SEMINAR FIVEAn accounting presentation presented by Group 4
Han Yue - Zhafir -Yang Yi β JonathanBU8101 S06
February 2015
1INTANGIBLE ASSETS
Rights, privileges, and competitive advantagesthat result from ownership of long-lived assetsthat do not possess physical substance
Identifiable
It is probable that future economic benefits attributable to assets will flow to the entity
Cost can be measurable
Properties of Intangible Assets
Limited Life Indefinite Life
Only
Impairment
Amortizationand
Impairment
Date Description Debit Credit
xxx Impairment Loss ( E+ ) (OE - ) xxx
Accumulated Impairment Loss ( A - ) xxx
Amortization
Impairment Loss
Date Description Debit Credit
xxx Amortization Expense ( E+ )( OE - ) xxx
Accumulated Amortization Expense ( A - ) xxx
Accounts for Intangible Assets
2
DEBT VS EQUITYDifferent types of financing
Debt Financing Equity Financing
Payable (Notes or Trade)
Bank Loan
Bonds
Shares Issuance
Retained Earnings
Debt Financing Equity Financing
Risk of Default Risk of Dillution
No legal obligationOn Dividend Payment
Legal obligation toPay Interest and repayPrincipal when due
3
LIABILITIESare legal obligations
Recognized when Incurred
Failure to record meansUnderstatement of Assets / Expenses
Valued at amount due
Properties of Liabilities
Current Non-Current
ONE YEAR OR LESS MORE THAN ONE YEAR
Examples of Current Liabilities
AccountsPayable
AcrruedLiabilities
NotesPayable
Portion ofLT Debt
GSTPayable
UnearnedRevenue
NotesPayable
Date Description Debit Credit
xxx Cash( E+ )( OE - ) xxx
Notes Payable ( A - ) xxx
Accounts for Current Liabilities
Date Description Debit Credit
xxx Interest Expense ( E+ )( OE - ) xxx
Interest Payable ( L+ ) xxx
Date Description Debit Credit
xxx Cash ( A+ ) xxx
GST Payable ( L+ ) xxx
Sales Revenue (R+)(OE+) xxx
InterestPayable
GST / TaxPayable
Warranty (Estimated Liability)
Warranty is seller obligation to replace product, recorded when revenue from sale is reported
Liabilities exist
Uncertain to dollar amount
Reasonable estimate of dollar amount is available
Accounts for Warranty Expenses
Date Description Debit Credit
xxx Warranty Expenses ( E+ )(OE -) xxx
Provision for Warranty Expenses ( L+ ) xxx
Date Description Debit Credit
xxx Provision for Warranty Expenses (L -) xxx
Inventory ( A -) xxx
Accrued of Warranty Expenses
Replacing Defective Parts
Accounts for Long Term Liability
Date Description Debit Credit
Jan 1 Cash (A +) 1,500,000
Bonds Payable(L +) 1,500,000
Jul 1 Interest Expenses (E +) (OE -) 90,000
Cash(A -) 90,000
Long term debt are usually coming from bonds. Which has fixed maturity date, face value, and interest semi-annually
Some liability that soon-to-mature may be refinanced, thus it will be classified as long-term liability.
BondPayableSemiAnnual
4CORPORATION
Corporation is a legal entity. It may entercontracts and it may sue as be sued as if it werea person. The type of Ownerships can bePrivately or Closely Held and Publicly Held.
Advantages of Corporation
LIMITED LIABILITY
TRANSFERABILITY
PROFESSIONAL MANAGEMENT
CONTINUITY OF EXISTENCE
stockholders are not personally liable for the debts of a corporation
Ownership of a corporation is evidenced by transferable shares of stocks, which may be sold by one investor to another.
Stockholders own the company but do not manage it on a daily basis.
Disadvantages of Corporation
TaxationCorporate income tax + Personal income tax
RegulationMore regulated than unincorporated business
Cost of formation Forming a corporation normally requires the services of an attorney
Separation of ownership and management
5EQUITY
There are two things that can generate equity. Share Capital and Retained Earnings
AUTHORIZED SHARES
ISSUED SHARES
NO-PAR STOCKIssue stocks without designating a par or stated value. The entire issue price is credited to the Capital Stock
account, viewed as legal capital not subject to withdrawal
ISSUED SHARES UNISSUED SHARES
OUTSTANDING SHARES TREASURY SHARES
Preference Shares
Priority in Dividend Distribution and Asset Liquidation
Cumulative Dividend Right and Convertible to Ordinary Shares
Usually Callable by the Company
No Voting Rights
Cumulative VS Noncumulative
CUMULATIVEDividends in arrears must be paid before dividends may be paid on ordinary shares.
NONCUMULATIVEUndeclared dividends from current and prior years do not have to be paid in future.
