Learning Module #1 That was talking, this is

doing. Doing is different than talking.

Curly Sue

What this course is and what it isn’t

The Plan

The website

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Where are you now?

From the following information for Laurel, Inc., prepare the financial statements for the year ending December 31, 2015.

Cash 58,000Accounts Receivable 15,000Inventory 80,000

Building200,00

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Equipment100,00

0Accumulated Depreciation 20,000Security Deposit 3,000Accounts Payable 12,000Salaries Payable 4,000Taxes Payable 6,000

Note Payable, Long-Term 40,00

0 Common Stock 5,000 Paid In Capital- Ex Par 45,000 Retained Earnings 334,000 Treasury Stock 10,000 Sales 410,000 Cost of Goods Sold 200,000 Salary Expense 50,000 Rent Expense 36,000 Depreciation Expense 10,000 Office Expense 10,000 Interest Revenue 1,000 Interest Expense 5,000 Income Tax Expense 30,000

Laurel, Inc. declared and paid a $5,000 dividend in 2015. The beginning Common Stock was $50,000 and beginning Retained Earnings was $259,000. Prepare a Trial Balance, Income Statement, Balance Sheet and Statement of Owners’ Equity for Laurel.

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From the following for 2015 for CoJo, Inc. prepare an Income Statement and a Balance Sheet. assume a December 31 year end.

Accounts Payable 200,000Accounts Receivable 120,000Accumulated Depreciation 56,000Administrative Expenses 58,000Advertising Expense 20,000Building 300,000Capital in Excess of Par 288,000Cash 98,000Common Stock ($1 Par) 12,000Cost of Goods Sold 500,000Depreciation Expense 32,000Equipment 140,000Gain on sale of equipment 6,000Interest Expense 10,000Inventory 180,000Notes Payable, Long-Term 100,000Patent 50,000Rent Expense 36,000Retained Earnings 143,000Sales 900,000Sales Returns and Allowances 4,000Salaries Payable 60,000Salary Expense 120,000Tax Expense 29,000Taxes Payable 29,000

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Calculating the Earnings Per Share

There are two levels of EPSB_____________

D_____________

Cash Flows

From the following information for Molly’s Munchies, prepare a Statement of Cash Flows for the year ended December 31, 2014 using the indirect method.

The following data is for Fred’s Follies: Balance Balance 12/31/15 12/31/14

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Cash 80,000 20,000Accounts Receivable 68,000 35,000Inventory 70,000 90,000Prepaid Insurance 500 3,000 Equipment 340,000 270,000Accumulated Depreciation 80,000 20,000Land 120,000

Security Deposits 12,000 10,000 Accounts Payable 35,000 30,000

Wages Payable 6,000 10,000Rent Payable 7,500 6,000Interest Payable 6,000 7,000Taxes Payable 16,000 5,000Note Payable 120,000 140,000Common Stock ($1 each) 300,000 160,000Retained Earnings 120,000 50,000Sales 1,200,000Cost of Goods Sold 575,000Wage Expense 260,000Rent Expense 24,000Office Expenses 70,000Depreciation Expense 60,000Advertising Expense 15,000Insurance Expense 9,000Interest Expense 14,000Income Tax Expense 52,000

Some of the equipment was acquired on March 31, 2015 by exchanging 60,000 shares of common stock worth $60,000. The additional common stock (other than that issued for the purchase of the equipment) was sold on June 30, 2015 for $1 per share. The company did not sell any equipment during the year. All the rest of the equipment and the land purchased during the year was purchased for cash. The retained earnings balance for both years is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30th of each year.

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Now you do one - Not dying is not the same as living.

The following balances are for Misty Company at December 31,

2014 2015Cash 10,000 30,000Accounts Receivable 40,000 50,000Inventory 80,000 60,000Prepaid Rent 6,000 3,000

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Equipment 180,000 210,000Accumulated Depreciation-Equipment 50,000 60,000Security Deposit 8,000 9,000Accounts Payable 40,000 50,000Salaries Payable 10,000 -0-Interest Payable -0- 5,000Taxes Payable -0- ______Note Payable 100,000 70,000Common Stock 10,000 50,000Retained Earnings 114,000 124,000Sales 200,000Cost of Goods Sold 100,000Salary Expense 40,000Rent Expense 24,000Interest Expense 6,000Depreciation Expense 10,000

The common stock outstanding was 10,000 shares on January 1, 2014. On April 1, 2015, Misty issued 10,000 shares of common stock in exchange for $10,000 of equipment. On July 1, 2015, Misty sold an additional 30,000 shares of common stock. During 2015, the company paid a dividend of _____________. No equipment was sold during the year. The tax rate is 30% and 1/2 of 2015 taxes were paid in 2015.

On the next page, prepare a Statement of Cash flows in good form using the indirect method.

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The following data is for Calvin’s Catnip Treats, Inc.:

Balance Balance 12/31/16 12/31/15

Cash 120,000 66,000Accounts Receivable 70,000 35,000Allowance for Doubtful Accounts 10,000 5,000Inventory 30,000 80,000Prepaid Rent 5,000Equipment 320,000 240,000Accumulated Depreciation 60,000 40,000Land 20,000Security Deposit 1,000Patent 9,000 9,000Accounts Payable 79,000 60,000Wages Payable 6,000 10,000Rent Payable 5,000Taxes Payable 25,000 38,000

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Interest Payable 5,000 2,000Note Payable 110,000 130,000Common Stock ($1 each) 120,000 60,000Retained Earnings 150,000 90,000Sales 1,000,000Cost of Goods Sold 600,000Wage Expense 155,000Rent Expense 60,000Office Expenses 27,000Depreciation Expense 20,000Bad Debt Expense 10,000Interest Expense 13,000Income Tax Expense 30,000

The land was acquired on April 1, 2016 by exchanging 20,000 shares of common stock worth $20,000. The additional common stock (other than that issued for the purchase of the land) was sold on July 1, 2016 for $1 per share. All equipment purchased during the year was purchased for cash. The retained earnings balance for both years is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on December 31st of each year.

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Learning Module #2

Managerial Elementtemerity Concentration comes out of

a combination of confidence and hunger.

(Arnold Palmer)

We have been studying Financial Accounting

Which deals with ___________________________________________

Managerial accounting is __________________________________________________

Cost BehaviorWe sell Tasteys. They cost $90 to make and sell for $ 300 each. Our only other expenses are the rent of $300 per month, utilities of $100 per month and a $10 per unit sales commission we pay to the salespeople. We sold ten during the year.

A Contribution Margin Statement

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Fixed Costs are

Variable Costs are

Calculating Break-even

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Target Profit

Using the Contribution Margin%

“ The art of conversation lies in listening. ” — Malcolm Forbes

Your Club is thinking about having a dinner. They expect to charge about $30 per head. They need to rent a room in Baker for $300 (includes servers). In addition to the $300, Baker will charge you $10 per dinner. How many dinners must you sell just to break even? How many dinners must you sell to make a profit of $600?

Sarah sells cookies. She uses ingredients that cost $.20 per cookie and sells them for $.50 each. She pays her sales force a 10% commission on all cookies sold. She pays rent of $1,000 per month. Her other fixed costs are $2,000 per month. How many cookies must she sell to

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break-even? How many cookies does she need to sell to make $2,000 per month? Prepare a contribution margin statement at the level where she is making $2,000 per month.

Gracie Company sells Dodds. The following is an income statement for a recent month.

Sales $250,000 Cost of goods sold 150,000 Gross Margin 100,000 Operating Expenses Salaries and commissions $42,000 Rent 18,000 Utilities 7,000 Other 3,000 70,000

Net Income $30,000

Gracie sells one product, Dodds at $20 each. Cost of goods sold is variable. A 10% sales commission, included in salaries and commissions, is the only other variable cost. Gracie tells you that the income statement is not helpful, for she cannot determine such things as the break-even point.

Redo the statement using the contribution margin format.

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What is the breakeven in units and dollars

Acme Company sells anvils and the following is per anvil

Unit Selling Price $20Variable Costs 12

Total fixed costs $ 400,000

Total volume 100,000 units

Prepare an income statement using the contribution margin format

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What is Acme’s Break Even point in units

In $

Now assume that Acme wants to make $1,000,000 per year. How many anvils does the company need to sell to accomplish this (in units and dollars).

The CFO of Garven Company provides the following per-unit analysis, based on a volume of 100,000 units

Selling Price $30Variable Costs $12

Fixed Costs 9 Total Costs 21 Profit per unit $ 9

Answer each of the following questions independent of your answers to the other questions

1) What total profit does Garven expect to earn?

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2) What would be the total profit at 110,000 units? (Be careful- they are fixed costs)

3) What is the break-even point in units?

4) Garven’s managers think they can increase volume to 120,000 units by spending an

additional $ 60,000 on salespeople. What total profit would they earn if they make this move?

5) Break-even using Contribution Margin %

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Now look at a Hot Dog Stand

You have decided to open a hot dog stand at the corner of Court and Union. The following is your opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she sells. (Dogs cost $.40 each- how do I know that?)

AssetsCash 5,000Inventory 10,000Cart 35,000 Total 50,000

Liabilities

Owners’ EquityCommon Stock 50,000

Retained Earnings -0- Total 50,000

Income Statement Using Contribution Margin Format

For the First Year Sales 60,000 Sales Cost of Sales 12,000 Gross Margin 48,000

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Operating Expenses Wages 23,000 Other 10,000 Total Operating Expenses 33,000 Operating Income 15,000

How many hot dogs do you need to sell to break-even Per Year

Per Month Per Week Per Day Per Hour

Professional tip In negotiating, go ___________ then ________________.Homework Managerial

Problem 1. Salmon Company makes Things. Things sell for $30 each and cost $10 each to make. Fixed costs are estimated to be $1,500,000 next year.

What is the breakeven point in units and sales dollars for Salmon based on the above information

How many Things must Salmon sell to make $1,200,000 next year?

Problem 2 Billy Bob’s has given you the following income statement for June 2013.

Sales $ 500,000Cost of goods sold 300,000

Gross margin 200,000

Operating expenses:

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Salaries and commissions $ 80,000 Utilities 20,000 Rent 22,000

Other 18,000 Total operating expenses 140,000 Income 60,000

Billy Bob sells one product, a running shoe for $100 per pair. A 10% sales commission, included in Salaries and commissions is the only other variable cost. The manager tells you that this financial statement is not very helpful to her.

Redo the income statement using the contribution margin format.

For Billy Bob’s determine the break-even in sales dollars and in units

Learning Module #3 struthious Managerial Lazy people are always anxious sycophant Part 2 to be doing something. pugnacious Marquis De Vauvenargues

Susie is the new manager of Helming Clothing. The controller has given her the following information based on expected operations for the coming year.

Shirts Pants PulloversSelling Price $ 20 $ 30 $ 60Variable Costs 10 12 15Contribution Margin 10 18 45

Sales mix percentage, in dollar sales 50% 30% 20%

Total fixed costs are $1,189,000

What is the weighted average contribution margin%?

What is the break-even in sales?

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Prepare an Income Statement by product line at the breakeven pointShirts Pants Pullovers Total

Sales $1,025,000Variable Costs 512,500Contribution Margin

Fixed Costs 1,189,000

Net Income

At the break-even point, how many of each item will be sold?

Shirts Pants Pullovers

The CEO wants a profit of $800,000. Determine the sales needed to achieve this goal?

The sales manager believes she can increase the sales of any of the three products by 20% by spending $25,000 in advertising on that product. Which product should she choose for the promotion?

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Cleveland Cliffs produces three models of gel pens, regular, silver and gold. Price and costs of the three are as follows

Regular Silver GoldSelling Price $ 20 $ 30 $60Variable Costs 12 15 21

Monthly fixed costs are $600,000

Suppose the sales mix is Regular 50%, Silver 30% and Gold 20% What is the breakeven in sales dollars?

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How much must the total sales dollars be to make $300,000 per month?

Freeland Company makes three products, Alpha, Beta, and Gamma

Below are the income statement for a recent month:

May Sales $160,000

Costs 120,000 Net Income 40,000

Selling price and cost data by product are as follows.Alpha Beta Gamma

Selling Price $40 $20 $10Variable costs 16 6 6Contribution margin 24 14 4

Sales mix (in dollars) 40% 40% 20%

1) Determine the break-even point in sales dollars

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2) Which product is most profitable per unit sold?

3) Which product is most profitable per dollar of sales?

4) What total sales dollars are needed to earn $70,000 per month, and how many units of each product will be sold at that sales level if the usual mix is maintained?

5) The sales manager believes that he could increase sales of Gamma by 10,000 units per month if more attention were devoted to it and less to Beta. Sales of Beta would fall by 2,000 units per month. What change in income would occur if this action were taken?

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6) June sales were $200,000 with a mix of 40% Alpha, 30% Beta and 30% Gamma. What was the income?

7) Suppose the company is currently selling 12,000 units of Gamma. Because this is the least profitable product, management believes it should be dropped from the mix. If Gamma is dropped, it is expected that sales of Beta would remain the same and those of Alpha would rise. By how much would sales of Alpha have to rise to maintain the same total income?

(Did you figure out that the fixed costs were $56,000? If yes, you are really good. If no, use the $56,000 as fixed costs anyway).

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Managerial 2 Homework

Problem 1. Jenkins company sells three different laundry baskets. The controller has prepared the following estimates for next year

A B CSelling Price $12 $20 $30Variable Costs 4 5 8

Estimated sales mix 60% 30% 10%

Estimated Fixed Costs $1,590,000

What is the weighted average contribution margin %?

How many of each of the laundry baskets does Jenkins have to sell for the company to make $2,000,000?

Problem 2

Aisha Exterminating Company performs a wide variety of pest control services. Aisha, the owner, has been examining the following forecasts for 2013.

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Type of Service Expected $ volume Contribution Margin %

Termites $480,000 60% Lawn Pests 360,000 50 Interior Pests 360,000 70

Total Fixed Costs are expected to be $560,000

1) What is the weighted average contribution margin %?

2) What profit does Aisha expect?

3) The actual sales mix turned out to be 20% termites, 30% lawn pests and 50% interior pests. Total actual sales were $1,200,000 and total fixed costs were $560,000. Determine the actual weighted-average contribution margin and the net income.

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Learning Module #4

Managerial Part 3

The following data relate to the planned operations of BobKat Company before considering the changes described later.

Chair Table SofaSelling Price 120 400 600Variable Costs 40 160 360Annual volume 8,000 3,000 4,000

Fixed costs are $1,320,000 (if you dropped or changed your products these would not change).

1) What is the total profit expected to be?

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2) What will happen to profit if BobKat drops Sofa?

3) What will happen to profit if BobKat drops chairs, but is able to shift the facilities to making more sofas so that volume increases to 7,000 units? (Total fixed costs remain constant)

4) Variable costs per sofa include $60 for parts that the company now buys outside. The company could make the parts at a variable cost of $45. If it did this, it would have to increase fixed costs by $35,000 annually. What would happen to profits if the company makes the part?

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5) Bobkat has received a special order for 1,000 tables at $245 each. Capacity is sufficient to make the units, and sales at the regular price would not be affected. What will happen to profit if BobKat accepts the order?

Cost Allocation

Kreutzer’s Klutz Company sells backpacks, tote-bags and book-bags. The cost structure is as follows:

Backpacks Tote-bags Book-bagsSelling Price $40 $32 $40Variable Costs 24 8 20

Sales Mix 60% 10% 30%

Additionally, the company spends $4,000 per year advertising Backpacks, $1,000 per year advertising Tote-bags, and $3,000 to advertise bookbags. All other administrative costs equal $112,000. Sales are $400,000.

What is the breakeven?

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Learning Module #5

Capital Budgeting Kreutzer Industries is introducing a new product expected to sell for $14 and to have variable costs of $7. The managers expect to sell 20,000 per year for 10 years. Making the product requires machinery that costs $400,000. Will last for 10 years, no salvage value and will increase annual fixed cash operating costs by $30,000. The machinery will be depreciated using the straight-line method. The tax rate is 30% and the required return is 12%Evaluate the feasibility of the project.

