1. CH 9: Long-Lived Assets
1.1. Purchasing Assets
1.1.1. P.P.E
1.1.1.1. Property, plant and equipment
1.1.1.1.1. Land
1.1.1.1.2. Land Improvements
1.1.1.1.3. Buildings
1.1.1.1.4. Equipment
1.1.2. Cost Principle
1.1.2.1. Assets purchased are recorded at (and remain on) the books at their historic cost
1.1.2.2. increases in fair market value aren’t usually considered.
1.1.3. Ratios
1.1.3.1. Asset Turnover Ratio
1.1.3.1.1. NET SALES/ AVERAGE TOTAL ASSETS
1.1.3.1.2. Evaluates how efficiently a company is using its assets.
1.1.3.1.3. Bigger ratio means more efficient
1.1.3.2. Return on Assets
1.1.3.2.1. NET INCOME/ AVERAGE TOTAL ASSETS
1.1.3.2.2. Measures overall profitability of assets used in earnings process
1.1.3.2.3. High ratio = profitable company
1.2. Amortization Methods
1.2.1. What is Amortization
1.2.1.1. The process of issuing the cost of an asset over its useful life. The asset is expensed over the years and helps generate revenue.
1.2.1.2. Follows matching principle
1.2.1.3. land is NOT amortized
1.2.1.4. Asset- acc. amortization = net book value
1.2.2. Straight-Line Method
1.2.2.1. Amortization expense is constant every year of asset’s useful life
1.2.2.2. Cost- Residential value = Amortizable cost
1.2.2.3. Amortizable cost/ Residential useful life = Annual amortization expense
1.2.3. Declining Balance Method
1.2.3.1. Annual amortization is larger in the early years of an asset’s life.
1.2.3.2. Formula: Net Book Value X rate
1.2.3.3. The “rate” is double the straight-line rate.
1.2.3.4. Amortization expense based on the asset’s declining net book value
1.2.3.5. Net book value at beginning of year X straight line rate (x2) = Annual amortization expense
1.2.4. Units of Activity
1.2.4.1. Useful life expressed as total units of production or activity
1.2.4.2. Must estimate the total units of activity that will be obtained from asset
1.2.4.3. Amortizable cost/ total estimated units of activity = amortizable cost per unit
1.2.4.4. Amortizable cost per unit X units of activity during the year = Annual amortization expense
1.3. Intangible Assets
1.3.1. Accounting for intangible assets
1.3.1.1. long-lived assets that lack physical substance.
1.3.1.2. Recorded at cost
1.3.1.3. Written off over useful life
1.3.1.4. Disposed of at the end of the useful life
1.3.2. Patents
1.3.2.1. an exclusive right to manufacture, sell, or otherwise control an invention
1.3.2.2. The initial cost of a patent is acquisition cost paid.
1.3.2.3. Legal costs from successfully defending the patent are added to the patent account
1.3.3. Trademarks
1.3.3.1. a word, phrase, jingle, or symbol that identifies an enterprise or product.
1.3.3.2. Purchased TMs: the cost is the purchase price.
1.3.3.3. Developed TMs: the cost includes legal fees
1.3.3.4. NOT amortized.
1.3.4. Copyrights
1.3.4.1. are the exclusive right to reproduce and sell an artistic or published work.
1.3.4.2. good for + 50 years,
1.3.4.3. cost of a copyright consists of the cost of acquiring and defending it.
1.3.5. Franchises & Licenses
1.3.5.1. Franchise
1.3.5.1.1. a contractual arrangement under which the seller grants the buyer the right to sell certain products
1.3.5.2. License
1.3.5.2.1. A governmental body authorizes a business enterprise to use public property
1.3.6. Goodwill
1.3.6.1. the value of all favourable aspect that relate to a business enterprise.
1.3.6.2. cannot be sold individually in the marketplace
1.3.6.3. recorded only at the time of purchase
1.3.6.4. excess of cost over the fair market value of the net assets
1.3.6.5. NOT amortized.
1.3.7. Research & Development Cost
1.3.7.1. the expenditures incurred to develop new products and processes.
1.3.7.2. Research costs: Expensed when incurred.
1.3.7.3. Development costs: future benefits may be capitalized
2. CH 11&15: Debt Financing
2.1. Credit Cards
2.1.1. Advantages
2.1.1.1. With a credit card you’ll be able to spread out the cost of a large purchase over several monthly payments.
2.1.1.2. it can let you buy a product or service and you can make your monthly repayment
2.1.1.3. some credit cards offer a 0% interest period that lets you borrow for free. You make your monthly payments.
2.1.1.4. many credit cards also come with varying benefits and incentives that can be useful if you pick the right ones
2.1.1.5. with a balance transfer credit card you’ll be able to transfer existing debts on to one credit account
2.1.1.6. If you have a poor or limited credit report, credit builder credit cards can offer a way to improve your financial situation
2.1.2. Disadvantages
2.1.2.1. you could put yourself in rising debt if you aren’t able to pay back what you borrow.
