stock split applies to all common shares including the unissued, issued, and treasury shares. A major objective of a stock split is to reduce the

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Financial Analysis and Interpretation: Earnings per Share

Net income is often used by investors and creditors in evaluating a company’s profit­ability. However, net income by itself is difficult to use in comparing companies of different sizes. Also, trends in net income may be difficult to evaluate if there have been significant changes in a company’s stockholders’ equity. Thus, the profitability of

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Financing Corporations

Corporations finance their operations using the following sources: Short-term debt, such as purchasing goods or services on account. Long-term debt, such as issuing bonds or notes payable. Equity, such as issuing common or preferred stock. Short-term debt, including the purchase of goods and services on account and the issuance of short-term notes payable, was

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Nature of Bonds Payable

Corporate bonds normally differ in face amount, interest rates, interest payment dates, and maturity dates. Bonds also differ in other ways such as whether corporate assets are pledged in support of the bonds. 1. Bond Characteristics and Terminology The underlying contract between the company issuing bonds and the bondholders is called a bond indenture.

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Accounting for Bonds Payable

Bonds may be issued at their face amount, a discount, or a premium. When bonds are issued at less or more than their face amount, the discount or premium must be amortized over the life of the bonds. At the maturity date, the face amount must be repaid. In some situations, a corporation may

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Installment Notes

Corporations often finance their operations by issuing bonds payable. As an alterna­tive, corporations may issue installment notes. An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note. Unlike bonds, each note payment includes the following: Payment of a portion of

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