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COMM293FINALEXAMREVIEWSESSION
ReviewKey
BY:KATHYHUANG
TABLEOFCONTENT
I. TangibleandIntangibleAssetsII. ShortTermLiabilitiesIII. LongTermLiabilitiesIV. Shareholder’sEquityV. CashFlowStatementVI. FinancialStatementAnalysis
SectionI:Plant,PropertyandEquipment
Provideslong-termbenefitstothecompany
• Cannotbeturnedquicklyintocash• Examples:building,land,machinery
CapitalizeorExpense?
Howdowetellwhattocapitalizeorwhattoexpense?
1. CapitalizeANYcostsincurredtogetanassetreadyforuseafterpurchase
2. Oncetheassetisinuse,onlycapitalizecoststhatchangethelifeoruseofanasset
3. Costsincurredinmaintaining,running,orworkinganassetisexpensed
Depreciation
ThisisdisplayedthroughFinancialStatementsthrough:
• IncomeStatement:DepreciationExpense=depreciationfortheyear
• BalanceSheet:AccumulatedDepreciation=totaldepreciationtodate
Tocalculatehowmuchtodepreciate,weneed:
1. Costofpurchasingasset2. EstimatedUsefullife3. EstimatedResidualValue
MethodstoDepreciation
1. StraightLineDepreciation• Equalportiondepreciatedeachyear• Netbookvaluesdecreasesbysameamounteachyearuntilitreachesresidualvalue
DepreciationExpenseperyear=!"#$!!"#$%&'( !"#$%!"#$%& !"#$
2. DoubleDecliningMethod• Assetismoreefficientwhenitisnew• Amortizationexpenseincreaseseachyear• Netbookvaluecannotfallbelowresidualvalue
DepreciationExpenseperyear=!"# !""# !"#$%!"#$%& !"#$
*2
3. UnitsofProduction• Depreciationdependsonuseeachyear
Dep.Expperyear=!"#$!!"#$%&'( !"#$%!"#.!"#$% !"#$%&'(#)
(ActualProduction)
SampleQuestion:
TheAvo-KaleJuicerypurchasedapulpingmachinefor$5,000.Thecompanyplannedtokeepitforfouryears,afterwhichitisexpectedtobesoldfor$500.
a)Calculatethedepreciationexpenseforeachofthefouryearsunderdoublediminishing-balancemethod:
YearDepreciationExpense
1 25002 12503 6254 125
b)AssumingAvo-KaleJuicerysoldthetablefor$1,225attheendofthethirdyear,calculateanygainorlossondisposalunderthedoublediminishingmethod.Cash
1225
AccumuledDep. 4375
Gainonsale 600
Equipment
5000
IntangibleAssets
• Recordedatcost• Usesthetermamortizationinsteadof
depreciationExamples:
• Finiteintangibleassets:havealimitedlifeo Patentso Copyrightso ResearchandDevelopmentcosts
• Infiniteintangibleassets:haveindefinitelives(NOTAMORTIZED)o Trademarko Franchiseandlicenseso Goodwill
SectionII:ShortTermLiabilities
CurrentLiabilities:obligationsarisingfrompasttransactionsthatwillbepaidwithassets/serviceswithinoneyear.
Examples:accountspayable,accruedexpenses,notespayable
SampleQuestion:
Lisaworksforamonthlysalaryof$550perweek.CanadaPensionPlancontributionsare$27.23eachfortheemployeeandtheemployer.Incometaxis$79.15.Employmentinsurancepremiumsare$9.79fortheemployeeand$13.12fortheemployer.
Howwouldtheemployerrecordthejournalentries?
a)EmployeeportionofthecontributionSalariesExpense 550
CPPPayable
27.23
EIPayable
9.79
IncomeTaxPayable 79.15
SalariesPayable 433.83
b)EmployerportionofthecontributionBenefitsExpense 40.35
CPPPayable
27.23
EIPayable
13.12
SampleQuestion:
ThreeCheesesisagourmetcheeseshopintheKerrisdalearea.OnApril1,2016,thecompanypaidforequipmentwitha$100,000,5%,1-yearnote-payablewithinterestpayableatmaturity.PreparealljournalentriespertainingtoThreeCheesesassumingthatthecompanyhasaDecember31year-end.
