Financing Decisions Creditors and Investors
Financing Decisions Creditors and Investors
Financing Decisions Creditors and Investors
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REPORTING LIABILITIES
Short-term liabilities Long-term Bonds Payable
Issuance Accounting for premium or discount
Other liabilities
Long-term Leases Contingencies Pensions & Postretirement Benefits
Income taxes
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Definition of a Lease A lease is a contractual agreement between the lessor (owner of the property) and the lessee (user of the property), giving the lessee the right to use the lessors property for a specific period in exchange for stipulated cash payments
Diamond Chapter 13
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Flexibility
Diamond Chapter 13
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Lease Types
Capital leases are accounted for as if the lease agreement transfers ownership of the asset to the lessee
The lease is equivalent to a financed purchase An asset and liability must be recorded on lessees books
Operating leases are accounted for as rental agreements, with no transfer of effective ownership associated with the lease
Lease payments are recorded as rent expense by the lessee and rent revenue to the lessor
Diamond Chapter 13
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4.
The present value of the minimum lease payments equals or exceeds 90% of the fair market value of the property
Diamond Chapter 13
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Diamond Chapter 13
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Lessor
Continues to carry as an asset Continues depreciation
Diamond Chapter 13
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Makes annual payments that are divided between interest and principal Depreciates the asset over a 5-year period
Diamond Chapter 13
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The interest amount for each year is based on 12% of the balance of the liability at the beginning of the year Annual depreciation is $10,000 ($50,000 5 years)
Diamond Chapter 13
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STOCKHOLDERS EQUITY
Contributed capital
Par value issues Common vs. Preferred stock
Retained earnings
Cash dividends Stock dividends
Other issues
Stock splits Treasury stock
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Corporations: An Overview
Fewer in number than sole proprietorships and partnerships, yet ... Generate greatest dollar volume of sales revenues Largest in terms of total assets and owners equity
MISSION STATEMENT
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Characteristics of a Corporation
Separate legal entity Continuous life/transferability of ownership Lack of mutual agency Stockholder limited liability Separation of ownership and management Subject to double-taxation Regulated by government
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STOCKHOLDERS RIGHTS
Stockholders generally have rights to: Vote on important matters Receive dividends Share in net assets upon liquidation Maintain proportionate ownership interest in corporation
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Retained Earnings
Corporations accumulated earnings and losses since its first day of operations
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Classes of Stock
PREFERRED Generally fewer rights of stock ownership Less risky than common stock First to receive corporate dividends Second claim against net assets in event of liquidation COMMON 4 rights of stock ownership More risk than preferred stock Dividends not guaranteed Residual claims on net assets upon liquidation
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Par Value
Par value - minimum legal capital of the corporation below which Stockholders Equity cannot fall Par value is randomly chosen Generally very low in amount - $.01, $.10, or $1.00
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Treasury Stock
Shares of its own stock which the corporation has reacquired from investors Similar to unissued stock No dividends paid on treasury stock Company does not own itself Treasury Stock is a contraequity account
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TREASURY STOCK
1. Use shares for employee compensation
Stock option/bonus plans
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equity
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Retained Earnings
Retained earnings represents investors claims against assets acquired through reinvestment of net income Balance in Retained Earnings account is NOT the same as cash
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Retained Earnings
Rather, retained earnings is a claim of the company Cash Inventory Plant assets, etc.
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Dividends
Distribution, to stockholders, of assets acquired through profitable operations Board of Directors declares dividends
Retained Earnings balance must be sufficient to support the declaration
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Dividend Dates
Declaration date Date of record Date of Distribution
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Stock Dividends
Shares of corporate stock given in lieu of cash dividends Shareholders receive shares in proportion to their current level of stock ownership Distribution doesnt increase or decrease total stockholders equity Nor does it affect total corporation assets
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Stock Dividends
Allow corporation to retain cash for reinvestment in operations or acquire long-term assets (PP&E) to be used for business activities
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Stock Splits
Increase in number of shares authorized, issued, and outstanding Corresponding par value
Stimulates more active trading of stocks with very high market prices
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STOCK DIVIDENDS Increase # shares owned and outstanding Doesnt change total equity or stockholders investments Leaves par value unchanged Shifts amounts from retained earnings to paid-in capital
STOCK SPLITS Increase # shares owned and outstanding Doesnt change total equity or stockholders investments Decreases par value of stock Doesnt shift amounts from one account to another
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