What is the expected increase in after-tax cash flows for the project?

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The Net Present Value

Payback

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IRR

Using Excel

Colton Company makes high-quality workshoes. Its managers believe the company can increase productivity by acquiring some new machinery but are unsure whether it would be profitable. The machinery costs $ 1,000,000, has a five-year life with no salvage value, and should save about $ 400,000 in operating costs annually. The company uses straight-line depreciation and has a 40% income tax rate and a 12% required rate of return.

What is the expected increase in after-tax cash flows for the project?

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Calculate the NPV of the project

What is the Payback?

What is the IRR?

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JD Company has the opportunity to introduce a new radio with the following expected results.Annual unit sales volume 300,000 Selling price per unit $60Annual cash fixed costs $ 4,200,000 Variable cost per unit $35

The product requires equipment costing $8,000,000 and having a four-year life with no salvage value. The company has a 12% hurdle rate. The tax rate is 40% and the company uses straight line depreciation.

What is the expected increase in after-tax cash flows for the project?

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What is the NPV of the project?

What is the Payback?

What is the IRR of the project?

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Stowe Company has the following three investment opportunities.

A B CCost $70,000 $70,000 $70,000

Cash inflow by year

Year 1 $35,000 $35,000 $4,000Year 2 35,000 10,000 8,000Year 3 - 45,000 10,000Year 4 5,000 20,000 98,000Total 75,000 110,000 120,000

Rank the investment opportunities in order of desirability using (a) payback, (b) NPV and, (c) irr.For the NPV, use a hurdle rate of 16%.

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Gabriel company currently makes 200,000 large strawberry jars per year at a variable cost of $9.75. Equipment is available for $500,000 that will reduce the variable cost to $7.50 while increase cash fixed costs by $200,000. The equipment will have not salvage value at the end of its four-year life and will be depreciated using the straight-line method. Gabriel has a 30% tax rate and a 12% hurdle rate. Do it????

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Debbie Stickle owns a driving range. She present pays several high school students $.8 a bucket to pick up the golf balls that his customers hit. A salesperson has shown her a machine that will pick up balls at an a cash cost of $6,600 plus $.05 per bucket. The machine costs $10,000 and has a five year life. Debbie would us straight line depreciation. Volume for the driving range is 21,000 buckets per year. Debbie’s combined state and federal tax rate is 30%. She believes the appropriate discount rate is 16%.

Do it? Other factors??

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Homework1) The Masters’ Company has the opportunity to market a new product. The sales manager

believes the company could sell 10,000 units per year at $15 per unit for five years. The product requires machinery that costs $100,000, has a five year life and not salvage value. Variable costs per unit are $8. The machinery has fixed operating costs requiring cash disbursements of $25,000 annually. Straight-line depreciation will be used for both book and tax purposes. The tax rate is 40% and the cutoff rate is 14%.

Required:1) Increase in annual net income and cash flows expected from the investment.2) The NPV of the investment3) The Payback4) The approximate IRR

2) Grove City Pottery currently makes 200,000 large strawberry jars per year at a variable cost of $9.75. Equipment is available for $5000,000 that will reduce the variable cost to $7.50, while increasing cash fixed costs by $200,000. The equipment will have no slavage value at the end of its four-year life and will be depreciated using the straight-line method. Grove City has a 40% tax rate and a 12% hurdle rate.

1) Determine the NPV2) Determine the change in NPV if the equipment has a $25,000 residual value

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Learning Module #6 \

Debits and CreditsThe Hot Dog Stand …

January 1, 2015…We formed a corporation, Hot Dogs, Inc., and you and everyone in the class invested $100 each in our venture. Everyone received ten shares of $1 par value stock for that $100 investment. Assume there are 30 of us. We elected a Board of Directors, a COO and we start to do business. First we sell 10 shares of $1,000, 6% convertible preferred stock to a venture capitalist. Each share of the preferred is convertible into 5 shares of stock. We borrowed $10,000 from the bank at 8% interest. The loan is repayable in five years. We bought a new cart for $10,000. During the year we bought 15,000 dogs and 15,000 buns. Dogs cost .15 and buns are .05 each. For our first year, we sold 14,000 dogs for $2 each. We paid our worker $7,200, paid office expenses of $3,600 and $800 for interest. On September 30 we sold 20 more shares for $300 each. On December 31, we paid the preferred dividend of $600. At the end of the year we owed our worker $100. The tax rate is 30% and we will pay our taxes next year. How did we do? Are we rich yet? Was it a good investment?

First what about that $100 we owe?

The matching concept is: Expenses must be _______________________________________________

_______________________________________________.

This is the basis of a_________________ a______________.

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What is Preferred Stock?

Types C_______________________________________

C_______________________________________

P______________________________________ not so much

Plus anything ____________

Now we go to work----

We need to break the process down into simple steps.

Create a Ledger-----Create a Journal,---------- Write it down----- Post it ----

Create a Trial Balance------ Make Financial Statements

(When we say record transactions and Prepare Financial Statements, this is what we mean)

Breaking things into simple components may seem like “dumbing down.” Isn’t this an insult to the intelligence of our students? We aren’t in kindergarten are we?

When we are new at something, we are all basically in kindergarten.” (AoCtB, 185)

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Write out in “accountanteze” what happened. This is done in a journal entry.

Rules of the Journal Entry: Journal entries are always numbered. Debits are to the left. Credits are to the right. The journal entry is always followed by an explanation. A blank line is left between journal entries.

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Assets = Liabilities +Owners' Equity

CASH

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Finally, we total and summarize what happened in a usable form- First a Trial Balance and then the financial statements.

The Trial Balance

A Chart of Accounts is ______________________________________________________

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We will do the Income Statement first (Statement of Income, Statement of Earnings, P&L, Statement of Profit & Loss)

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Balance Sheet (Statement of Financial Position, Statement of Financial Condition, Statement of Assets, Liabilities & Owners’ Equity)

Statement of Owners’ Equity (Statement of Shareholders’ Equity, Statement of Stockholders’ Equity, Statement of Retained Earnings)

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BBBB, Inc. Balance Sheet

December 31, 2014 Assets Liabilities

Current Assets Current Liabilities Cash $ 151,000 Taxes Payable $ 18,600 Merchandise Inventory 8,000 Note Payable-Land 28,000Total Current Assets 159,000 Total Current Liabilities 46,600

Fixed Assets Long-Term Liabi l i t ies Land 30,000 Note Payable-Bank 100,000

Total Liabilities 146,600 Other Assets Security Deposit 6,000 Owners’ Equity

Common Stock ($1 Par) $ 500 Paid In Capital 4,500

Retained Earnings 43,400 Total Owners’ Equity 48,400 Total Liabil i t ies and Total Assets $ 195,000 Owners’ Equity $195,000

During 2015 the companyPurchased 15,000 biffs at $8 each. Paid $100,000 cash and will pay $20,000 next year.Sold 11,000 biffs at $20 eachPaid the $28,000 note on the land plus $2,000 interestPaid 11 months’ rent of $11,000Paid salaries of $36,000Issued 100 shares of common stock for $10,000 on June 1st.On December 31, bought a truck for $40,000, cash.On December 31, paid $50,000 on the note payable to bank and $10,000 interest.Paid 2014 taxes payableTax rate is 30% and paid ½ of 2015 taxes in 2015. The rest will be paid in 2016.

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Assets = Liabilities +Owners' Equity

CASH

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Homework

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1) Debbie’s Doodles Inc. had the following account balances at December 31, 2014: Accounts Payable $ 34,000 Accounts Receivable 48,000 Notes Payable- long term 104,000 Cash 140,000Depreciation Expense 24,000 Common Stock 5,000 Paid In Capital 175,000Cost of Goods Sold 400,000 Equipment 136,000 Inventory 34,000 Land 180,000 Prepaid Insurance 30,000Accumulated Depreciation 48,000 Retained Earnings 240,000 Sales Revenue 820,000 Advertising Expense 73,000 Supplies Expense 16,000 Wages Expense 100,000 Security Deposits 50,000 Interest Expense 7,000 Wages Payable 12,000 Tax Expense ??

The tax rate is 30% of the Earnings Before Tax and there are 5,000 shares of common stock outstanding at December 31, 2014. The company sold 3,000 shares of common stock on November 1, 2014 for $40 per share, and declared and paid a dividend of $15,000. The beginning Common Stock was $ 60,000 and the beginning Retained Earnings was $115,000. Prepare Financial Statements for Debbie’s for the year 2014.

2) Beamer Business Year 2014 Chris opened a Beamer business on January 1, 2014. She started with $400,000 of her own money, for which she received 4,000 shares of $1 par common stock, and $100,000 borrowed from her Uncle Phil (Note Payable). The Note Payable to Uncle Phil requires that she pay the interest annually on December 31. She paid the $8,000 interest on December 31, 2013. She is required to repay the principal at the end of year 2019. She planned to operate her business as a corporation, Chris’s Beamer Biz, Inc. (CBB,Inc.). During the year she bought nine Beamers for $40,000 each. She sold seven of the Beamers for $60,000 each. Other expenses she paid cash for were: wages, $20,000; rent, $12,000; and utilities $1,000. She signed a 20-year lease and put down a rent security deposit of $1,000. In addition to the cash she invested on January 1st, on June 1st she also invested a piece of land she owned in the business that was worth $60,000 in exchange for 600 shares of common stock. At the end of the year she owed her worker wages of $1,000. She paid a dividend of $3,000. The tax rate is 30%. Chris pays 2014 taxes in 2015. So how did Chris do? (Do everything - Journal Entries, T-Accounts, Trial Balance and Financial Statements).

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Debits, Credits and Related EnigmasChristine E. Kirch

David P. Kirch The Basics

Debit and credit are simply a way of keeping track of what happens in a business. It is the quintessential element of what is known as double entry bookkeeping. For this class you do not really need to understand everything about bookkeeping, you just need to be able to create enough rules for yourself that you can get by.

Each business transaction is recorded using specific rules. These rules fall under the general category we call “Debit and Credit”. Using these rules we keep track of the financial transactions that affect the business.

First, we will review the stuff we talked about earlier when we introduced accounting. Remember the basic accounting equation for keeping track of transactions is:

ASSETS = LIABILITIES + OWNERS’ EQUITY

A lot of beginning textbooks like to say that the assets equal claims against those assets. In other words, if you put $20,000 of your own money in a business, then you increase cash by $20,000 and you have a claim against that $20,000.

ASSETS = LIABILITIES + OWNERS’ EQUITY 20,000 = 20,000

But now we are going to modify this by saying that we divide each category or account into two sections as follows:

Assets = Liabilities + Owners’ Equity + - - + - +

Notice that we “plus” the assets on the left side and “minus” them on the right and that we “plus” the liabilities and owners’ equity on the right side and “minus” them on the left. In this way our equation of A = L + O/E is always in balance because our right side always equals our left side. Huh? Consider the transaction where you started the business. (We call these T-accounts for obvious reasons!)

Assets = Liabilities + Owners’ Equity + - - + - + 20,000 20,000

Instead of saying plus and minus, we are going to use the words debit and credit. The word debit simply refers to the left side of an account. The word credit simply refers to the right side of an account. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~So we can now say that assets are increased by debits and decreased by credits. Liabilities and owners’ equities are increased by credits and decreased by debits.

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If all we wanted to keep track of was the totals of the assets and the liabilities and the owners’ equity, the above method would suffice. While this works, simply having just the three totals doesn’t provide enough information to be useful for decision-making. We probably will want or need to know how much of the assets is in cash and how much is in inventory. Therefore, we want to break the assets down into categories or “accounts”. Further, we will break down our main categories of Assets, Liabilities and Owners’ Equity into more descriptive sub-categories.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Cash Owners’ Investment Debit Credit Debit Credit 20,000 = 20,000

Now assume your new company borrows $10,000 from the bank. You have an increase in the asset cash of $10,000 and an increase in the liability (or claim against assets) bank loan payable of $10,000.

ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Bank Loan Payable Owners’ Investment Debit Credit Debit Credit Debit Credit20,000 = 20,00010,000 = 10,000 _________________30,000 = 10,000 + 20,000

Next, your company spends $15,000 for inventory. ASSETS = LIABILITIES + OWNERS’ EQUITY

Cash Inventory = Bank Loan Owners’ Investment Debit Credit Debit Credit Debit Credit Debit Credit20,000 = 20,00010,000 = 10,000 15,000 15,000 ______________ 15,000 15,000 = 10,000 20,000

Notice that we credited cash $15,000 and debited $15,000 to inventory. We used one asset (cash) to purchase another type of asset (inventory). Note also that the $15,000 balance in cash is the $30,000 debit total minus the $15,000 credit total.

As a final step to this stage of the accounting process, we introduce the process of journalizing or, preparing journal entries. Journal entries are simply a written record of the transaction. For instance, when we started the business above, our journal entry would have been:

DR CRCash 20,000 The debit Owners’ Investment 20,000 The creditTo record initial receipt of cash from the owner. The explanation of what the

journal entry is recording.

Note that we usually put the debit account name first and the debited account names are indented to the left. Debits are abbreviated dr. We then put the amount in the dr column, which is the left column. Next we put in the credit account name, indented to the right and the amount

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in the credit column, which is the column on the right. (Credits are abbreviated cr). After the journal entry, we write a short description or explanation of the transaction the journal entry is recording.Now let’s try and put all this together.

PROBLEM:It is January 1, 2014. You and I have decided to go into the business of selling DVDs. I

heard from a friend that there is an excellent teacher at UCGA University who explains debit and credit so anyone can understand it. And she does it in exactly two hours. I have arranged with a studio near the University to tape her lecture. They will then produce the videos and sell them to us for $10 each. We will be the exclusive distributor of the DVD- Debit for Dummies. The studio which tapes the lecture will take care of paying the prof a royalty and has the equipment to make all the DVDs we want. We have decided to operate as a corporation- The Chillicothe Learning Company. I will put $9,000 in the business for 9,000 shares of stock. You are a little short right now so you will put only $1,000 in the business for 1,000 shares of stock. You will run everything and give me monthly financial statements. You will receive a salary of $3,000 per month. The following things happened in January. Remember, you must keep track of everything and report to me monthly.

First we will start by writing down what happened. We write this down in a special form or what we call journalizing the transaction. You know that assets must equal liabilities + owners’ equity. For this transaction we increase our assets by $10,000 and increase owners’ equity by $10,000. The journal entry to record the above transaction would look like:

Dr. Cr.(1) Cash 10,000

Common Stock 10,000 To record issuing capital stock in exchange for cash. The next step in the recording process is to post the amounts to their respective accounts. This recording process, the taking of the numbers from the journal to the T-Accounts is called posting. After posting, the T-Accounts would look like:

Cash Common Stock Dr. Cr. Dr. Cr.(1) 10,000 10,000 (1)

January 1: While we were at the bank we borrowed $6,000 which we agreed to repay in two years. The loan carries interest at 12% which we will pay at the end of each year.

Dr. Cr.(2) Cash 6,000

Note Payable-Bank 6,000 To record the loan from the bank.

Our T-accounts look like: Cash Note Payable-Bank Common Stock Dr. Cr. Dr. Cr. Dr. Cr.(1) 10,000 6,000 (2) 10,000 (1)

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(2) 6,000 _________ 16,000

January 5: We purchased 1,250 DVDs with cash. Dr. Cr.

(3) Merchandise Inventory 12,500 Cash 12,500

To record purchase of inventory 1,250@$10.

The T-accounts will look like:

Merchandise Note Payable Cash Inventory Bank Common Stock Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.(1)10,000 12,500 (3) (3) 12,500 6,000 (2) 10,000 (1)(2) 6,000 _______ 16,000 12,500 3,500

January 31: We sold 900 DVDs for $20 each during the month of January. We paid your salary of $3,000, rent of $1,000, utilities of $350 and advertising of $250.