6TREASURY SHARES
They are Issued shares, reacquired by the company for various reasons
Reason for Reacquire
Make more shares available for employee purchase plans
Increase earnings per share
To avoid takeover by external parties
Return cash to shareholdersReduce cash needed to pay future dividends
Recording Treasury SharesDate Description Debit Credit
xxx Treasury Shares ( OE- ) 144,000
Cash (A- ) 144,000
Purchased 1,600 shares at $90 per share
ISSUING SHARES
PURCHASINGTREASURY
A = L + OE
A = L + OE
7MARKET VALUE VS BOOK VALUE
Difference and Significance from both of them
Market Value
Daily Fluctuations of share prices on the stock market do not affect the accounting records of the issuer company
Issuer Investor
Share is always at the original issue price Share is carried at the market value
Book Value per Share
Refers to the value per share if a company is liquidated at balance sheets amounts
π΅ππ =πππ‘ππ πβπππβππππππ πΈππ’ππ‘π¦
ππ’ππππ ππ ππππππππ¦ πβππππ ππ’π‘π π‘ππππππ
Preference shares and preferred dividends in arrears are not included in total shareholdersβ equity
Market Value to Book Value
Market Value is the price at which the share is currently trading at on the stock market
ππππππ‘ π‘π π΅πππ π ππ‘ππ =ππππππ‘ πππππ πππ πβπππ
π΅πππ ππππ’π πππ πβπππ
It is a measure of how much a company is worth to investors and the worth of every dollar invested
1
TUTORIAL QUESTION
βA note payable to its bank is due in 60 days. Arrangements have been made to renew this note for an additional 18 months.β
AStatement :
Income Statement Balance Sheet
E ANIR CL LTL OE
A change occurred within liability. There is a change from current liablility into Long term Liability.No effect to other items.
βInterest expense that will result from existing liabilities over the next 12 months amounted to $12,000. β
BStatement :
Income Statement Balance Sheet
E ANIR CL LTL OE
This information is not relevant.It is a future expense and future liability.
No effect at all
βMade a yearβend adjusting entry to accrue interest on a note payableβ
CStatement :
Accountant need to make adjustment to the financial statement in terms of accruing interest from existing liabilities.
Income Statement Balance Sheet
E ANIR CL LTL OE
Since this interest is payable within 1 year, it is classified as a current liability.
Date Description Debit Credit
xxx Interest Expenses ( E+ )(OE -) xxx
Interest Payable( L+ ) xxx
βA liability classified for several years as long-term becomes due within the next 12 monthsβ
DStatement :
Income Statement Balance Sheet
E ANIR CL LTL OE
A change occurred within liability. There is a change from Long Term liablility into Current Liability.No effect to other items.
βEarned an amount previously recorded as unearned revenueβ EStatement :
Date Description Debit Credit
xxx Unearned Revenue (L -) xxx
Revenue( R+ )(OE +) xxx
Income Statement Balance Sheet
E ANIR CL LTL OE
Unearned revenue usually classified as current liabilities
βRecorded an estimated liability for warranty claimsβ FStatement :
Income Statement Balance Sheet
E ANIR CL LTL OE
Means : Record Provision for Warranty Expenses
Date Description Debit Credit
xxx Warranty Expenses ( E+ )(OE -) xxx
Provision for Warranty Expenses ( L+ ) xxx
Traditionally, Provision of warranty classified as Current Liabilities
βEntered a two year commitment to buy all hard drives from a
particular supplier at a price 10 percent below marketβ
GStatement :
Income Statement Balance Sheet
This transaction is considered as commitment. There are no obligation to pay until transaction is happened, thus this is not liability.
No effect at all, except must be disclosed in notes
E ANIR CL LTL OE
βReceived notice that a lawsuit has been filed against the company for $8 million. The amount of the companyβs liability,
if any, cannot be reasonably estimated at this time.β
HStatement :
Income Statement Balance Sheet
Since the amount owed is nonestimable and the result of lawsuit is still uncertain, This is not recorded as liability
E ANIR CL LTL OE
No effect at all, except must be disclosed in notes
βThe Companyβs president is in poor health and has previously
suffered two heart attacksβ
IStatement :
Income Statement Balance Sheet
There are no statement that the company is obliged to pay for any expenses. If any, it would be future expensesAccounting did not take president as an asset.
E ANIR CL LTL OE
No Effect at All
βReceived cash deposits from customers for goods and
services to be delivered over the next nine monthsβ
JStatement :
Income Statement Balance Sheet
E ANIR CL LTL OE
Date Description Debit Credit
xxx Cash( A+) xxx
Unearned Revenue( L+ ) xxx
Means : Received cash, for services that hasnβt been done yet
Since the due date is less than one year, it is considered as Current Liabilities. There are no changes in income statement, unless the services has been done
2ANNUAL GENERAL
MEETING
2Description Amount in $β000s
Preference Shares β 5% cumulative
1,000,000 shares issued and outstanding 100,000
Ordinary shares
100,000,000 shares issued and outstanding 150,000
Retained Earnings 681,000
Total Shareholdersβ equity 931,000
BHβs ordinary shares were traded on the stockexchange at $$33.50 per share on 31 December 2014.The total ordinary shares value should be $3,000million, but the amount reflected in the financialstatements as at 31 December 2014 is only$150,000,000. How could that be?