2.1.2.2. letting your credit card debt build up, or missing payments, can influence your credit rating.
2.1.2.3. credit cards can also come with fees and charges if you don’t meet your repayments or you exceed your credit limit.
2.1.2.4. you might be restricted in how and where you can use your credit card.
2.1.3. Types of credit cards
2.1.3.1. BANK CREDIT CARDS
2.1.3.1.1. Credit card issued by a bank or another financial institution.
2.1.3.1.2. Instant access to cash.
2.1.3.1.3. If unable to repay within 30 days, interest is charged.
2.1.3.2. RETAIL CREDIT CARDS
2.1.3.2.1. Credit card issued by a store.
2.1.3.2.2. Instant access to cash.
2.1.3.2.3. If unable to repay within 30 days, interest rate is charged.
2.1.3.3. "NON BANK" CREDIT CARDS
2.1.3.3.1. These cards offer unlimited credit limits.
2.1.3.3.2. Cardholders must pay the balence at the end of each month.
2.1.3.3.3. They typically have high annual fees.
2.2. Ratios
2.2.1. Debt to total assets
2.2.1.1. Measures the percentage of total assets financed by creditors
2.2.1.2. Higher the percentage, greater the risk of company defaulting on its obligations.
2.2.1.3. TOTAL LIABILITIES/ TOTAL ASSETS
2.2.2. Interest coverage ratio
2.2.2.1. Interest coverage ratio indicates the company's ability to meet interest payments as they come due.
2.2.2.2. Uses EBIT: net income + interest expense + income tax expense
2.2.2.3. EBIT/ INTEREST EXPENSE
2.3. Debt Financing
2.3.1. Line of credit
2.3.1.1. pre-approved bank loan where the money is avaliable to be borrowed.
2.3.1.2. Lower interest rate than other debt options
2.3.1.3. Short term financing
2.3.2. Term loan
2.3.2.1. One time withdrawal of a sum of money. Needs to be payed back at a later date.
2.3.2.2. Short term financing.
2.3.3. Notes payable
2.3.3.1. Similar to a term loan. Arranged by a supplier.
2.3.3.2. Long term or short term financing
2.3.3.2.1. Long term notes require instalments
2.3.3.2.2. Short term notes are repaid at maturity
2.3.4. Bank and retail credit card
2.3.4.1. Refer to "Types of credit cards" from the "CH 11&15: Debt Financing" branch.
2.3.5. Operating lease
2.3.5.1. Rent an item for a period of time, but do not own it.
2.3.5.2. a liability that is kept off the balance sheet
2.3.6. Capital lease
2.3.6.1. Rent an asset for a period of time, while you work towards purchasing it.
2.3.6.2. Long term financing option.
2.3.7. Mortgage
2.3.7.1. A long term personal loan for buying a home. Often considered a good debt.
2.3.7.2. Repayment is done in instalments.
2.3.8. Home equity loan
2.3.8.1. Take a second mortgage from a bank, for the amount of your that you have currently own/ have paid off.
2.3.8.2. The loan is secured with your phone.
2.3.8.3. Must make additional payments on top of first mortgage.
3. CH 13&14: Corporations
3.1. Organization and Shares
3.1.1. Corporations
3.1.1.1. A corporation is a legal entity that is separate from its owners, who are known as shareholders.
3.1.1.2. Shareholders are the owners of a corporation.
3.1.1.3. Shareholders vote on a Board of Directors to represent them.
3.1.1.4. The B.O.D. then choose a CEO to run the company.
3.1.2. Advantages of corporations
3.1.2.1. Shareholders do not run the company. They elect a B.O.D.
3.1.2.2. Separate from owners and acts under its own name.
3.1.2.3. Creditors only have claims to corporate assets.
3.1.2.4. Tax rate of a corporation is lower than an individual
3.1.2.5. Ownership is held in shares. These are transferable and can be sold by the shareholder.
3.1.3. Disadvantages of corporations
3.1.3.1. Buying shares in a corporation will not allow you to have an active role in running that corporation.
3.1.3.2. There are laws specify the requirements for issuing shares, distributing income to shareholders, and requiring shares.
3.1.3.3. More complex to set up
3.2. Issuing Shares
3.2.1. Reacquisition of shares
3.2.1.1. corporation’s own shares that have been issued, fully paid for, and then reacquired
3.2.1.2. Increase company’s market price
3.2.1.3. increase earnings per share by reducing the number of shares
3.2.1.4. eliminate hostile shareholders by buying them out
3.2.2. Preferred shares
3.2.2.1. All companies issue common shares. A corporation may choose to issue preferred shares in addition to common shares
3.3. Dividends
3.3.1. What are dividends
3.3.1.1. the distribution of a portion of the company's earnings, decided and managed by the company's board of directors
3.3.1.2. To fulfil shareholders and attract new customers
3.3.2. Issuing a dividend
3.3.2.1. Enough Retained Earnings
3.3.2.1.1. Dividends come from retained earnings, and therefore reduce them
3.3.2.2. Enough cash on hand
3.3.2.3. A declaration of dividends
3.3.2.3.1. A company can not pay dividends unless the board of directors decides to. The board “declares” a dividend.
3.3.3. Accounting for a dividend
3.3.3.1. Declaration Date
3.3.3.1.1. When the Board of Directors declares a dividend, a legal obligation is created.
3.3.3.1.2. preferred shareholders must be paid first.