Dr. Cr.(4) Cash 18,000

Sales 18,000 To record January sales.

(5) Cost of Goods Sold 9,000 Merchandise Inventory 9,000

To record the cost of the sales for January.

(6) Salary Expense 3,000 (These could have Rent Expense 1,000 been have been Utilities Expense 350 recorded as separate Advertising Expense 250 journal entries. This

Cash 4,600 is what is known as To record expenses paid with a compound journal

cash in January. e ntry .)

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Sales and expenses are special accounts in the owners’ equity section of the balance sheet. Revenues (sales) increase owners’ equity and expenses decrease owners’ equity. (We will go into the why of this later). Expenses are increased by debits and revenues, or sales, are increased by credits. Cash Merchandise Inventory Note Payable-Bank Common Stock Dr. + Cr. - Dr. + Cr. - Dr. - Cr. + Dr. - Cr. +(1) 10,000 12,500 (3) (3) 12,500 6,000 (2) 10,000 (1)(2) 6,000 9,000 (5)(4) 18,000 ____________ 4,600 (6) 12,500 9,000 34,000 17,100 3,500 16,900 Sales Cost of Goods Sold

Dr. - Cr. + Dr. + Cr. - 18,000(4) (5) 9,000

Salary Expense Rent Expense Dr. + Cr. - Dr. + Cr. - (6) 3,000 (3) 1,000

Utilities Expense Advertising ExpenseDr. + Cr. - Dr. + Cr. -

(6) 350 (6) 250

Some final notes concerning T-Accounts and Journal Entries. All accounts that eventually wind up on the balance sheet (Cash, Merchandise Inventory, Note Payable - Bank and Common Stock are termed real accounts. All the accounts that end up on the income statement are called temporary accounts. At the end of each year, the temporary accounts are closed to a balance sheet account called Retained Earnings. This closing process allows us to keep track of only the current year’s sales and expenses. This allows the data to be much more relevant to decision makers. If we assume that the above transactions were for the whole year instead of just of the month, then our closing entry would be:

(7) Sales 18,000 COGS 9,000 Salary Expense 3,000 Rent Expense 1,000 Utilities Expense 350 Advert Expense 250 Retained Earnings 4,400To close the temporary accounts for the year

Retained Earnings is an owners’ equity account where we accumulate the earnings for each year. Note that after you post the above entry, all the temporary accounts (Sales, Cost of Goods Sold, Salary Expense, Rent Expense, Utilities Expense and Advertising Expense) would now have -0- balances. They are ready to begin accumulating the data for the next year.

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From these balances now, can you construct an Income Statement, Statement of Owners’ Equity and Balance Sheet? (Try it and then check the next page)

Our DVD, Inc. Income Statement

For the Month Ended January 31, 2014

Sales $ 18,000 Cost of Goods Sold 9,000Gross Margin 9,000 Operating Expenses:

Salary Expense $ 3,000 Rent Expense 1,000 Utilities Expense 350 Advertising Expense 250

Total Operating Expenses 4,600 Net Income $ 4,400

Earnings Per Share $ 0.44

Our DVD, Inc. Statement of Owners’ Equity

For the Month Ended January 31, 2014

Common Stock Retained Earnings Totals Beginning Balances, January 1, 2014 $ 0 $ 0 $ 0Common Stock Issued 10,000 10,000Net Income 4,400 4,400Less: Dividends Declared < 0> < 0>Ending Balances, January 31, 2014 $ 10,000 $ 4,400 $ 14,400

Our DVD, Inc. Balance Sheet

January 31, 2014

Assets LiabilitiesCurrent Assets Current Liabilities Cash $16,900 None Merchandise Inventory 3,500 Total Current Liabilities $ -0- Total Current Assets 20,400 Long-Term Liabilities Note Payable-Bank 6,000 Fixed Assets Total Liabilities 6,000 None 0 Owners’ Equity

Common Stock $10,000 Other Assets Retained Earnings 4,400 None 0 Total Owners’ Equity 14,400 Total Liabilities and Total Assets $ 20,400 Owners’ Equity $ 20,400

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(Note the only time that Retained Earnings and Net Income will be the same is after the first year of operations).

Module 7 It’s a round ball and a round bat,

but you have to hit it square.Pete Rose

Continuing those accursed Debits and Credits

It is a shallow life that doesn’t give

a person a few scars.

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Garrison Keillor

“Great occasions do not make heroes or cowards; they simply unveil them to the eyes of men. Silently and perceptibly, as we wake or sleep, we grow strong or weak; and last some crisis shows what we have become. ” ― Brooke Foss Westcott

Beamer Biz - 2015 On January 1, she issued a $100,000, 5 year, 5%, convertible bond. The bond is convertible into 500 shares of common stock. During 2015 (the second year) Chris bought 9 Beamers and sold 8 Beamers. Same prices as last year. When she bought the Beamers in the second year, she paid 40% down and will pay the balance in the following year. Also, when she sold the Beamers, she got 60% down and will receive the balance in the following year. During the year she paid cash for wages $24,000; utilities of $3,000; and rent of $8,000. She paid last year’s taxes. On May 1, she issued 200 shares of common stock for $ 25,000. At the end of the year, in addition to what she owed on the Beamers, she owed rent of $4,000 and wages of $2,000. At December 31, she paid a dividend of $5,000. At December 31 she paid the interest + $50,000 of principal due to Uncle Phil, the interest on the convertible bond. Tax rate is 30% and she paid ½ of 2015 taxes in 2015 with the remainder to be paid in 2016.

Remember the matching concept is _____________________________________________________________________________________________________________________!!

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69

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T Accounts

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CASH

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Financial Statements

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Types of Income Statements

M___________________

Or S___________________

And C___________________

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Accounts ReceivableControlling and Subsidiary Accounts

Most sales of businesses, especially business to business sales, are on credit. When a business sells something, we debit accounts receivable and credit sales. The Accounts Receivable account is what is known as a controlling account. If we sell $100 worth of goods on credit to Jack and $150 worth of goods to Jill, also on credit, up to now, our two journal entries would look like this:

Accounts Receivable 100Sales 100

To record sale1

1For all the illustrations in this section, we are assuming that the appropriate entries to record the cost of goods sold would also be made.

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Accounts Receivable 150 Sales 150

To record sale

Note that we have put all of the sales in the same receivable account. That is not really how a business handles these transactions. Actually, in a real business, the journal entries for the sales would be:

Accounts Receivable- Jack 100Sales 100

To record sale

Accounts Receivable- Jill 150 Sales 150

To record sale

Note that each customer has their own accounts receivable account. This makes sense as we want to keep track of collections and sales by customer. These individual accounts are called subsidiary accounts. Whenever we debit or credit accounts receivable, we debit and credit both the controlling and the subsidiary accounts. Thus, at any time, the balance in the controlling account is exactly equal to the total of the balances of all the subsidiary accounts.

Let’s go back to Jack and Jill. Assume that Jack buys $100 and Jill $150 as above. The next week Jill buys another $100 worth of stuff. During that week, Jack comes in the store and pays $50 on his bill. Prepare journal entries for all these transactions and prepare “T” accounts for both the controlling account and the subsidiary accounts.

1) Accounts Receivable- Jack 100 Control AccountSales 100

To record sale Accounts Receivable 1) 100 50 (4

2) Accounts Receivable- Jill 150 2) 150Sales 150 3) 100_________

To record sale 350______50 300

3) Accounts Receivable- Jill 100 Sales 100

To record sale Subsidiary Accounts Accounts Rec-Jack Accounts Rec-Jill

4) Cash 50 1) 100 50 (4 2) 150

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Accounts Rec- Jack 50 50 3) 100_______ To record cash payment by Jack 250

Notice that each time an entry is made to the control account, an entry is also made to the appropriate subsidiary account(s) and that the ending balance in the control account (300), equals the total of all the ending balances in the subsidiary accounts (50 + 250).

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

When you pay for your purchase using a national credit card such as Master Card, the retail store you are buying the merchandise from, books the sale as a cash sale not as a credit sale. They deposit your Master Card slip in the bank just like they deposit the cash from sales. The bank deducts a collection fee- usually from 2-3%, and credits the net amount to the store’s account immediately. If the store has followed proper procedure in accepting the credit card, then any losses from bad debts or fraud belong to the bank, not the retail store.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Bad Debt ExpenseBusinesses that sell on credit will have bad debts (customers who do not pay). If they do not, they

might not be good business people-why?Now if we have people who do not pay us, two questions arise. When is the nonpayment

recognized? And is it an expense or a reduction in revenue?

Think about these questions then look at the next the page.

Answers:It should be recognized as an expense during the year the sale was made. Many times this is

impossible because it is much later that we find out the bum is not going to pay us. Businesses treat them as expenses because they are considered a normal cost of doing business. Secondly, they are treated as an expense to allow users of the financial statements to clearly see how much is being written off by the company.

So how do we decide how much the expense is? If we knew who wasn’t going to pay, we wouldn’t have sold to them! What companies do in these situations is make an estimate of how much of the current accounts receivable will ultimately be uncollected. They recognize this amount as an expense for the period. A problem arises as to what to credit. We credit a contra account which we call Allowance for Doubtful Accounts.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

A contra account is also known as a valuation account. You have already encountered another valuation account - remember accumulated depreciation? A valuation account is an

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account which is used to adjust the balance of another account to which it is directly related. Contra accounts have a balance opposite to the account to which they are attached. Because Accounts Receivable has a debit balance, the Allowance for Doubtful Accounts will have a credit balance.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

In the instance at hand, we create an account called Allowance for Doubtful Accounts which is used to reduce the total Accounts Receivable to the amount we eventually expect to collect. Let’s work out an example.

At December 31, 2014, our company had a balance of $400,000 in Accounts Receivable and $12,000 in the Allowance for Doubtful Accounts. The allowance account was a normal balance. (A “normal balance” is one which is as expected. Thus, the normal balance for cash would be a debit balance. A normal balance for the Allowance for Doubtful Accounts would be a credit balance). During the year, we sold $1,200,000 worth of merchandise on account. (“On account” means that we sold the merchandise on credit). On May 1, 2014 we got notice that one of our customers, Mr. Redhawk, had gone bankrupt. Mr. Redhawk owed us $8,000 at the time of his bankruptcy. Additionally, the bill we sent to Mrs. Herd on July 1, 2014 had been returned marked “not at this address, no forwarding address available” so we wrote off the balance. The bill to Mrs. Herd had been for $500.00. On October 17, Mrs. Herd sent us a letter from Phoenix with a check that paid her bill in full. During the year we collected $1,250,000 from our credit customers. At December 31, 2014, we estimated that 3% of our receivables will never be collected. Prepare the journal entries to record all these transactions. (Record both the write off and the subsequent payment of Mrs. Herd). Prepare “T” accounts to record the transactions.

A) Accounts Receivable 1,200,000Sales 1,200,000

To record sales for the year

B) Cash 1,250,000Accounts Receivable 1,250,000

To record collections on accounts receivable during the year.

May 1, 2014 Allowance for Doubtful Accounts 8,000Accounts Receivable-Redhawk 8,000

To write off Mr. Redhawks’s receivable

July1, 2014 Allowance for Doubtful Accounts 500

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Accounts Receivable- Herd 500To write off Mrs. Herd

Oct 17, 2014 Accounts Receivable-Herd 500Allowance for doubtful accounts 500

To reverse write off of Mrs. Herd’s account

Cash 500Accounts Receivable-Herd 500

To record Mrs. Herd’s paying of her account

Dec 31, 2014 Bad Debt Expense 6,245Allowance for Doubtful Accounts

6,245 To adjust ADA to 3% of ending Accounts Receivable balance.

(ADA= Allowance for Doubtful Accounts)

Accounts Receivable Allowance for Doubtful Accounts BB 400,000 1,250,000 (B 5/1 8,000 12,000 BB A) 1,200,000 8,000 5/1 7/1 500 500 10/17 10/17 500 500 7/1 8,500 12,500 500 10/17 4,000 1,600,500 1,259,000 6,245 12/31 341,500 10,245

341,500 * .03 = 10,245 amount needed as ending balance in ADA

onomatopoeia Module #3 "There's no business like show

taciturn Accounts Receivable business, but there are several businesses like accounting."

David LettermanAccounts Receivable

Controlling and subsidiary accounts

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Slammin’ Sammy had $600,000 in Accounts Receivable at the beginning of the year. He also had $12,000 in the Allowance for Doubtful Accounts. Allowance for Doubtful Accounts is

and the T-Accounts look like

and the Balance Sheet looks like

Two ways of accounting for Bad Debts, % of ___________________ and % of A_____________ R_______________

The % of ________________ focuses on the I____________ S_________________

And the % of A_____________ R_______________, focuses on the B_________ S_________

We will be using __________________________

During the year Slammin’ Sammy sold $1,200,000 on account, he collected $900,000 from the customers and he wrote off $5,000 owed him by companies that went bankrupt. One of the companies who he wrote off, came back and paid him $1,000. At the end of the year, SS

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estimates that 2% of his receivables will eventually prove uncollectible. Prepare journal entries for all these transactions and post the accounts receivable and allowance for doubtful accounts t-accounts.

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Smokin’ Yokum sold $2,000,000 worth of Begees during the year on credit. At the beginning of the year his Accounts Receivable was $400,000 and his Allowance for Doubtful Accounts was $18,000. During the year he collected $1,500,000 of his Accounts Receivable. During the year he wrote off $22,000 in bad accounts. One of the customers who had owed him $2,000 and who he had written off, came back and paid in in full. At the end of the year he estimates that 5% of his receivables will never be collected. Prepare the all journal entries related to Accounts Receivable for the year and post the A/R & ADA T-accounts. Show how the results will appear on the financial statements.

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2015 - Simms had total sales of $300,000. All of the company’s sales are on credit with terms of 2/10, net 30. At the beginning of the year, the company had a balance in Accounts Receivable of $26,000 and an Allowance for Doubtful Accounts of $1,000. At the end of the year, Accounts Receivable had a balance of $37,000 and an Allowance for Doubtful Accounts of $2,000.

First as to terms- 2/10 n/30 means

and costs

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so why do?

now as to the receivable turn

Which tells us

and dividing the turn into 365

gives us A__________________ C___________________ P___________________.

Also known as D___________ S________________ O____________________.

What is an aging schedule?

Total Receivable Current 30-60 60-90 over 90

Able Co. 60,000.0

0 60,000.0

0

Acme Corp 40,000.0

0 38,000.0

0 2,000.

00

Baker Co 20,000.0

0 12,000.0

0 4,000.

00 4,000.

00

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Zollar Co 80,250.0

0 60,250.0

0 20,000.0

0

 Totals

236,965,374.87

223,885,462.25

9,000,486.57

3,236,582.95

842,843.10

Accounts Receivable and the Cash Flow Statement - Use N_____ Accounts Receivable

Homework

Problem 1 Sally sold $300,000 worth of stuff during the year (all on account). Her beginning balance in Accounts Receivable was $200,000 and her beginning credit balance in Allowance for Doubtful Accounts was $6,000. During the year she collected $280,000 on her receivables, and wrote off $9,000. She estimates that 3% of her receivables at any one time will not be collectable.Prepare all journal entries for the year related to the receivables (including any year end adjustment).

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Problem 2 What is Sally’s average collection period?

Problem 3At December 31, 2012 Makenna’s balance in Accounts Receivable was $200,000 and the balance in Allowance for Doubtful Accounts was $4,000. During 2013 she had credit sales of $1,000,000. She collected $850,000 on her accounts receivable during 2013. She wrote off $3,000 of accounts receivable during 2013. One of the customers she wrote off came back and paid her $500. Makenna estimates that 2% of her receivables will never be collected. Prepare all journal entries and T-Accounts for 2013 related to the receivables, including any year-end adjustment. Show how this information will appear on the financial statements and calculate the accounts receivable turn and the average collection period.