April1,2016 Equipment
100,000
NotePayable 100,000
December31,2016 InterestExpense 3750
InterestPayable 3750
April1,2017 InterestExpense 1250
InterestPayable 3750
NotePayable 100,000
Cash
105000
SectionIII:Bonds
FaceValue:Amountowedwhenthebondmatures.
EffectiveInterestRate:Rateofinterestinthemarket.
CouponRate:Interestpaidtothebondholder.
• Couponrate=EffectiveRateatpar• Couponrate<EffectiveRatesoldatdiscount• Couponrate>EffectiveRatesoldatpremium*Semi-Annual:2xtheperiods,1⁄2thecouponrate,1⁄2theeff.intrate.
StepstoCalculatethepriceofthebond:
Step1:Calculatepresentvalueofthefacevalue
=FacevaluexPV($1)(Effectiveinterest%,#ofPeriods)
Step2:Calculatepresentvalueofthecouponpayments
=FacevaluexCouponRatexPVFA(Effectiveinterest%,#ofPeriods)
Step3:AddPVoffacevalueandPVofcouponpaymentstogether.
Step4:Completejournalentrytorecordthetransaction.
SampleQuestion:
OnJuly1,2016,BlueOasisCorp.issued$1million,10-year,6%bondatapricetoyieldamarketinterestrateof7%.ThebondspaysemiannuallyonJuly1andJan1.BlueOasisCorp.hasaDecember31year-end.
a)Whatisthepriceofthebondtoday?
PVoffacevalue:1,000,000*PV$1(3.5%,20periods)
=1,000,000*0.50257=502,570
PVofcouponpayments:30,000*PVFA(3.5%,20periods)
=30,000*14.21240=426,372
Price=502,570+426,372=$928,942
b)RecordtheissuanceofthebondOnJul1,2016.July1,2016 Cash
928,842
BondsPayable 928,842
c)RecordthejournalentryfortheaccrualonDec31,2016andsubsequentpaymentonJan1,2017.
December31,2016 Interestexpense 32,509
BondsPayable 2,509
InterestPayable 30,000
January1,2016 InterestPayable 30,000
Cash
30,000
d)RecordthesecondpaymentofJul1,2017.July1,2017 Interestexpense 32597
BondsPayable 2597
InterestPayable 30,000
SectionIV:Shareholder’sEquity
CommonShares:Votingsharesofacompany
PreferredShares:Haveaccesstodividendsandassetsonliquidationbeforecommonshareholders
IssuingShares:
DR.Cash
CR.CommonShares/PreferredShares
IssuingSharesfornoncashconsideration:
Ex:2,500sharesofPalmTreePlantationworth$3/sharewereissuedforaparceloflandonJan20.OnJan20,thelandwasappraisedtobeworth$42,000.Land
42,000
CommonShares 42,000
CashDividends:
OnDecember1,2015,directorsdeclareda$0.50persharecashdividendoncompany’s$100,000,$2preferredshares,payableonJanuary20toshareholdersofrecordonDecember22.Preparethejournalentriesoneachofthethreedates
Dec1(DeclarationDate):CashDividends 50,000
DividendsPayable 50,000
Dec22(RecordDate):Nojournalentry
Jan20(PaymentDate):DividendsPayable 50,000
Cash
50,000
StockDividends:
DoggieDoshas50,000shareswithabalanceof$500,000inCommonSharesand$300,000inretainedearnings.OnJune30,itdeclaresa10%stockdividendtoshareholdersofrecordatJuly20,tobedistributedtoshareholdersonAugust5.
ThesharepriceonJune30(declarationdate)is$15pershare.
ThesharepriceonJuly20(recorddate)is$16pershare.
ThesharepriceonAugust5(distributiondate)is$14pershare.
Thenumberofsharestobeissuedis____5,000_____.
June30(DeclarationDate):StockDividends 75000
StockDividendsDistributable 75000
July20(RecordDate):Nojournalentry
Aug5(PaymentDate):StockDividendsDistributable 75000
CommonShare 75000
StockSplits:
LeakyFaucetshas100,000sharestradingat$20/share.Ithas$200,000beginningbalanceinretainedearnings.OnJan1,themanagementteamdeclaresa3:1stocksplit.Whatwilltheeffectsoncommonsharesbe?