3.3.3.1.3. Declaring a dividend creates a liability
3.3.3.2. Record Date
3.3.3.2.1. cut-off date established by a company to determine which shareholders can receive a dividend.
3.3.3.2.2. the company updates their records of who owns their shares.
3.3.3.2.3. No journal entry.
3.3.3.3. Payment Date
3.3.3.3.1. Dividend cheques are mailed to shareholders and payment of the dividend is recorded.
3.3.3.3.2. Liability is reserved.
3.4. Ratios
3.4.1. Return to equity
3.4.2. Earnings per share
3.4.2.1. (NET INCOME- PREFERRED SHARES)/ Weighted Average Number of Common Shares
3.4.2.1.1. Measures the net income earned by each common share.
3.4.2.1.2. Expressed as a dollar value. A higher amount is better
3.4.3. Price earning ratio
3.4.3.1. MARKET PRICE PER SHARE/ EARNINGS PER SHARE
3.4.3.1.1. The PE Ratio reflects investors’ assessment of a company’s future earnings.
3.4.3.1.2. A high P/E ratio can be one indicator that investors believe the company has good earning potential
3.4.4. Payout ratio
3.4.4.1. NET INCOME/ AVERAGE SHAREHOLDERS EQUITY
3.4.4.1.1. measures how many dollars are earned for each dollar invested by shareholders.
3.4.4.1.2. Considered to be the most important measure of a firm’s profitability.
3.4.4.1.3. Expressed as a percentage.
3.4.4.2. Total Dividend Paid Out/ NET INCOME
3.4.4.2.1. indicates what percentage of earnings a company is distributing to its shareholders.
3.4.4.2.2. calculated for both common and preferred shares.
3.4.4.3. Dividend Per Share/ EARNINGS PER SHARE
3.4.4.3.1. Expressed as a percentage
3.4.5. Dividend yield
3.4.5.1. DIVIDEND/ CURRENT MARKET PRICE
3.4.5.1.1. estimates a one-year return on investment, based only the dividend payment
3.4.5.1.2. Higher dividend yields aren’t always attractive investment opportunities
3.4.5.1.3. Investors will look at EPS, Dividend yield, and other profitability tools to evaluate investment opportunities.
4. CH 5-6: Merchandising Businesses
4.1. Ratios
4.1.1. Gross Profit Margin
4.1.1.1. GROSS PROFIT/ NET SALES
4.1.1.2. Measures the merchandising profit of a business.
4.1.2. Profit Margin
4.1.2.1. NET INCOME/ NET SALES
4.1.2.2. Measures the percentage of each dollar of sales that results in net income.
4.1.3. Inventory Turnover
4.1.3.1. COGS/ AVERAGE INVENTORY
4.1.3.2. Measures the number of times an average, inventory is sold during the selling period.
4.1.4. Days Sales in Inventory
4.1.4.1. DAYS IN YEAR/ INVENTORY TURNOVER
4.1.4.2. Measures the average age of inventory on hand, or how long an item remain in inventory.
4.2. Buying and Selling Inventory
4.2.1. Freight Costs
4.2.1.1. FOB Shipping Point
4.2.1.1.1. Buyer accepts ownership at place of shipping and pays for shipping costs.
4.2.1.1.2. Buyer debits merchandise inventory for cost of shipping.
4.2.2. FOB Destination
4.2.2.1. FOB Destination
4.2.2.1.1. Buyer accepts ownership when goods are received, seller pays for shipping.
4.2.2.1.2. Seller debits freight-out for cost of shipping.
4.2.3. Buying Inventory
4.2.4. Selling Inventory
4.3. FIFO/LIFO/AVG
4.3.1. FIFO- First in, first out
4.3.1.1. Items purchased earlier are sold first. Items purchased later remain in inventory.
4.3.2. LIFO- Last in, first out
4.3.2.1. Items purchased later are sold first. Items purchased first remain in inventory.
4.3.3. Weighted Average
4.3.3.1. Focuses on the average cost of inventory on hand.
4.3.3.1.1. UNIT COST= Cost of goods sold/ units on hand.
4.4. Determining Ownership
4.4.1. Goods in Transit
4.4.1.1. Items being shipped may or may not be included in the inventory count. It depends on the shipping terms.
4.4.2. Cosigned Goods
4.4.2.1. Goods belonging to other parties of with the intent to sell for a fee.
4.4.2.1.1. Holder of the goods never takes ownership and never includes in inventory.
4.4.2.1.2. Ownership remains with the shipper (cosigner) until goods are actually sold to a customer.