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Depreciation

When a company buys a fixed asset (accountanteze for buildings, machines, furniture, trucks and so forth) the cost of the asset, except land, must be allocated over the period the asset helps the company generate revenues. The period over which the asset is useful to the company in generating revenues is called its economic or useful life. Therefore, a definition of depreciation expense is the allocation of the cost of a fixed asset over its estimated useful life. To figure the amount of the expense for each year under the straight-line method of depreciation, we use the following formula:

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Cost - Estimated Salvage ValueDepreciation Expense per year = Estimated Life of the Asset

Suppose we bought a truck to deliver our product. The truck cost us $30,000 and we estimate that we will use it for 3 years before it becomes too expensive to keep it going. We further estimate that at the end of the three years we will be able to sell it for $3,000. This $3,000 is the estimated salvage value (also termed the residual value).

So, when we buy the truck our journal entry is:

Truck 30,000 Cash (or loan payable) 30,000To record purchase of truck.

Then, at the end of the year, we would have the journal entry:

Depreciation expense 9,000 Accumulated Depreciation 9,000To record depreciation for the year.

Accumulated Depreciation is an enigmatic account for many students. It is a valuation account. It is also a contra account. Now let’s see what it really is. The truck account will remain the same, $30,000, until we sell or trade in the truck. The amount of depreciation we take on the truck will accumulate over the years we own it in the Accumulated Depreciation account. The cost minus the accumulated depreciation of any fixed asset is known as its book value. Consider the P & L and the Balance Sheet for each of the following years:

P&L Year 1 Year 2 Year 3 Sales

Cost of Good SoldGross MarginOperating Expenses: Xxxxx Expense Xxxxx Expense Depreciation Expense 9,000 9,000 9,000

Balance SheetCurrent Assets Xxxxxxx Xxxxxxx XxxxxxxTotal Current Assets

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Fixed AssetsTruck 30,000 30,000 30,000Less: Accumulated

Depreciation < 9,000> <18,000> <27,000>Net Fixed Assets 21,000 12,000 3,000

By accounting for the truck and its depreciation in this manner, we are imparting a lot more information than if we just credited the truck for the depreciation. If we are considering investing in this company, we can tell approximately how old its assets are. This gives us an idea of when they will need replaced.

Let’s assume that we sell the truck for $3,000 at the end of the third year. The journal entry would be:

Cash 3,000Accumulated Depreciation 27,000

Truck 30,000To record sale of truck

(We will leave the selling of the truck for more or less than $3,000 for later).

If we originally purchased the truck at a point in the year other than the beginning, we would adjust our depreciation for the period we used it. Many companies have special rules for these situations. A common one is that the company takes 1/2 of a year’s depreciation in the year they buy the asset, no matter when in the year that occurs, and they take 1/2 of a year’s depreciation in the year they sell the asset, again, no matter when in the year that occurs.

DepreciationWhat it is, is

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You bought a new truck to use to deliver the Whatevers that you sell. The truck cost $30,000, will last for 4 years. At the end of 4 years, you figure you could sell it for $2,000.

Formula for Straight-Line Depreciation:

Journal Entries

T-Accounts

Goes on the Balance Sheet

Sale of Fixed AssetsOn June 30, 2015, Billy Bob sold a piece of equipment which he used in his business for $20,000. Billy Bob bought the equipment on January 1, 2011, for $60,000. When he bought the equipment, he estimated the life at 5 years and a $6,000 salvage value.

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What if the equipment had been sold for $5,000?

InventoriesSpecific Identification

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Weighted Average

LIFO _____________________________________

(Not used much anymore because of the I______________.)

FIFO means ___________ ___, __________ _____.

Inventory “turn”

and taking that one step further,

gives us the A____________ days __________ _____ _____________

And “Working Capital” is

Forensic Accounting

Cindy’s Best Buy Company had a fire. We know that her beginning inventory was $250,000. We also know that she purchased $400,000 worth of goods prior to the fire. Her gross margin averaged 40% of sales. Sales to the date of the fire, as best can be estimated, were $500,000. How much inventory did Cindy lose in the fire?

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Estimating Inventory- (a forensic accounting tool)First a detailed Cost of Goods Sold Section

Mike K’s Golf Business (he left the CPAing to Terri and the staff) had a fire. Beginning inventory was $100,000. During the period up to the fire he had sales of $1,000,000. By calling all his vendors, he was able to establish that he purchased about $750,000 in merchandise prior to the fire. Assume that his average mark-up is 50%, how much inventory did he lose in the fire?

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HomeworkProblem 1 Suzie’s Gymnastic Supply Company had a flood. Her ending inventory last year was $300,000. Her average markup is 140% of the cost of an item. Her sales to the date of the flood were 600,000. She had purchased $400,000 in inventory prior to the flood. How much inventory did she lose? Show your calculations.

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Problem 2Gracie’s Gobbers, Inc. was robbed! She needs to file a claim for the loss with her insurance company. She knows that last year she ended the year with $475,000 in inventory and after going through her invoices she finds she had purchased $350,000 in inventory this year up to the date of the robbery. Her sales so far this year were $1,200,000. She estimates that her gross margin averages 45%. How much inventory did she lose in the robbery? Show your calculations

Problem 3Comparative Balance Sheets for Darby’s Doodles, Inc. are listed below:

December 31, 2015 2016

Cash 400 650

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Accounts Receivable 600 800Inventory 1,000 1,300Plant and Equipment 1,000 1,050Accumulated Depreciation 325 600Accounts Payable 600 640Common Stock 1,000 1,000Retained Earnings 900 1,560

The following data relate to 2016:a) collections from credit customers, $30,000, cash sales $6,000b) payments to suppliers of merchandise $ 40,000c) purchases of equipment for cash, $50d) dividends paid to shareholders $500e) no plant and equipment was retired or sold during the year

1) For Darby, the Depreciation Expense for 2016 was

2) For Darby, the Sales Revenue for 2016 was

3) For Darby, the Net Income for 2016 was

4) The Cost of Goods Sold for 2016 was

MRyan Co., purveyor of fine, fine things, had the following balances at December 31, 2015:

Cash 40,000Accounts Receivable 60,000Allowance for doubtful accts 1,000Inventory 50,000 (1 thing)Equipment 190,000

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Accumulated Depreciation-Equipment 60,000Land 50,000Patent 20,000Accounts Payable 40,000Salary Payable 1,000Rent Payable 2,000Taxes Payable 3,000Long-Term Debt 80,000Common Stock ($1 per share) 90,000Retained Earnings 133,000

During 2016 the following transactions occurred: Jan 1, received all beg A/R and paid all Beg A/P Mar 1, bought 2 things for $60,000 each, (Paid 25% down and rest payable in one year) April 15, paid year 2015 taxes payable May 1, sold one thing for $120,000 (received 3/4 down and the rest in one year) May 15, bought 1 thing for $80,000 (Paid 25% down and rest payable in one year) July 1, company wrote off $600 in bad debts July 1, sold one thing for $160,000 (received 75% down, the rest will be paid in one year) Aug 1, purchased piece of equipment for $10,000 cash. Sept 1, exchanged 40,000 shares of common stock for piece of land worth $40,000. Dec 1, declared and paid $.10 per share dividend. Dec 31, paid an annual payment on long term debt- $28,000. Of that amount, $8,000

was for interest and $20,000 was for principal.

During the year the company paid 15 months’ rent of $15,000. Also during the year the company paid salaries of $12,000 in cash, and at the end of the year they owed $3,000 for salaries. Depreciation for the year is $10,000. The long-term debt is payable in $20,000 principal payments plus interest of 10% each December 31. The tax rate is 30% and during the year the company paid 2015 taxes payable and 50% of 2016 taxes. The company uses the FIFO inventory system. The company estimates that 2% of its receivables will ultimately be uncollectible. Journalize the above transactions and post them to T-Accounts. Prepare any necessary adjustments. Prepare a P&L, Statement of Owners’ Equity, Balance Sheet and Cash Flow Statement for the year 2016.

Prepaid Expenses and Accruals

(remember the matching principal is __________________________________________

____________________________________________________________________________

You started the year with a beginning balance in Rent Payable of $2,000.

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You paid 15 months’ rent of $15,000. Record the journal entry.

You started the year with a beginning balance in Prepaid Rent of $2,000.You paid 8 months of rent of $16,000. Record the journal entry.

You started the year with $3,000 in Wages Payable. You paid $40,000 to your worker. You owed her $ 7,000 at the end of the year. Record the journal entries.

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You started the year with $1,200 in Prepaid Insurance. This was for the final two years of a three year policy. What is the journal entry you would prepare at the end of the year to recognize the insurance expense for the year.

Extra Prepaid/Accrual ProblemsYou started the year with a beginning balance in Prepaid Rent of $2,000. You paid 13 months’ rent of $26,000. Record the journal entry.

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You started the year with a beginning balance in Prepaid Rent of $4,000.You paid 6 months of rent of $12,000. Record the journal entry.

You started the year with $4,000 in Wages Payable. You paid $40,000 to your worker. You owed her $ 3,000 at the end of the year. Record the journal entry(s).

You started the year with $1,000 in Prepaid Insurance. This was six months of insurance on a policy that expires this year. On June 30, you purchased a two year policy for $3,000. Record the journal entries.

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You started the year with a beginning balance in Rent Payable of $1,000.You paid 14 months’ rent of $14,000. Record the journal entry.

You started the year with a beginning balance in Prepaid Rent of $4,000.You paid 9 months of rent of $18,000. Record the journal entry.

You started the year with $5,000 in Wages Payable. You paid $50,000 to your worker. You owed her $ 10,000 at the end of the year. Record the journal entries.

You started the year with $ 750 in Prepaid Insurance. This was four months of insurance on a policy that expires this year. On May 1, you purchased a two year policy for $4,800. Record the journal entries.

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You started the year with a beginning balance in Rent Payable of $1,000.You paid 14 months’ rent of $14,000. Record the journal entry.

You started the year with a beginning balance in Rent Payable of $4,000.You paid 9 months of rent of $18,000. Record the journal entry.

Without data, you are just another person with an opinion.

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New Bunch of Difficulties“What we have here is just a bunch of difficulties” Cindy Kirch

Cindy, doing business as CK, Inc., had the following balances at the end of 2015:

Cash $100,000Accounts Receivable 52,000Allowance for Doubtful Accounts (2,000)

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Inventory (80 difficulties @ 400 each) 32,000Prepaid Insurance 2,400Equipment 90,000Accumulated Depreciation 16,000Security Deposit 3,000Accounts Payable 13,000Wages Payable 6,000Taxes Payable 5,000Rent Payable 4,000 Note Payable 100,000Common Stock (20,000 shares) 2,000Capital In Excess of Par 18,000Retained Earnings 113,400

During 2016, the following transactions occurredPaid beginning accounts payable and received beginning accounts receivable.Purchased 600 difficulties at $450 each, 25% down and the rest payable in one yearSold 500 Difficulties for $800 each. Customers paid 1/2 down and the rest in one year.Paid cash wages of $40,000 and owed $5,000 at the end of the year.Paid last year’s taxes.

The prepaid insurance is for a three-year policy taken out in 2015. The policy had exactly two years left on it at the beginning of 2016.

The beginning equipment originally cost $90,000, had a $10,000 salvage value and was expected to last ten years from the date of its purchase. On January 1, Cindy purchased a new truck. The cost was $60,000. She put $10,000 down and will pay the rest in 4 equal annual payments of $14,429.57, which include interest at 6%. She made the first payment on December 31, 2016.The truck is expected to last for 6 years and then be worth $6,000.The rent is $4,000 per month and during 2016 Cindy paid the landlord $56,000.On December 31, 2016, Cindy paid the annual payment on the Note Payable of $20,000 plus

interest at 10%.Paid $10,000 in advertising during the year and owed $2,000 in advertising at end of year.On October 1, 2016, CK, Inc. paid cash of $5,000 and issued 1,000 shares of common stock in

exchange for a piece of land worth $15,000.The tax rate is 30% and she paid ½ of 2016 taxes in 2016. She will pay the rest in 2017.During the year the company wrote off $1,500. One customer who was written off, came back

and paid $200. The company estimates that 2% of accounts receivable will ultimately not be collected.

During the year the company paid $25,000 in dividends.Cindy uses the FIFO inventory system.

Prepare Journal Entries, T-Accounts, an Income Statement, a Statement of Owners’ Equity, and a Balance Sheet for CK, Inc.

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Cash Flows Happiness is different from pleasure

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Happiness has something to do with struggling and enduring and accomplishing.

George Sheehan Back Brain Stuff-

Format for the Cash Flow Statement Two Types of Format, D________ and I__________ Vast majority of world uses __________________ and we will use both _________________________

Company NameStatement of Cash Flows

For the (Period) Ending (Date)

Operating ActivitiesNet Income $ xx,xxxAdd: Depreciation Expense x,xxxAdd: Amortization Expense x,xxxAdd: Loss on Sale of Fixed Asset(s) x,xxxLess: Gain on Sale of Fixed Asset(s) <x,xxx>Increase in (current asset account name) < x,xxx>Decrease in (current asset account name) x,xxxDecrease in (current asset account name) x,xxxIncrease in (current liability account name) x,xxxDecrease in (current liability account name) < x,xxx>

Increase in (current liability account name) x,xxx Cash Provided By Operating Activities -or-Cash Used For Operating Activities xx,xxx or <xx,xxx> Investing Activities

Purchase(s) of (fixed asset account name) <$ xx,xxx>Purchase(s) of (fixed asset account name) < xx,xxx>Sale(s) of (fixed asset account name) x,xxxPayment of Security Deposit < x,xxx>Refund of Security Deposit x,xxx

Cash Provided By Investing Activities -or- Cash Used For Investing Activities xx,xxx or <x,xxx>

Financing ActivitiesNew Borrowing(s) xx,xxxPayment(s) on (description of debt) < x,xxx>Issuance(s) of Common Stock x,xxxPurchase(s) of Treasury Stock < x,xxx>Payment of Dividends < x,xxx>Issuance(s) of Bonds x,xxxRedemption of Bonds < xx,xxx>

Cash Provided By Financing Activities -or- Cash Used for Investing Activities xx,xxx or <xx,xxx>Increase in Cash -or- Decrease in Cash xx,xxx or <xx,xxx>Beginning Cash, (Date) xx,xxxEnding Cash, (Date) $ xx,xxx

Supplemental Cash Flow Information Cash payments for income taxes $ x,xxx Cash payments for interest x,xxx Noncash investing and financing activities

(Description of transaction) x,xxx(Description of transaction) x,xxx

From the following information for Molly’s Munchies, prepare a Statement of Cash Flows for the year ended December 31, 2014 using the indirect method.

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The following data is for Molly’s Munchies: Balance Balance 12/31/14 12/31/13

Cash 80,000 20,000Accounts Receivable 68,000 35,000Inventory 70,000 90,000Prepaid Insurance 500 3,000 Equipment 340,000 270,000Accumulated Depreciation 80,000 20,000Land 120,000

Security Deposits 12,000 10,000 Accounts Payable 35,000 30,000

Wages Payable 6,000 10,000Rent Payable 7,500 6,000Interest Payable 6,000 7,000Taxes Payable 16,000 5,000Note Payable 120,000 140,000Common Stock ($1 each) 300,000 160,000Retained Earnings 120,000 50,000Sales 1,200,000Cost of Goods Sold 575,000Wage Expense 260,000Rent Expense 24,000Office Expenses 70,000Depreciation Expense 60,000Advertising Expense 15,000Insurance Expense 9,000Interest Expense 14,000Income Tax Expense 52,000

Some of the equipment was acquired on March 31, 2014 by exchanging 60,000 shares of common stock worth $60,000. The additional common stock (other than that issued for the purchase of the equipment) was sold on June 30, 2014 for $1 per share. The company did not sell any equipment during the year. All the rest of the equipment and the land purchased during the year was purchased for cash. The retained earnings balance for both years is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30th of each year. Current market price is $5.00 per share

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Now you do one - Not dying is not the same as living.