Noeffect:
CommonSharesbeforestocksplit:100,000*$20/share=$2,000,000
CommonSharesafterstocksplit:300,000*$6.67/share=$2,000,000
SectionV:StatementofCashFlows
IndirectMethod:AlwaysstartwithNetIncome… Then adjust for the non cash expenses on the IncomeStatement… And adjust for the changes in the balances on theStatementofFinancialPositionCashFlowStatementisseparatedintothreemainactivities:Operating,Investing,Financing
DoggieDonts
StatementofFinancialPosition
December31
2015 2014
Assets Cash
$13,000 $5,000AccountsReceivable
38,000 24,000
MerchandiseInventory
27,000 20,000
Propoerty,PlantandEquipment
80,000 78,000AccumulatedDepreciation
(30,000) (24,000)
Goodwill
5,000 16,000TotalAssets
$133,000 $119,000
LiabilitiesandShareholder'sEquity AccountsPayable
$17,000 $15,000
SalariesPayable
1,900 2,100IncomeTaxPayable
1,000 4,000
BankLoanPayable
34,100 50,650CommonShares
18,000 14,000
RetainedEarnings
56,000 28,250AccumulatedOCI
5,000 5,000
TotalLiabilitiesandShareholder'sEquity 133,000 119,000
IncomeStatement Sales
$256,000
CostofGoodsSold
140,000GrossProfit
116,000
OperatingExpenses
78,250ProfitfromOperations
37,750
InterestExpense
4,000Profitbeforeincometax
33,750
Incometaxexpense
6,000Profit
27,750
AdditionalInfo:1. Equipmentwassoldduringtheyearfor$8,500cash.Theequipmentoriginallycost
$12,000andhasacarryingamountof$8,500atthetimeofthesale.2. Equipmentcosting$14,000waspurchasedinexchangefor$4,000cashanda
$10,000long-termbankloan.3. Someofthebankloanwasrepaidduringtheyear4. Operatingexpensesarecomposedof$9,500depreciationexpense,$7,750of
administrativeexpenses,$50,000ofsalariesexpenseandan$11,000impairmentlossongoodwill.
Answer:OperatingActivities
NetProfit
27,750
DepreciationExpense 9,500
ImpairmentLoss 11,000
Incometaxexpense 6000
Incometaxpaid -9000
SalariesExpense 50,000
Salariespaid -50,200
IncreaseinA/R -14,000
IncreaseinInventory -7,000
IncreaseinA/P 2,000
NetCashProvidedbyOperatingActivities 26,050
InvestingActivities
SaleofEquipment 8,500
PurchaseofEquipment -4,000
NetCashProvidedbyInvestingActivities 4,500
FinancingActivities
RepaymentofBankLoan -26550
IssuanceofShares 4000
NetCashProvidedbyFinancingActivities -22550
NetchangeinCash
8,000Cash,Beg
5,000
Cash,End
13,000
SectionVI:FinancialStatementAnalysisRefertoChapter13Notesforfulllistofformulas.Profitability:Howprofitableisthecompany• GrossProfitMargin=!"#$$ !"#$%&
!"#$%
• ReturnonAssets= !"# !"#$%&!"#$%&# !"#$% !""#$"
• ReturnonEquity= !"# !"#$%&!"#$%&# !!!"#!!"#$!!! !"#$%&
• BasicEarningsPerShare= !"#$%& !"#$%#&%' !" !"##"$ !!!"#!!"#$%&!"#$!!"# !"#$!%# !"##"$ !!!"#$ !"#$#%&'(&)
Liquidity:Firm’sabilitytomeetshort-termobligations• CurrentRatio= !"##$%& !""#$"
!"!!"#$ !"#$"%"&"'(
• QuickRatio= !"#! ! !/!!"##$%& !"#$"%"&"'(
• ReceivablesTurnover= !"#$%!"#$%&# !/!
• PayablesTurnover= !"#$!"# !"
• InventoryTurnover= !"#$!"#$%&# !"#$"%&'(
Solvency:Firm’sabilitytomeetlong-termobligations.• TimesInterestEarned=!"#$%& !"#$%" !"#$%$&# !"# !"#$%
!"#$%$&#
• DebttoEquityRatio=!"#$% !"#$"%"&"'(!"#$% !"#$%&
GeneralTips:• Understandthenumeratoranddenominator• Thinkaboutwhotheaudienceisandwhattheywouldwanttoknowaboutthecompany
• Comparetheratiofromyeartoyearandlookforunusualchanges
• CompanytheratioofthatcompanytothatofcompaniesinthesameindustryGoodLuckonyourexam!