β
- Shareholder A
A
$33.50 the market value per share, while what was stated on the financial statement is the original issue price.
AMarket value per share is the price at which the share is currently trading
What does the term βcumulativeβ in relation to thepreference shares mean?β
- Shareholder B
B
Cumulative means If all or any part of the regular dividend on the preferred stock is omitted in a given year, the amount omitted is said to be in arrears and must be paid in a subsequent year before any dividend can be paid on common stock.
B
2009 2010 2011
If stock is noncumulative
Dividend paid $80,000 $20,000 -
Dividend in arrears Not applicable
If stock is noncumulative
Dividend paid $80,000 $20,000 -
Dividend in arrears - $60,000 $140,000
The Board of directors proposed a cash dividend of 20cents per share to ordinary shareholders for thecurrent year to be approved during this AGM. It did notpay dividends during the last 2 financial years topreference shareholders. How much dividends wouldbe payable to preference shareholders and to ordinaryshareholders?
β
- Shareholder C
C
Payment for Preferred Shares C
Preferred Shares Payment = $15,000,000
DividendRate
Years Accumulated Dividends
X XAmounts of
Shares Issued
Preferred Shares Payment = $100,000,000 x 5% x (2+1)
Payment for Ordinary Shares C
Ordinary Shares Payment = $20,000,000
DividendPer Share
XNumber of
Shares Issued
Ordinary Shares Payment = 100,000,000 x $0.2
Why were the outstanding dividends to preferenceshareholders not accrued as liabilities in the financialstatements?
β
- Shareholder D
D
Dividends in the arrears are not included among the liabilities of a corporation because no liability exists until a dividend is declared by the board of directors.
The amount of any dividends in arrears on preferred stock is an important factor to investors, however, and should be always disclosed by a note on balance sheet
D
Note 6: Dividend in arrears.As of December 31,2011, dividends on the $8 cumulative preferred stock were in arrears to the extent of $14 per share and amounted in total to $140,000
You mentioned just now that the ordinary shares weretraded at about 4 times book value per share at 31December 2014. Could you please show us how didyou derive the number?
β
- Shareholder C
E
Eπ΅ππ =πβπππβπππππβ²π πΈππ’ππ‘π¦
πππ‘ππ ππ’ππππ ππ πβπππ
π΅ππ =πππ‘ππ πΈππ’ππ‘π¦ β πππππππππ πβπππβπππππβ²π πΈππ’ππ‘π¦ β πππππππππ π·ππ£πππππ
πππ‘ππ ππ’ππππ ππ πβπππ
π΅ππ =$931,000,000 β $100,000,000 β $15,000,000
100,000,000
π΅ππ = $8,16
ππππππ‘ ππππ’ππππ πβπππ = $33.50 β 4 π π΅ππ
BH is currently in the process of raising funds byissuing another $10,000,000 preference shares tofinance the purchase of a hotel. What is the companyβsrationale for choosing preference shares over long-term debt?
β
- Shareholder A
F
Debt Financingβ’ Increases Assets available at the expense of increased liabilitiesβ’ BH is contractually obligated to pay off the loanβ’ If BH defaults on payments, the company may be forced into
bankruptcy
Equity Financingβ’ Increases Assets available at the expense of owners equity by issuing
sharesβ’ Company usually pays a fixed dividend to preferential shareholders.β’ Can suspend dividend pay out.
FThis question compares between debit financing and equity financing
Is book value per share the amount ordinaryshareholders should expect to receive if BH were tocease operations and liquidate? Could you enlighten me?
β
- Shareholder C
G
Book value per share indicates the value per share if a company is liquidated at balance sheet amounts.
It is also the theoretical value per share an ordinary shareholder should receive if the company is liquidated.
However, in the event the company were to be liquidated, ordinary shareholders will have the lowest priority in terms of debt repayment.
G
I would like to ask a question relating to the assetssection of the balance sheet at 31 December 2014. Thereis an amount of $500,000 Goodwill under the assetssection. What is Goodwill? How did it arise? Do wedepreciate Goodwill just like plant assets?
β
- Shareholder D
H
Goodwill is the worth of intangible asset such as rights, privileges, and competitive advantages that do not possess any physical substance..
H
Intangible Asset Properties
Identifiable AttributableTo Future Benefits
Cost can beMeasured Reliably
Goodwill occurs only when one company buys another company, and only purchased goodwill is an intangible asset.
H
Since goodwill has an indefinite lifespan, it is tested annually for possible impairment and write down.There are no depreciation in goodwill
Good CustomerRelation
SuperiorManagement
Other Factors thatResulted in Earnings
END
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