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The following balances are for Misty Company at December 31,

2013 2014Cash 10,000 30,000Accounts Receivable 40,000 50,000Inventory 80,000 60,000Prepaid Rent 6,000 3,000Equipment 180,000 210,000Accumulated Depreciation-Equipment 50,000 60,000Security Deposit 8,000 9,000Accounts Payable 40,000 50,000Salaries Payable 10,000 -0-Interest Payable -0- 5,000Taxes Payable -0- ______Note Payable 100,000 70,000Common Stock 10,000 50,000Retained Earnings 114,000 124,000Sales 200,000Cost of Goods Sold 100,000Salary Expense 40,000Rent Expense 24,000Interest Expense 6,000Depreciation Expense 10,000

The common stock outstanding was 10,000 shares on January 1, 2014. On April 1, 2014, Misty issued 10,000 shares of common stock in exchange for $10,000 of equipment. On July 1, 2014, Misty sold an additional 30,000 shares of common stock. During 2014, the company paid a dividend of _____________. No equipment was sold during the year. The tax rate is 30% and 1/2 of 2014 taxes were paid in 2014.

On the next page, prepare a Statement of Cash flows in good form using the indirect method.

A word to the wise ain't necessary -- it's the stupid ones that need the advice. - Bill Cosby

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Bobcat Bob, Inc. Bobcat Bob, Inc. Income Statement Balance Sheet

For the Year Ended December 31, 2015 December 31,

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Sales $ 480,000 2015 2014Cost of Goods Sold 240,000 Assets Gross Margin 240,000 Current AssetsOperating Expenses Cash $ 26,200 $ 16,800 Salary Expense $124,000 Accounts Receivable 45,000 38,000 Insurance Expense 12,000 Allowance for Bad Debt Expense 300 Doubtful Accounts 1,200 1,000 Depreciation Expense 2,400 Net Accounts Receivable 43,800 37,000 Total Operating Expenses 138,700 Inventory 10,000 11,000 Operating Income 101,300 Prepaid Insurance _ 100 ______ Other Revenues & <Expenses> Total Current Assets 80,100 64,800 Interest Expense (4,200) Property and Equipment Gain on sale of Equipment 500 Furniture & Fixtures 186,000 130,000 Net Other Revenue (Expense) (3,700) Less: AccumulatedTaxable Income 97,600 Depreciation (19,400) (20,000) Tax Expense 29, 280 Net Property and Equipment 166,600 110,000 Net Income $68,320 Other Assets

Patents 500 100

Earnings Per Share $22.57 Total Assets $247,200 $174,900

Liabilities Current Liabilities Accounts Payable $ 17,000 $ 2,000 Salaries Payable 1,000 Taxes Payable 12,100 13,120 Advertising Payable 100

Current Portion of Long-term Debt 10,000 10,000

Total Current Liabilities 40,100 25,220 Long-Term Debt

Note Payable-Bank 50,000 60,000 Total Long-Term Debt 50,000 60,000

Total Liabilities 90,100 85,220 Owners’ Equity Common Stock ($1 par) 3,100 3,000

Capital in Excess Par 30,000 21,000 Retained Earnings 124,000 65,680

Total Owners’ Equity 157,100 89,680 Total Liabilities

& Owners’ Equity $247,200 $174,900

On June 30, the company sold a piece of equipment which had cost $3,500, had accumulated depreciation of $3,000 for $1,000. The Note Payable-Bank is payable at $10,000 per year plus interest at 6% on December 31 of each year. The company wrote off one account which owed $100 during the year. The company paid a dividend during the year. On June 30, the company exchanges 10 shares of stock for equipment worth $1,000. The additional common stock, other that traded for equipment was sold on October 1, 2015 for cash. The additional equipment, other than that exchanged for stock, was purchased for cash.

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Cash Flow Homework

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Problem 1 From the following information for Kevin’s Kennels, prepare a Statement of Cash Flows for the year ended December 31, 2014.

The land was acquired on March 31, 2014 by exchanging 60,000 shares of common stock worth $60,000 and cash for the balance of the purchase price. The additional common stock (other than that issued for the purchase of the land) was sold on September 30, 2014 for $1 per share. The company did not sell any equipment during the year. All equipment purchased during the year was purchased for cash. The retained earnings balance for both years is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30th of each year.

Problem 2 CoJo’s Colts, Inc. Balance Balance

12/31/15 12/31/14

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Balance 12/31/13

Balance 12/31/14

Cash 28,900 81,900Accounts Receivable 45,000 78,000Inventory 90,000 70,000Prepaid Insurance 2,600 3,600Equipment 280,000 320,000Accumulated Depreciation 20,000 80,000Land 130,000Security Deposits 20,000 32,000Accounts Payable 30,000 35,000Wages Payable 10,000 6,000Rent Payable 4,000 8,000Interest Payable 7,500 6,500Taxes Payable 5,000 10,000Note Payable 150,000 130,000Common Stock ($1 each) 160,000 310,000Retained Earnings 80,000 130,000Sales 1,200,000Cost of Goods Sold 700,000Wage Expense 220,000Rent Expense 48,000Office Expenses 46,000Depreciation Expense 60,000Utilities Expense 15,000Insurance Expense 6,000Interest Expense 14,000Income Tax Expense 27,000

Cash 97,600 88,900Accounts Receivable 90,000 50,000Allowance for Doubtful Accounts 3,600 2,000Inventory 120,000 40,000Prepaid Insurance 2,900 3,600Prepaid Rent 0 3,000Equipment 320,000 220,000Accumulated Depreciation 50,000 20,000Land 100,000

Security Deposits 8,000 10,000 Accounts Payable 35,000 30,000

Salaries Payable 6,000 10,000Rent Payable 3,000 0Interest Payable 9,000 10,000Taxes Payable 10,000 5,000Note Payable 180,000 200,000Common Stock ($1 each) 160,000 50,000 Retained Earnings 281,900 88,500Sales 1,400,000Cost of Goods Sold 700,000Salary Expense 185,000Rent Expense 36,000Advertising Expense 85,000Office Expenses 27,000Depreciation Expense 30,000Utilities Expense 12,000Bad Debt Expense 6,500Insurance Expense 6,000Miscellaneous Expense 3,000Interest Expense 9,500Income Tax Expense 90,000

The land was acquired on June 30, 2015 by exchanging 80,000 shares of common stock worth $80,000 and cash for the balance of the purchase price. The additional common stock (other than that issued for the purchase of the land) was sold on September 30, 2015 for $1 per share. The company did not sell any equipment during the year. All equipment purchased during the year was purchased for cash. The balance in retained earnings for each year is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30th of each year.

(This is a tough one.)

The Biz Business The Biz Business

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Statement of Income Balance Sheet For the Year Ended December 31, 2015 December 31,

Sales $ 600,000 2015 2014Cost of Goods Sold 300,000 Assets Gross Margin 300,000 Current Assets

Cash $ 160,000 $ 100,000Operating Expenses Accounts Receivable 80,000 50,000 Wage Expense $ 55,000 Inventory 70,000 90,000 Rent Expense 24,000 Total Current Assets 310,000 240,000 Depreciation Expense 10,000 Utilities Expense 6,000 Property and EquipmentTotal Operating Expenses 95,000 Equipment 320,000 200,000Income from Operations 205,000 Vehicles 40,000Other Revenues & <Expenses> Less: Accumulated Interest Revenue 5,000 Depreciation < 50,000> < 40,000> Interest Expense < 10,000> Net Property & Equipment 310,000 160,000 Total Other Revenues & <Expenses < 5,000> Other Assets Income Before Taxes 200,000 Security Deposits 1,000 2,000Tax Expense 60,000 Total Assets $ 621,000 $ 402,000 Net Income $ 140,000

LiabilitiesEarnings Per Share $ 2.55 Current Liabilities

Accounts Payable $ 9,000 $ 5,000 Wages Payable 8,500 10,000 Taxes Payable 48,000 62,000 Interest Payable 7,500 5,000 Current Portion of Long-

Term Debt 26,086 20,000 Total Current Liabilities 99,086 102,000

Long-Term Debt Contract Payable 28,914

Note Payable 130,000 80,000 Total Long-Term Debt 158,914 80,000Total Liabilities 258,000 182,000 Owners’ Equity Common Stock ($1 each) 60,000 50,000

Retained Earnings 303,000 170,000 Total Owners’ Equity 363,000 220,000

Total Liabilities & Owners’ Equity $ 621,000 $ 402,000

The company purchased a vehicle on December 31, 2015 for $40,000. The company made a down payment of $5,000 and financed the balance at 7% payable in five equal annual payments including interest of $8,536.17. The note payable is payable at $20,000 plus interest at 10% on June 30th of each year. During the year, the company exchanged 8,000 shares of common stock worth $8,000 for a piece of equipment.

"When it becomes more difficult to suffer than to change... you will change." -- Dr. Robert Anthony

The turtorials and instruction book for your calculator make some easy calculations very difficult. If you do one or two additional steps, it all becomes easy.

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First, some basics The third line of the calculator is the one we will be using the most.

N is the number of compounding periodsI/Y is the interest rate per compounding periodPV is the present valuePMT is the payment per periodFV is the future value

To set your decimal points2nd Format (bottom middle key)

Enter number of decimal points you want to use.Enter (top line second key)

Future Value Problems

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10% compounded annually?

1) 2nd clr tvm2) 100 PV 3) 1 N4) 10 I/Y 5) CPT FV FV = -110.00

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10% compounded semi-annually?

1) 2nd clr tvm2) 100 PV 3) 2 N4) 5 I/Y5) CPT FV FV = -110.25

Present Value Problems What is the present value of $1,000 to be paid to me in 2 years, bank pays interest annually at 10%.

2nd CLR TVM1000 FV2 N10 I/YCpt PV -826.45

What is the present value of $1,000 to be paid to me in 2 years, bank pays interest of 10% semi-annually?

2nd CLR TVM1,000 FV4 N5 I/YCpt PV -822.70 Payments

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You want to buy a new car. The cost is $50,000. You make 5 equal annual payments which include interest at 10%. How much are the payments?

2nd CLR TVM50,000 PV5 N10 I/YCpt PMT -13,189.87

What would the payments be if they were monthly? 2nd CLR TVM

50,000 PV5X12 = N10/12 = I/YCpt PMT -1,062.35

Differential InterestBob will sell you a DooDad for $10,000 payable in 3 equal annual payments which include interest at 2%. The bank would charge you 10% for the same loan. How much are you really paying for the DooDad in today’s dollars?

2nd CLR TVM10,000 PV3 N2 I/YCpt PMT 10 I/YCpt PV 8,623.28

How much would you pay for a 10 year, 100,000 bond, 10% interest payable annually, to earn 8% interest?

2nd CLR TVM100,000 FV10 N.10 X 100,000 = PMT8 I/YCpt PV 113,420.16

You are buying a 10 year, $100,000 Note issued 5 years ago. The Note is being paid in equal annual payments which included interest at 10%. Current interest rates are 12%. The Note has exactly 5 years of payments left and you will get the first in 1 year. How much do you pay to earn 12%?

2nd CLR TVM100,000 PV10 N10 I/Y Cpt PMT5 N12 I/YCpt PV 58,666.07

Time Value of Money- Short Version

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Present valueHow much will you have in one year if you put $100 in the bank today and the bank pays interest compounded annually at 10%?

How much do you need to put in the bank today to have $110 in one year if the bank pays interest at 10%, compounded annually?

What if you wanted to have $100 in one year, bank pays interest at 10% compounded annually?

How to use the calculator:

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How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays interest at 10% compounded annually?

2nd CLR TVM 1000 FV

3 N 10 I/Y CPT PV

How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays interest at 10% compounded semi-annually?

2nd CLR TVM 1000 FV

3 X 2= N 10÷2= I/Y

CPT PV

How about wanting $50,000 in 10 years bank pays interest 16% payable quarterly?

2nd CLR TVM 50000 FV

10 X 4= N16÷4= I/Y CPT PV

Problems

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1) How much do you need to put in the bank if you want to have $1,000,000 in 5 years, bank pays interest at 4% compounded annually?

2) Compounded semi-annually?

3) How much if you want to have $100,000 in 15 years, the bank pays interest at 8% compounded annually?

4) What if you want $1,000,000 in 20 years at 12% compounded semi-annually?

5) Problem 4 compounded quarterly?

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Payments and amortizations

You are buying a Mercedes for $65,000. You pay $5,000 down and will pay the rest in five annual payments of $15,027.39 beginning one year from today. The payments include interest at 8%. Prepare an amortization schedule.

How did I get the payment amount?

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Now Amortize the loan Ending or Unpaid

Applied to Principal Periods Payments Interest 8% Principal Balance

Total Cost 65,000.00

Down Payment 5,000.00 5,000.00 60,000.00

1 15,027.39_______________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

What built this country over time is tens of thousands of people who want to live better tomorrow than they did today and go to work on it. Warren Buffett Go back to the Mercedes- how would we do monthly payments?.......

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Now Amortize the loan Ending or Unpaid

Applied to Principal Periods Payments Interest 12% Principal Balance

Total Cost 65,000.00

Down Payment 5,000.00 5,000.00 60,000.00

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

6 ________________________________________________________

Mental toughness is to the physical as the number 4 is to the number 1. B. Knight

Sharon wants to buy a new red dress (which her dad and uncle think is way too short and too tight). The cost is $600, 10% down and the rest in 3 equal annual payments which include interest at 8%. How much are the payments? Prepare an amortization schedule.

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You want to buy a cow. Price is $10,000 to be paid $1,000 down and the rest in three equal annual installments which include interest at 10%. How much are the payments? Prepare an amortization schedule.

You have just purchased a new car for $40,000. You pay no money down and will make 60 equal monthly payments starting next month. The interest rate is 12% per year. Amortize the first three months of your loan. (Did you get $889.78 as your payments?)

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A man can make a mistake, but he isn’t a failure until he starts blaming someone else.Sam Rutigliano

Amortization Homework

Problem 1

John wants to buy a new gas Barbeque. The cost is $659.98. He will have to pay for it with10% down and 5 equal annual payments that include interest at 10%. Calculate the payments. Amortize the payments.

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Problem 2

You, on the other hand, want a new Jeep. The cost is $ 29,000. You pay 5% down and the rest in five equal annual payments which include interest at 8%. Calculate the payments. Amortize the payments.

Problem 3

Megan has just purchased a new goat. The cost was $ 1,000. She paid 10% down and will pay the rest in 4 equal annual installments which include interest at 6%. Calculate her payments and prepare an amortization schedule

Problem 4You want to buy a bus. The cost is $769,000. You pay $69,000 down and the rest in five equal annual payments which include interest at 8%. Calculate the payments. Amortize the payments.

Without data, you are just another person with an opinion.

Differential InterestSam will sell you a Bopper for $8,000. No money down and 5% per year for five years. At the end of the fifth year, you send him both that year’s interest and the $8,000. You send him the 5% each year. How much are you really paying for the Bopper? (The bank would charge you 10% interest for a loan of this type).

Kirch’s 2nd Law of the Universe:

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T___________________________________________________

and it___________________________________________________!

Amortize it. Ending or Unpaid

Applied to Principal Periods Payments Interest 10% Principal Balance

BB

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

What if the Sam deal had been for five equal payments that included interest at 5%? Current rate for similar loans is 10%

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Amortize it. Ending or Unpaid

Applied to Principal Periods Payments Interest 10% Principal Balance

BB

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

What a deal!! Buddy will sell you an airplane for $250,000. $50,000 down and the rest in five equal easy payments which include interest at 5%. A realistic interest rate would be 10%. How much are you really paying? Record the purchase and prepare the amortization schedule. (How do you handle the down payment ____________________________________)

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Buddy wants to sell you a car. $20,000, no money down and you pay interest of only 4% for one year. At the end of the year along with your 4% interest, you pay Buddy $20,000 for the car. You think this is a heck of a deal because if you borrowed the money from a bank it would cost you 12%. What a deal? Or,.. how much are you really paying for the car? And Sam has offered you the same car for $18,000 cash - what to do, what to do............

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Nick also wants to sell you a thing-a-ma-jig for $100,000! He tells you that you can pay in three equal annual payments which start in one year and include interest at 5%. You have seen the same item on sale for $85,000. If you bought the item for $85,000, you would have to borrow the money from the bank at 12%. Which is the better deal?

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Buddy will sell you some carpet. $20,000. No money down and only 1% interest per year for two years. (You send him the 1% at the end of each year). At the end of the 2nd year, you send him the $20,000 along with the interest. If you borrowed from the bank you would have to pay 12%- a heck of a deal... or is it? (How much are you really paying for the carpet?)

You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal annual payment beginning one year from today. Interest is included in the payments at 10%. How much are the payments? Amortize the loan.

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Professional Tips

#1 The Effective Leader is D________________ without being D____________________.

(The latter is a sign of weakness)

#2 The Effective leaders makes s__________________, does not generally ask q____________.

And seldom ap_______________ as this is perceived as weakness.

Differential Interest HomeworkProblem 1Colton wants to sell you a Bubble Guppie $89,000! He tells you that you can pay in three equal annual payments which start in one year and include interest at 5%. You have seen the same item on sale for $79,000. If you bought the item for $79,000, you would have to borrow the money from the bank at 8%. Which is the better deal?

Problem 2 Ryan will sell you a Thing for $30,000. No money down and only 1% interest per year for two years. (You send him the 1% at the end of each year). At the end of the 2nd year, you send

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him the $30,000 along with the interest. If you borrowed from the bank you would have to pay 6%- a heck of a deal... or is it? (How much are you really paying for the Thing?)

Problem 3What if the original Sally note (around page 59) had called for seven equal payments including interest at 12% and now has four more years left to run. How much would you be willing to pay Sally if you wanted to earn

A) 8%? Amortize it.B) 14%? Amortize it.

Problem 4Doozer wants to sell you a note with a face value of $1,000,000. The face rate on the note is 10% and is payable in 4 equal payments which include interest at 10%. The note has four years left to run and is seasoned.

A. How much would you pay for the note to earn 12%? Amortize it.

B. How much would you pay for the note to earn 8%? Amortize it.

Problem 5You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal annual payment beginning one year from today. Interest is included in the payments at 10%. How much are the payments? Amortize the loan.

Extra Calculator ProblemsEric wants to buy a new Mercedes. The cost is $80,000. Eric will put 10% down and pay the rest in 5 equal annual payments which include interest at 8%. How much are the payments?

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If Eric amortizes the above loan correctly, what would be the interest expense for the second year?

If Eric amortizes the loan correctly, what would be the principal balance after the third payment?

If Eric made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be the amount of the each payment?

Still on monthly payments, what would be the interest expense for the second month?

Suzie wants to have $1,000,000 in the bank in thirty years. If the bank pays interest at 6% compounded semi-annually, how much does she need to deposit today to reach her goal?

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Cindy wants to withdraw $1,000 per month for the next 5 years. She will withdraw her first amount in one month. The bank pays interest at 12% compounded monthly. How much does she need to deposit today to do this?

Heather hit the lottery!! She has the option of taking 560,000 today or 100,000 per year for the next 8 years, or $1,000,000 in ten years. If she can deposit her money at 8%, ignoring taxes, which deal should she take?

Extra Extra Calculator ProblemsBob wants to buy a new Harley. The cost is $60,000. Bob will put 10% down and pay the rest in 3 equal annual payments which include interest at 8%. How much are the payments?

Amortize the loan

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If Bob made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be the amount of the each payment?

Still on monthly payments, what would be the interest expense for the second month?

Suzie wants to have $10,000,000 in the bank in thirty years. If the bank pays interest at 8% compounded semi-annually, how much does she need to deposit today to reach her goal?

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Cindy wants to withdraw $10,000 per month for the next 5 years. She will withdraw her first amount in one month. The bank pays interest at 12% compounded monthly. How much does she need to deposit today to do this?

Chris hit the lottery!! She has the option of taking $520,000 today or $90,000 per year for the next 8 years, or $85,000 per year for the next nine years or $1,000,000 in ten years. If she can deposit her money at 6%, ignoring taxes, which deal should she take?

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Bonds Our most important thoughts are those that contradict our emotions.

ValarieLearning Objectives

Bonds

What is a bond?

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The coupon is

On January 1, 2014, Lucky Company of Las Vegas, Nevada, issues $100,000 of 8% bonds. The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of each year. (First interest is to be paid 12/31/14)

What if by the time it got to the market, interest rates had risen to 10%?

Kirch’s 3rd law of the Universe…. You _____________ ______________ the _____________!!!

How much does Lucky receive?

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Bonds issued for less than the face are said to be issued at d__________.

Journalize the issuance of the bond

Amortize the bond

Prepare journal entries for payment of the interest for each year and for the bond redemption at the end. Post the T-accounts related to the bonds.

150

Show how the Bond Accounts appear on the Balance Sheet for each year.

What if the current interest rate was 6%? (3rd law applies!!!)(Do all steps-calculate issuance amount, amortize and prepare journal entries)

Bonds sold for an amount higher than the face are said to sell at a p________________.

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152

Show how the Bond Accounts will appear on the Balance Sheet for each year.

153

A zero coupon bond is

Also called a D________ D_____________ B________

Why issue/buy?

Claire Co. issues a $100,000 zero on 12/31/13, interest rate 10% per annum, bond is due in three years. How much do they get? Amortize it

154

Prepare the journal entries for the sale (issuance) and for the interest payments each year and post the T-accounts related to the bonds.

155

How will the bonds appear on the Balance Sheet each year?

When you’re on the phone with the man, you’re all alone.

The Las Vegas Bookie

Bond Sales Between Institutions and/or Individuals

Once upon a time….

Once upon a time…..Suzie had just graduated from medical school and was set to begin a five year ENT internship at a hospital in Pontiac Michigan. Interns earn comparatively little and Suzie was a little apprehensive about her money situation. When she arrived in Michigan, the housing market was such that she could buy a really nice condo for a really good price. The payments on the condo would be less than rent payments. The problem was the down payment and the furnishing. She decided that if she could borrow $100,000, she would be set. After her internship, her first year pay would be about $400,000 per year and she figured she could pay off the loan easily. Debbie, her sister was flush with cash and so Suzie approached her for a possible loan. Debbie’s money was currently sitting in the bank earning 2%. Suzie asked the

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bank what they would charge for a six year, interest only loan and they told her 10% per year. Debbie offered to loan her the money at 8%. The terms were that Suzie would pay 8% on December 31st of each year. Then with the sixth interest payment, Suzie would repay the $100,000. The note was signed and Suzie got her money and bought her house.

Time has passed, three interest payments have been made by Suzie on time. (The note would now be considered seasoned.) Debbie is about to have her fourth child, Colton, and wants to move. A new house would deplete her savings and so she decided to sell the Suzie note. She had just received the third payment of interest yesterday. Debbie called a loan broker, a company that specializes in selling debt such as this. They told her that notes such as hers currently earn 12%. So if Debbie sells the note so that it earns 12%, how much will she get?

Go to the last problem, what if the original note had called for 6 equal annual payments that included interest at 8%. Three payments have been made and current interest rates are 12%. How much would much would Debbie sell the note for?

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Buckeye wants to buy from Debbie a Lucky Company 10%, $100,000 bond that was issued 6 years ago. The bond pays interest annually. The bonds currently have exactly four yearsleft to maturity. Figure out the price Buckeye should pay Debbie under each of the following scenarios. Amortize them.

Current interest rates are 8%

Current interest rates are 10%

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Current interest rates are 12%

Go back to the Lucky Company bonds – What if the date of issuance is April 1st and not December 31st? What will the effect be on the journal entries, T-accounts and financial statements?

Go to Sam’s Town (page 157) - The annual payment on the note is made half-way through the year. How would you handle that?

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160

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Bond Homework

Problem 1 A Challenging Cash Flow Problem-

The following balances are from the beginning of the year for Sam’s Town as of December 31, 2013:Cash 108,000Accounts Receivable 40,000Allowance for Doubtful Accts 2,000Inventory 60,000 (3 junkets)Prepaid Rent 3,000Equipment 200,000Accumulated Depreciation 60,000Security Deposit 10,000Accounts Payable 80,000Wages Payable 5,000Interest Payable 5,000Taxes Payable 8,000Note Payable 100,000Common Stock ($1 each) 60,000Retained Earnings 101,000

For 2014: Received all beginning accounts receivable and paid all beginning accounts payableBought five Junkets at $25,000 each, 20% down, rest next yearSold six Junkets, $50,000 each, 60% down, 40% next year Paid cash wages of $40,000 and at the end of the year owed employees $2,000 Paid utilities of $12,000 and advertising of $10,000.On June 30th, they paid the annual payment of $10,000 principal plus interest on the Note

Payable. The note was taken out on June 30th of the previous year. (Can you figure out the interest rate?)

On August 1, purchased a new wagon for delivery of the junkets for $20,000.On December 1, they declared and paid a dividend of $5,000. On December 31, the company purchased a piece of land by issuing a note for $75,000. The note is payable in five years. The interest at 12% is payable annually on December 31 of each year starting in 2015.During the year they paid $8,000 in rent (rent is $1,000 per month)The company uses the FIFO inventory flow assumptionThe depreciation for the year was $30,000The company estimates that 4% of its accounts receivable will never be collected. During

the year the company wrote off $1,500 in bad accounts.The tax rate is 30%. During the year the company paid all of last year’s taxes and 50% of

2014 taxes.

Prepare Journal Entries, T-Accounts, and Financial Statements for the year 2014. Calculate all the ratios you have learned and analyze the company using these ratios.

(Don’t stop….there are more problems on the next page!!)

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Problem 2 Darby Company issues a $100,000 on 12/31/15, 15%, bond that matures in 5 years. Interest is paid on December 31st of each year. Prepare all journal entries for all years related to this bond issue if it was priced to yield: 10% 15% 20%

Problem 3 Still Darby Company - How about an 8% zero issued on 12/31/16, due in 3 years, face amount of $100,000. How much would you pay? Amortize it.

Problem 4 Ryan Company issues a $100,000 on 8/31/14, 10%, bond that matures in 5 years. Interest is paid on August 31st of each year. How much would you pay to yield:

8% 10% 14%

Problem 5 Still Ryan Company - How about a zero issued on 5/31/14, due in 4 years, face amount of $100,000. Current market rates are 11%. How much would you pay?Amortize it.

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Intangible AssetsGoodwill is

The excess paid when one company buys another company of the purchase price over the fair market value of the assets acquired less the fair market value of the liabilities assumed.

Freeland Company wants to enter the Athens market. Freeland is one of the largest distributors of greeting cards in Ohio. They have been looking at Garven Distributing, a smaller greeting card company that services the Athens area. The following is a summary of Garven’s balance sheet.

Accounts Receivables $ 50,000 Accounts Payable 60,000Inventory 60,000 Note Payable 150,000Fixed Assets $500,000 Owners’ Equity 200,000Accum Deprec 200,000 300,000

$410,000 $410,000 Garven’s Net Income for the last twelve months was $100,000. Freeland offers to buy Garvin for $500,000.

Assume that Garven’s accepts the offer. Freeland goes through the Balance Sheet carefully and determines that the Accounts Receivable are worth about $40,000 because?_____________________), that the Inventory is worth $75,000 and the Fixed Assets are worth $375,000. Everything else is worth its book value. Prepare the journal entry to record the purchase on Freeland’s books.

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When and how do you write off goodwill? Each year you must test for I_______________.

Impairment of GoodwillIf there is an indication that the book value of goodwill is greater than the recoverable value of net assets, an assessment of the recoverable value is made, and if the suspicion is correct, then an impairment expense is recorded. Goodwill's value on the balance sheet is reported at net of accumulated impairment loss, a contra asset account; the current impairment loss is reported on the income statement.An impairment cost must be included under expenses when the carrying value of a non-current asset on the balance sheet exceeds the asset's market valuesubtracted by any transaction costs (recoverable amount). The impairment cost is calculated as follows: carrying value - recoverable amount.

The carrying amount is defined as the value of the asset as it is displayed on the balance sheet. The recoverable amount is the higher of either the asset's future value for the company or the amount it can be sold for, minus any transaction cost.

According IAS 36, reversal of goodwill impairment losses are not allowed.

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And the Journal Entry is

And goes on the income statement

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Another Case: JD’s Tractor Company

Accounts Receivable $400,000 Accounts Payable 50,000Inventory 175,000 Note Payable 450,000Fixed Assets $800,000 Common Stock 300,000 Accum Deprec 200,000 600,000 Retained Earnings 375,000

Your company will buy this company for $3,000,000. You estimate that the receivables are worth about $375,000, the inventory is worth $150,000 (how could that be?) and the fixed assets are worth $500,000. Everything else is worth its book value. Prepare the journal entry to record the purchase on your company’s books.

Go back to the previous problem (JD’s Tractor Company). Assume the Note Payable is interest only at 8% with exactly five years left before the principal is due. Current interest rates are 12%. Redo the journal entry to account for the market value of the Note Payable using a Note Payable Discount or Premium account similar to Bonds.

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Consider the case:

Below is financial information from John’s Company

Accounts Receivables $100,000 Accounts Payable 50,000Inventory 200,000 Note Payable 500,000Fixed Assets $900,000 Owners’ Equity Accum Deprec 100,000 800,000 Common Stock 200,000

Retained Earnings 350,000

Debbie’s Company will buy John’s Company for $1,500,000. You estimate that the Inventory is worth $175,000 and the Fixed Assets are worth $700,000. The Note Payable is interest only at 8% with exactly ten years left before the principal is due. Current interest rates are 10%. Everything else is worth its book value. Prepare the journal entry made by your company to record the purchase.

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Other AssetsIntangible Assets

Other Intangibles:

Organization Costs

Patents, Trademarks and Copyrights

Franchises Research and Development (R&D)???

and a consolidated statement is _________________________________________________.

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Goodwill Homework

Problem 1 Consider Dezie’s Company

Accounts Receivables $300,000 Accounts Payable 150,000Inventory 200,000 Note Payable 400,000Fixed Assets $900,000 Owners’ Equity Accum Deprec 100,000 800,000 Common Stock 200,000

Retained Earnings 350,000

Hayley’s Company will buy this company (Dezie’s) for $1,000,000. Hayley estimates that the Accounts Receivables are worth $290,000, the Inventory is worth $220,000 and the Fixed Assets are worth $750,000. The Note Payable is interest only at 10% with exactly ten years left before the principle is due. Current interest rates are 8%. Everything else is worth its book value. Prepare the journal entry made by Hayley to record the purchase.

Problem 2 On January 1, Joey, Inc. buys equipment for $10,000. Terms are 10% down the rest in 3 equal annual payments which include interest at 12%. The payments start December 31. Prepare an amortization schedule and all the journal entries for each year.

Problem 3 This is data from the Marjean Company:

Accounts Receivable $100,000 Accounts Payable 30,000Inventory 80,000 Note Payable 150,000Fixed Assets $600,000 Owners’ Equity 400,000Accum Deprec 200,000 400,000

Acme Co. will buy Marjean Company for $3,000,000. They estimate the Accounts Receivable are worth $ 98,000, the Inventory is worth $500,000 and the Fixed Assets are worth $800,000. The Note Payable is interest only at 10% with the principal due 5 years from today. Current interest is 12%. Everything else is worth its book value. Prepare the journal entry for the purchase on Acme Co.’s books.

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Problem 5Claire Company

(An exercise in deduction and sifting through useful and some useless, even spurious, information.)

Claire Company began operations on April 1, 2014 (at 5:07 PM to be precise). They have come to you because they want to borrow money from the bank to expand. The bank has requested financial statements. They heard you were cheap, so they came on by! From the following information, record the transactions and prepare all financial statements for the period April 1- December 31, 2014.

Per the checkbookCash received from Claire for 100 shares of common stock- $60,000.Cash received from Brother on May 1, 2014, $50,000, repayable at $10,000 per year plus 5% interest.Cash received from customers- $160,000.Cash paid for inventory $100,000.Security deposit to landlord for store- $3,000Cash paid for rent $12,000Cash paid for equipment for store, $30,000. It is estimated that this equipment will last for six

years and then be worthless. (Calculate depreciation on a monthly basis for this problem.) The actual cost of the equipment was $60,000, the rest of the cost will be paid in equal annual payments of $_____________ for five years. The payments include interest at 6% and the first payment is due April 1, 2015.

Cash paid for wages, $12,000 .Cash paid for two-year insurance policy (runs from 6/30/14 – 6/30/16), $2,400.Cash paid for other operating expenses, $3,000.Cash paid for dividend, $2,000

Other InformationOn November 1, Claire hired Bill as an employee. They agreed his wages would be $2,000 per month payable on the first day following each month he worked. On April 1, Claire signed a three-year lease for the store it was to use. The lease called for a security deposit and monthly payments of $2,000 due at the beginning of each

month.At the end of December, Claire owed its inventory suppliers $10,000. Claire also owed wages of $6,000 at December 31st.On December 31st, the company ordered $20,000 worth of merchandise which was received in January and will be paid for in February. At December 31, 2014, Claire took a physical inventory and found they had inventory on hand that cost them $30,000. (This is their ending inventory.)Customers owed Claire Company $20,000 at the end of December.The tax rate is 30% Assume a $1 par value.

Prepare all Financial Statements

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Revenue Recognition

Revenue Recognition- other than just selling things! Basics

When Delivery has occurred or services have been renderedPrice is fixed or determinableCollectability is reasonably assured

Your Company sells a $100 gift certificate.

And when it is used to buy a pair of pants that cost you $40.

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On October 31, you purchased a three year subscription to a monthly magazine- “College Today”. You send them $180 and your subscription starts with the November issue. Here is the accounting on the books of “College Today” books.

October 31st

November 30

December 31st

Presentation on Financial Statements

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Revenue recognition considerations

Ongoing??

Done??? Rights of Return??

Certainty of collection

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Construction

Steven’s Construction Company contracted on June 30, 2014 to build a new high rise apartment building for Gabrielle Properties. The construction is expected to take three years. The contract price is $50,000,000. Gabrielle pays Steven’s $1,000,000 on the day the contract was signed. The contract included a retainage clause of 10% which will be paid on completion, and Gabrielle’s acceptance of the building. The following is a summary of the of the builGabrielle will and costs, billings and cash receipts are expected to be as follows: (in millions)

2015 2016 2017 2018 Costs 17 10 8 5 Billings 20 10 10 10 Cash Collections* 22 10 8 10*includes 1,000,000 on day of signing

% of Completion

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Go back to Stevens-Steven’s Construction Company contracted on June 30, 2014 to build a new high rise apartment building for Gabrielle Properties. The construction is expected to take three years. The contract price is $50,000,000. Gabrielle pays Steven’s $1,000,000 on the day the contract was signed. The contract included a retainage clause of 10% which will be paid on completion, and Gabrielle’s acceptance of the building. The following is a summary of the of the builGabrielle will and costs, billings and cash receipts are expected to be as follows: (in millions)

2015 2016 2017 2018 Costs 17 10 8 5 Billings 20 20 10 10 Cash Collections* 22 10 8 10*includes 1,000,000 on day of signing

Now assume that 2015 and 2016 go as planned, but in 2017 you hit a snag. The actual costs are $20,000,000 and you still estimate that after that year, you will have $10,000,000 in costs to finish the project.

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178

Completed Contract

179

Installment SaleOn January 1, 2015, General Development Corporation acquired 100 acres of land in Florida for $10,000. They put $30,000 in infrastructure (roads and so forth) on the property. They broke the property into 400 quarter acre lots which they advertised for sale to at $2,600 per lot. During 2015 they sold 25 lots at an average price of $2,600. The terms were $100 down and the rest in 120 equal annual monthly payments of $27.76 which include interest at 6%. The Sales people get 10% of the sales price regardless of whether the buyer ultimately makes all the payments. Assume all purchasers made 6 payments during 2015. Assume this qualifies to be accounted for as an installment sale. Prepare all related journal entries for 2015.

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Cost Recovery-

redo the last problem using the cost recovery accounting

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Homework

Your are building a building and accounting for the profit using the percentage of completion method. The contract is for $3,000,000. The total estimated costs are $2,400,000. In year 1, your costs were $600,000 and your billings were $900,000. In year two, your costs were $1,200,000 and the billings were $1,500,000. In year 3, costs were $600,000 and billings were $600,000.

Prepare journal entries for these transactions.

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Put Bond Here

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Learning Module #10 Our most important thoughts are

Bonds those that contradict our emotions. Valarie

What is a bond?

The coupon is

On January 1, 2014, Lucky Company of Las Vegas, Nevada, issues $100,000 of 8% bonds. The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of each year. (First interest is to be paid 12/31/14)

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What if by the time it got to the market, interest rates had risen to 10%?

Kirch’s 3rd law of the Universe…. You _____________ ______________ the _____________!!!

How much does Lucky receive?

Bonds issued for less than the face are said to be issued at d__________.

Journalize the issuance of the bond

Amortize the bond

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Prepare journal entries for payment of the interest for each year and for the bond redemption at the end. Post the T-accounts related to the bonds.

Show how the Bond Accounts appear on the Balance Sheet for each year.

191

What if the current interest rate was 6%? (3rd law applies!!!)(Do all steps-calculate issuance amount, amortize and prepare journal entries)

Bonds sold for an amount higher than the face are said to sell at a p________________.

192

Show how the Bond Accounts will appear on the Balance Sheet for each year.

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194

A zero coupon bond is

Also called a D________ D_____________ B________

Why issue/buy?

Claire Co. issues a $100,000 zero on 12/31/13, interest rate 10% per annum, bond is due in three years. How much do they get? Amortize it

Prepare the journal entries for the sale (issuance) and for the interest payments each year and post the T-accounts related to the bonds.

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How will the bonds appear on the Balance Sheet each year?

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Bond Sales Between Institutions and/or Individuals

Buckeye wants to buy from Debbie a Lucky Company 10%, $100,000 bond that was issued 6 years ago. The bond pays interest annually. The bonds currently have exactly four yearsleft to maturity. Figure out the price Buckeye should pay Debbie under each of the following scenarios. Amortize them.

Current interest rates are 8%

Current interest rates are 10%

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Current interest rates are 12%

Go back to the Lucky Company bonds – What if the date of issuance is April 1st and not December 31st? What will the effect be on the journal entries, T-accounts and financial statements?

Go to Sam’s Town (page 153) - The annual payment on the note is made half-way through the year. How would you handle that?

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Bond Homework

Problem 1 A Challenging Cash Flow Problem-

The following balances are from the beginning of the year for Sam’s Town as of December 31, 2013:Cash 108,000Accounts Receivable 40,000Allowance for Doubtful Accts 2,000Inventory 60,000 (3 junkets)Prepaid Rent 3,000Equipment 200,000Accumulated Depreciation 60,000Security Deposit 10,000Accounts Payable 80,000Wages Payable 5,000Interest Payable 5,000Taxes Payable 8,000Note Payable 100,000Common Stock ($1 each) 60,000Retained Earnings 101,000

For 2014: Received all beginning accounts receivable and paid all beginning accounts payableBought five Junkets at $25,000 each, 20% down, rest next yearSold six Junkets, $50,000 each, 60% down, 40% next year Paid cash wages of $40,000 and at the end of the year owed employees $2,000 Paid utilities of $12,000 and advertising of $10,000.On June 30th, they paid the annual payment of $10,000 principal plus interest on the Note

Payable. The note was taken out on June 30th of the previous year. (Can you figure out the interest rate?)

On August 1, purchased a new wagon for delivery of the junkets for $20,000.On December 1, they declared and paid a dividend of $5,000. On December 31, the company purchased a piece of land by issuing a note for $75,000. The note is payable in five years. The interest at 12% is payable annually on December 31 of each year starting in 2015.During the year they paid $8,000 in rent (rent is $1,000 per month)The company uses the FIFO inventory flow assumptionThe depreciation for the year was $30,000The company estimates that 4% of its accounts receivable will never be collected. During

the year the company wrote off $1,500 in bad accounts.The tax rate is 30%. During the year the company paid all of last year’s taxes and 50% of

2014 taxes.

Prepare Journal Entries, T-Accounts, and Financial Statements for the year 2014. Calculate all the ratios you have learned and analyze the company using these ratios.

(Don’t stop….there are more problems on the next page!!)

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Problem 2 Darby Company issues a $100,000 on 12/31/12, 15%, bond that matures in 5 years. Interest is paid on December 31st of each year. Prepare all journal entries for all years related to this bond issue if it was priced to yield: 10% 15% 20%

Problem 3 Still Darby Company - How about an 8% zero issued on 12/31/12, due in 3 years, face amount of $100,000. How much would you pay? Amortize it.

Problem 4 Ryan Company issues a $100,000 on 8/31/12, 10%, bond that matures in 5 years. Interest is paid on August 31st of each year. How much would you pay to yield:

8% 10% 14%

Problem 5 Still Ryan Company - How about a zero issued on 5/31/12, due in 4 years, face amount of $100,000. Current market rates are 11%. How much would you pay?Amortize it.

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201

Consider the case:

Below is financial information from John’s Company

Accounts Receivables $100,000 Accounts Payable 50,000Inventory 200,000 Note Payable 500,000Fixed Assets $900,000 Owners’ Equity Accum Deprec 100,000 800,000 Common Stock 200,000

Retained Earnings 350,000

Debbie’s Company will buy John’s Company for $1,500,000. You estimate that the Inventory is worth $175,000 and the Fixed Assets are worth $700,000. The Note Payable is interest only at 8% with exactly ten years left before the principal is due. Current interest rates are 10%. Everything else is worth its book value. Prepare the journal entry made by your company to record the purchase.

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Another Case: JD’s Tractor Company

Accounts Receivable $400,000 Accounts Payable 50,000Inventory 175,000 Note Payable 450,000Fixed Assets $800,000 Common Stock 300,000 Accum Deprec 200,000 600,000 Retained Earnings 375,000

Your company will buy this company for $3,000,000. You estimate that the receivables are worth about $375,000, the inventory is worth $150,000 (how could that be?) and the fixed assets are worth $500,000. Everything else is worth its book value. Prepare the journal entry to record the purchase on your company’s books.

Go back to the previous problem (JD’s Tractor Company). Assume the Note Payable is interest only at 8% with exactly five years left before the principal is due. Current interest rates are 12%. Redo the journal entry to account for the market value of the Note Payable using a Note Payable Discount or Premium account similar to Bonds.

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Module Don’t tell me how roughThe Rules Here and There the seas are son,

just bring the darn ship in. Lou Holtz Rules of the Game

For the US

GAAP

G______________ A_____________ A_______________P________________

Who sets GAAP? FASB

F____________ A_______________ S________________ B________________

General Principles

Assets and Liabilities measured in H_________________ C_____________

Measureable in C_______________________

G_____ C_______________ (Unlimited Life)

Disclosure and Measurement Puzzlements

Contingent Liabilities

Gift Cards

GAAP vs Non-GAAP???

http://www.youtube.com/watch?v=7P2-vEtXSug

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The Rest of the World(IFRS????)

U.S. adoption of IFRS unlikelyFull U.S. adoption of International Financial Reporting Standards (IFRS) appears unlikely to occur in the intermediate-term as the major accounting standard setters continue to move away from full convergence of their standards, according to a Fitch Ratings report.

Three joint, or former joint, FASB/IASB projects remain outstanding:1. Financial instruments2. Insurance3. Lease contracts

Differences in financial products between U.S. institutions and those following IFRS, as well as differences in application meant that a one-size-fits-all accounting approach for financial instruments was problematic. Furthermore, on the insurance front there were a number of concerns raised by U.S. constituents, including that the proposal would ensnare both insurance and non-insuring issuers. These considerations resulted in the joint insurance project also falling by the wayside.

Discussions remain on track over a joint FASB/IASB standard for lease contracts. However, some detailed issues remain to resolve and there may be some minor differences in application between the final IFRS and U.S. GAAP standards.

Nevertheless, the two standard setters recently marked successful completion of their joint project on revenue recognition. The new revenue standard was issued in May and is nearly identical to a new IFRS standard, IFRS 15 issued on the same date. U.S. public companies using GAAP will be required to apply the standard for annual reporting periods beginning after Dec. 15, 2016 with private companies after Dec. 15, 2017. The revenue standard should not affect overall contract profitability.

For many companies, the new rules will affect the timing of revenue, and Fitch believes this has the potential of making margins less consistent over time due to sales deleverage. Transition to the new rules may provide an opportunity for companies to scrutinize their contracts. Changes to terms and conditions may then be considered to optimize revenue under the new rules or remove redundant conditions.

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In the interim, accounting updates during 2013 were mostly clean-ups of previous pronouncements or updates. As such, they are likely to have minimal impact to corporate credit metrics and cash flows.

Owners’ Equity RevisitedDividends Cash

Annabella Co., declares a $.10 per share dividend on September 1, payable on October 1 to shareholders of record September 15

|---------------------------------------------------------|-------------------------------------------------------|

date of _____________

date of _____________

date of _____________

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Guber Co. began operations by issuing 10,000 shares of $1 par value stock on January 1 for $10 per share. On June 30 they declared a $.03 per share dividend, record date July 15 and payable August 1. Prepare journal entries to record these transactions.

Treasury stock is

Why do?

On January 1 the company bought back 1,000 shares of its own stock for $10 per share.Prepare the journal entry and post the T-accounts related to Treasury Stock.

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On February 1 the company resold 100 of the shares purchased on January 1 for $12 per share. Prepare the journal entry and post the T-accounts related to Treasury Stock.

On March 1 the company resold 100 of the shares purchased on January 1 for $9 per share. Prepare the journal entry and post the T-accounts related to Treasury Stock.

On April 1 the company resold 200 of the shares purchased on January 1 for $9 per share.Prepare the journal entry and post the T-accounts related to Treasury Stock.

1The Additional Paid in Capital-Treasury Stock Transactions cannot go below ______________.

If you need it to, you debit _________________________________________.

And Treasury Stock goes __________________________________

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1On January 1, 2015, Acme Company had 100,000 shares of $10 par stock outstanding which it originally issued for $15 per share. On April 30th it bought back 2,000 shares at $27 per share. On October 1, Acme Company sold 500 shares of the Treasury Stock on the open market at $30 per share. On November 30th the Company sold 1,000 shares of Treasury Stock at $28 per share. Prepare journal entries for the treasury stock transactions and post the treasury stock T-accounts.

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A Couple of Miscellaneous PV Items

Annuity DueYou are leasing a new car. The deal calls for 36 payments of $747.35 per month. You can, and intend to, buy the car at the end of the lease for $24,000. The first payment is due today. What is the present value of the lease?

Deferred AnnuityYou are planning on retiring in 30 years. You figure you will need about $200,000 per year

to live on. If you plan to live 40 years after you retire, how much do you need to deposit today, if you put it in a mutual fund with an 8% annual return?

Go back to the last problem. How much do you need to put in per year to get to your goal?

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HomeworkProblem 1 You have just had your first child. The grandparents want to pay for the child’s education at Ohio University. The child will enter OU in exactly eighteen years. The cost per year then is estimated at $60,000. The amount must be paid at the beginning of each of the four years. How much do the grandparents need to deposit today in an account paying 9% to accomplish the goal?

What if the grandparents are not wealthy and so want to make annual deposits. They will make the first one today. How much do the annual deposits need to be.

What if they wanted to make monthly deposits, again, first one today, into an account paying 9%?

Problem 2 Prepare Journal Entries for all of the following transactions:On January 1, 2014, Heather Corporation (a subsidiary of the famed PWC Corporation) began operations by selling 200,000 shares of $1 par value stock to the public for $5 per share. On June 30, they sold 50,000 more shares at $6 per share. On July 1, they declared a dividend of $.25 per share, payable on July 30 to shareholders of record on July 15. On July 30 they paid the dividend. On August 1, they bought back 10,000 shares of the company’s stock for $6 per share. On September 30, they sold 5,000 shares of the treasury stock for $9 per share. On December 1, they sold the rest of the stock in the treasury for $8 per share.

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Deferred TaxesDifferences between Net Income and Taxable Income

T_________________________________ (could also be termed timing)

Such as

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P________________________________

Such as

Deferred tax liabilitiesDeferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense/unpaid liabilities, or income is accrued but not taxed until received. Examples of such situations include:

a company claims tax depreciation at an accelerated rate relative to accounting depreciation

a company makes pension contributions for which tax relief is provided on a paid basis, whereas accounting entries are determined in accordance with actuarial valuations

Deferred tax assetsDeferred tax assets generally arise where tax relief is provided after an expense is deducted for accounting purposes.Examples of such situations include:

a company may accrue an accounting expense in relation to a provision such as bad debts, but tax relief may not be obtained until the provision is utilized

a company may incur tax losses and be able to "carry forward" losses to reduce taxable income in future years..

An asset on a company's balance sheet that may be used to reduce any subsequent period's income tax expense. Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is deemed more likely than not that the asset will be realized.

MACRS

M_______________ A_________________ C_________ R_____________ S___________

MACRS has the half year convention built into the tables. For all our problems we will assume that, for financial reporting, the company depreciates assets a full year during the year of acquisition and none in the year of disposition, unless the problem states otherwise.

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Acme, Inc. purchased new computer software on January 1, 2014. The cost of the software was $84,000. It is expected that the software will last 4 years and then be worthless. The company uses straight-line depreciation for reporting purposes. The software is three-year property for tax purposes. Assume that Acme makes $510,000 annually before depreciation and taxes and that this is the only fixed asset the company has. Included in the $510,000 is $10,000 of municipal bond interest that the company receives each the year. Prepare the journal entries as they relate to depreciation and taxes for each of the years and post the deferred tax T accounts for each of the years. The corporate tax rate is 30%.

Accounting Tax

Income before Depreciation and Taxes $ 510,000 $ 510,000

Depreciation Expense

Income before Permanent Differences & Taxes

Permanent Differences

Taxable Income

Tax Expense

Journal Entry for x1

Now prepare the journal entries for the next three years. Assume the same earnings and permanent differences.

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MACRS GDS Property (General Depreciation System)

Property Class Personal Property (all property except real-estate)

3-year propertySpecial handling devices for food and beverage manufacture.

Special tools for the manufacture of finished plastic products, fabricated metal products, and motor vehicles

5-year property

Information Systems; Computers / Peripherals

Aircraft and parts (of non-air-transport companies)

Computers

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Petroleum drilling equipment

Property with ADR class life of more than 4 years and less than 10 years

Certain geothermal, solar, and wind energy properties.

7-year property

All other property not assigned to another class

Office furniture, fixtures, and equipment

Property with ADR class life of more than 10 years and less than 16 years

10-year property

Assets used in petroleum refining and certain food products

Vessels and water transportation equipment

Property with ADR class life of 16 years or more and less than 20 years

15-year property

Telephone distribution plants

Municipal sewage treatment plants

Property with ADR class life of 20 years or more and less than 25 years

20-year propertyMunicipal sewers

Property with ADR class life of 25 years or more

Property Class Real Property (real estate)

27.5-year property Residential rental property (does not include hotels and motels)

39-year property Non-residential real property

Year

Depreciation Rate in % for Recovery Period3-year 5-year 7-year 10-year 15-year 20-year

1 33.33 20.00 14.29 10.00 5.00 3.7502 44.45 32.00 24.49 18.00 9.50 7.2193 14.81 19.20 17.49 14.40 8.55 6.6774 7.41 11.52 12.49 11.52 7.70 6.1775 11.52 8.93 9.22 6.93 5.7136 5.76 8.92 7.37 6.23 5.2857 8.93 6.55 5.90 4.8888 4.46 6.55 5.90 4.5229 6.56 5.91 4.462

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Year

Depreciation Rate in % for Recovery Period3-year 5-year 7-year 10-year 15-year 20-year

10 6.55 5.90 4.46111 3.28 5.91 4.46212 5.90 4.46113 5.91 4.46214 5.90 4.46115 5.91 4.46216 2.95 4.46117 4.46218 4.46119 4.46220 4.46121 2.231

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For 2014, Kylie Company had income before taxes and depreciation last year of $500,000. Included in the other revenue section was $5,000 in municipal bond interest she received on Athens Municipal Bonds which the company owned. On January 1, 2014 she purchased a new goomahochie for $60,000. She estimates it will last two years and then be worthless. (For the uninformed, a goomachochie is used to produce goomies and is three-year property according to the IRS). She used straight-line depreciation to depreciate the goomahochie. During 2014 she paid fines of $20,000 for speeding. Her Bad Debt Expense for the year was $7,000. She actually wrote off $4,000 in accounts that she will never collect. In 2015, her fines were $6,000, her bad debt expense was 6,000 and she wrote off $7,000. She had municipal bond interest of $2,000. In 2016, her fines were $7,000, bad debt expense was $5,000, she wrote off ($7,000) and she had no municipal bond interest. In 2017, her bad debt expense was the same as her write offs, she had no fines or municipal bond interest. Prepare the journal entries for all of the years that relate to taxes. (Assume the same earnings each year before depreciation and a 30% tax rate and all taxes are accrued and then paid the following year.)

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Ruth just bought a new airplane - cost $600,000. She will use it to deliver stuffs for the next five years. At the end of the fifth year she expects it will be worthless. Ruth’s net income before depreciation and taxes for the year was $4,000,000. Her tax rate is 30%. Ruth uses the straight line method (half-year convention) when calculating depreciation for accounting purposes. For IRS purposes, the plane is considered five-year property. Assume the same earnings before depreciation and taxes for the next six years. Prepare all journal entries relating to depreciation and taxes for all five years.

What happens when tax rates change?

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Why Successful People Never Bring Smartphones Into MeetingsYou are annoying your boss and colleagues any time you take your phone out during meetings, says new research from USC's Marshall School of Business, and if you work with women and people over forty they're even more perturbed by it than everyone else.The researchers conducted a nationwide survey of 554 full-time working professionals earning above $30K and working in companies with at least 50 employees. They asked a variety of questions about smartphone use during meetings and found:

86% think it’s inappropriate to answer phone calls during meetings 84% think it’s inappropriate to write texts or emails during meetings 66% think it’s inappropriate to write texts or emails even during lunches offsite The more money people make the less they approve of smartphone use.

The study also found that Millennials are three times more likely than those over 40 to think that smartphone use during meetings is okay, which is ironic considering Millennials are highly dependent upon the opinions of their older colleagues for career advancement.TalentSmart has tested the emotional intelligence of more than a million people worldwide and found that Millennials have the lowest self-awareness in the workplace, making them unlikely to see that their smartphone use in meetings is harming their careers.Why do so many people—especially successful people—find smartphone use in meetings to be inappropriate? When you take out your phone it shows a:

Lack of respect. You consider the information on your phone to be more important than the conversation at hand, and you view people outside of the meeting to be more important than those sitting right in front of you.

Lack of attention. You are unable to stay focused on one thing at a time. Lack of listening. You aren’t practicing active listening, so no one around you

feels heard. Lack of power. You are like a modern-day Pavlovian dog who responds to the

whims of others through the buzz of your phone. Lack of self-awareness: You don't understand how ridiculous your behavior

looks to other people.

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Lack of social awareness: You don't understand how your behavior affects those around you.

I can't say I'm surprised by the USC study's findings. My company coaches leadersusing 360° assessments that compare their self-perception to how everyone else sees them. Smartphone use in meetings is one of the most common coworker complaints.It’s important to be clear with what you expect of others. If sharing this article with your team doesn't end smartphone use in meetings, take a page out of the Old West and put a basket by the conference room door with an image of a smart phone and the message, "Leave your guns at the door."

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2014 2013 2012Current Assets Cash 64,770$ 44,140$ 87,000$ Accounts Receivable - Net 110,000 60,000 40,000 Inventories 200,000 160,000 80,000 Other current assets 8,000 8,000 5,000 Total Current Assets 382,770 272,140 212,000

Net Fixed Assets 240,000 220,000 180,000

Other Assets 10,000 10,000 10,000

Total Assets 632,770$ 502,140$ 402,000$

Current Liabilities Accounts Payable 210,000$ 150,000$ 100,000$ Other Payables 28,000 32,000 38,000 Current Portion- Long Term Debt 10,000 10,000 10,000 Total Current Liabilities 248,000 192,000 148,000

Long-Term Debt- Net of Current Maturities 170,000 180,000 190,000

Total Liabilities 418,000 372,000 338,000

Owners' Equity Common Stock 120,000 120,000 120,000 Retained Earnings 94,770 10,140 (56,000) Total Owners' Equity 214,770 130,140 64,000

Total Liabilities and Owners' Equity 632,770$ 502,140$ 402,000$ - - -

Sales 1,100,000$ 700,000$ 400,000$ Cost of sales 687,500 360,000 240,000 Gross Margin 412,500 340,000 160,000

Operating Expenses Salaries and wages 110,000 100,000 80,000 Rent 48,000 48,000 48,000 Utilities 20,000 19,000 18,000 Advertising 25,000 20,000 15,000 Vehicle expenses (Gas, oil etc) 29,000 26,000 13,000 Depreciation 15,000 10,000 10,000 Other Operating Expenses 23,000 18,000 12,000 Total Operating Expenses 270,000 241,000 196,000

Income From Operations 142,500 99,000 (36,000) Other Expenses Interest (21,600) (22,800) (24,000) Income Before Taxes 120,900 76,200 (60,000) Income Tax Expense 36,270 6,060 - Net Income 84,630$ 70,140$ (56,000)$

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Hermi’s Bumbles, Inc.

Hermi’s Bumbles is a company that has been in business for three years. The company is a wholesaler of Bumbles. Bumbles are bulbs which grow into beautiful, sweet smelling plant-trees. They are a cross between a hyacinth and a buckeye. They are refrigerated and must be planted within one year of when they are harvested. Hermi buys the bumbles from a grower when they are one month old. Hermi has one location in Columbus, Ohio. It has three refrigerated trucks which deliver the Bumbles throughout Ohio. The financial statements on the previous page summarize Hermi’s operations for its first three years.

Hermi began operations with individuals investing $120,000 for 12,000 shares of common stock and a small business loan of $200,000 from the bank. The loan carries interest at 12%. Hermi must pay the interest plus $10,000 on the principal on January 1 of each year. Hermi sells using terms of 2/10 n/30. The latest sale of stock between individuals was yesterday at $85.00 per share. There are more shares available from the other investors for this amount. The tax rate is 30%.

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Analyzing Hermi’s

Current Ratio

Which tells us?

Calculate the Accounts Receivable Turn for 2012 and 2013

And the average collection period for the two years

Calculate the Inventory Turn

Calculate the Average Days Sales In Inventory

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Calculate Book Value Per Share

Return on Assets ROA

Which tells us?

Return on Equity ROE

Which tells us?

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Leverage What causes the difference between the ROA and the ROE??

Debt Ratio

Debt to Equity

Which tells us?

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You have decided to open a hot dog stand at the corner of Court and Union. The following is your opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she sells.

AssetsCash 5,000Inventory 10,000Cart 35,000 Total 50,000

Liabilities -0-

Owners’ EquityCommon Stock 50,000Retained Earnings -0- Total 50,000

Expand using Expand using Stock Loan

For the First Year Sales 60,000 Cost of Sales 12,000 Gross Margin 48,000 Operating Expenses Wages 23,000 Other 10,000 Total Operating Expenses 33,000 Operating Income 15,000

Net Income Before Taxes ______ Tax Expense Net Income .

EPS .

You paid all your income out as a dividend. You want to expand to Oxford. You will need to invest a total of $60,000. You expect your sales and cogs to double with the new operation. Your wage expense for Oxford will be based the same as it is in Athens. Your other expenses will increase to $12,000. Your tax rate is 30%. You can either sell 60,000 shares of stock for $1 each or you can borrow the money from the bank. The bank will charge you 8% interest on the loan. Prepare the income statement for next year if you do the deal under each of the alternatives. Assume the deal is done on January 1st.

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Window Dressing

Cash $300,000 Accounts Payable $200,000 Accounts Rec 100,000 Other payables 200,000 Inventory 100,000 Total Current Assets 500,000 Total Current Liabilities 400,000

Current Ratio is

Now pay off the Accounts Payable

The Current Ratio is

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Problem 1Calculate all the ratios you have learned for both Kevin’s Kennels and Molly’s Muchies (Cash Flow Homework). Compare and contrast the two companies using the ratios you have learned.

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Explanations and Calculations of the RatiosSusanne Freeland

Current Ratio = Working Capital RatioCurrent AssetsCurrent Liabilities

C) Measure of liquidity – a company has sufficient liquid assets to cover its current obligations.

The higher the ratio the better able a company can meet its current obligations.

Return on Assets = Net Income Ave. Total Assets

Measure of how well a company uses its assets to create profits.

The company wants to create a return that satisfies its shareholders (owners).

Investors use this ratio to evaluate company leadership.

Return on Equity = Net Income Ave. Equity

Measures the success of company’s financing, investing and operating activities.

A company that generates a high return relative to its shareholders equity is considered a sound investment. The original investors will be repaid with the proceeds from business operations.

Debt Ratio = Total Liabilities Total Liabilities + Total Owners’ Equity

= Total Liabilities Total Assets

Debt to Equity Ratio = Total Liabilities Total Owners’ Equity

The more outstanding debt a company has, the more its earnings must go to making the payments on this debt load. This limits the amount of capital available to grow the business or pay dividends to the shareholders.

D) The more debt a company carries, the more risk is being taken by the creditors as opposed to the shareholders.

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Inventory Cost of Goods SoldTurnover Average Inventory

Average Inventory = Inventory @ BOY + Inventory @ EOY/2

Measures the success a company has in converting (turning) its investment in inventory into sales.The number of times a company sells and replaces its inventory during a given period.

Average Days = __ 365_____ Sales in Inventory Inventory Turn

E) The number of days sales, on average, that a firm carries in inventory.F)G)

Acid Test Ratio = Quick RatioCurrent Assets - Inventory

Current Liabilities

H) A stringent test that indicates whether a company has enough current assets to cover immediate liabilities without selling inventory.I)

Accounts Receivable Turnover

Sales / Average Net Accounts Receivable

The number of times the accounts receivable are turned over or are collected during the period.

Average Collection Period

365 days per year / Accounts Receivable Turn

The number of days it takes on average to collect an account receivable.

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Earnings Per Share

Net IncomeWeighted Average number of shares of common stock

The dollar amount of earnings that is associated with each share of stock.

Book Value per Share

Assets – Liabilities Number of shares of common stock at the end of the year

The dollar amount of equity that is associated with each share of stock.

Price Earnings Ratio

Market Price per share Earnings per share

This tells you how expensive a share of stock is in relation to its earnings.

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Finally- As to Financial Statement Evaluation

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