Professional Documents
Culture Documents
Valuation of PP & E
Consider how much youve paid for building
General rule, any cost that you pay to bring asset to company is part of the value of what you
boughtany cost you need to pay to have ownership goes to the value of what you bought
Ex: machineryorder machinery, pay price 1,000bring to company, therefore shipping cost,
then shipping cost added to equipment cost, installation fee is also part of itany cost used to
make machine usable is part of the cost of the machine
Whenever you buy any long term assets this is how you determine the value
Buy car: then have to pay for gas, oil, these are not part of the cost, these are expenses
Ex: purchased building 10 years agomake renovations is this part of assets or expense? If you
are adding to the value of the building then its going to the assets, but if you add something to
be able to have an operating/functional building then its part of operating expenses therefore
its an expense.
Another example of previous: purchased car 5 years ago, need to make major changes to
caryou will be adding to the lifespan of car, youre adding value therefore this is an asset.
AP8-2
a. Amount to be capitalized:
Jan 22not yet paid, just an estimation, therefore we dont record anything yet
Feb 1A/P goes down and cash goes down (no effects on assets)
May 24not necessary therefore its an expense
June 10expense
any cost needed to bring asset to use = asset
Need to capitalize this cost means putting it into an asset accountif tell you to expensethen goes to operating expense
Depreciation
Known as the effect of time and use on the value of an asset
When end of financial year we journalize
To be able to calculate depreciation must understand terms
Residual value: the value f the asset at the end of the useful life
Ex: buy table and they tell can use for 15 years = useful life
After that time the expert tell you the table will be 1,000 = residual value
Both RV and UL = estimated amounts
Depreciable amount = cost to buy RV
=
()
10,0000
example: now journalize
10
Depreciation 1,000
Accumulated depreciation 1,000
2. Units of Production: used for assets that we can express useful life in number of units
Ex: buy car. think it has useful life for 12 years.,.km on the car, useful life can b determined by
KM driven, good method for car:
()
3. Double-declining method: good for assets used in first years and less in later yearshort
depreciation on computer at beginning then increases of the value ex: computers
1
2
()
AP8-6:
a.
i. Straight-line method depreciation
Year
2016 15,000*1.20 = 18,000
2017 24,000*1.20 = 28,800
2018 30,000*1.20 = 36,000
2019 28,000*1.20 = 33,600
2010 18,000*1.20 = 21,600
Different from first method because you are calculating the depreciation of use per each
unit, not over a period of time, but in terms of usage
Year
2016 First year = 0 carrying value, because havent calculated anything yet (150,000-
0)=carrying value 150,000*40% = $60,000
2017 (150,000-60,000)*40%= $36,000
2018 (150,000-60,000-36,000)*40% = $21,600
2019 (150,000-60,000-36,000-21,600)*40%= $12,960
2020 (150,000-60,000-36,000-21,600-12,960)*40% = $19,440
*Always use this method to calculate depreciation for the last year
Residual value = 12,000 thus
19,440-12,000 = 7,440
OCTOBER 25TH/2016
Reviewprevious class
General rule for journalizing long-term assets:
Says when you buy any asset you need to consider all the costs you need to pay in order to make ready
for usageany of these costs will go into the asset
PROBLEM SOLVING:
a.
Jan 1, 2016 Equipment 21,000
Cash 21,000
(21,000-3,000)/5 years = 3,600/year of depreciation (under straight line, same all years)
b.
Carrying amount = cost-accumulated depreciation
*Depending which method you use your residual value after useful life will be different
**Depending on which asset you are buying, you will need to go to expert in the field to be able to asses
which depreciation method will be most useful
*** Total depreciable amount will be the same at the end regardless of method, but companies will use
certain methods due to taxes
Under straight-line method (3,600 x 3 = 10,800) and under double decline (8,400 + 5,040 + 3,024 =
16,464)
Using the straight-line method: your first year will be less, therefore
Income and financial position statement are affected
c.
Sept 30, 2016 Equipment 21,000
Cash 21,000
(21,000-3000)/5 = 3600
*In the year you sell your asset, you need to calculate your depreciation
So in 2018.Jan-June (6 months)only had for 6 months (didnt use for the full year)
(21,000-3000)/5*6/12 = 1,800
Now apply general rule: what you receive needs to be recorded to closethen check gain/loss
What we received:
June 30, 2018 Cash 13,000
Accumulated depreciation 6,300
Loss (14,700-13,000) 1,700
Equipment 21,000
Accumulated
depreciation
900
3,600
1,800
6,300
reciving 13,000..but giving up 14,700..what were taking is less than what we givetherefore LOSS
(13,000-14,700) = 1,700
Now calculate carrying value and difference.and calculate the book value/carrying value
Equipment 21,000
Gain (16,000-14,700) 1,300
At the end of each financial year you need to evaluate your assets (must go to market)
o Look at fair value (market value)
o Must compareif yours higher must lowerif lowering the value of your asset then you must
journalize it
o If higher in market then under IFRS will increase, adjust (gainbut not really because you havent
sold asset, so not a real gain) you dont have to journalize
INTANGIBLE ASSETS:
Such as: copy write, label, patent (created inside companythen value put in asset)if buying from third
party
ex: copy write: DR copy write CR cash.
Any cost related to purchasing copy write must go to asset (ex: legal fees)
How do you put a value on such an asset?
Ex: apple, name itself has value (hard to estimate, so often times you wont see a value)
=
()
AP8-24:
For the licence: 80,000 + legal fee (12,000)
*Expect to have unlimited useful lifeso wont calculate amortization
Customer lists:
Patent: valued for 20 years (useful life)but technology say after 8 years out of date, must be
replacedtherefore we choose lower (8 years)
Copyrights: valued for 40 yearsbut max amount of money you can generate form it is 10 yearsafter
that we have legal rightbut wont be bringing money to the company
*Assuming the straight-line method is appropriate for all intangible with a limited or finite useful life
RVusually zerobecause gone after a few yearswe will not create a contra account for the patent (or
any intangible asset)
GOODWILL:
There are things within a company that will add value (ex: management team of company, customers),
but we can measure when one company purchases anotherthen we can put a value on it. goodwill is
the difference between the market value of asset and the liabilities
AB
A = L + S/E
Put a value on their assets, and then look at their liabilities (what is the fair value of them, if we want to
calculate them)
The difference between them will give you the value of the company
Ex: say this value is 1,000,000but then says theres more value (ex: customers, employee, etc) says its
1,500,000.so:
1,500,000 1,000,000 =
Chapter 8 = 31 questions
CHAPTER 9Current Liabilities
Know exactly how much you owe and to whom you owe
But certain current liabilities are hard to classifywill go over
Unearned revenue
-salary payable
-L to Canada pension plan
-canada revenue
Look at powerpoint..
(Liabilities we have to lender, they are long term >1 year from now)
1st payment:
1,000,000 x 6% x (1/12) = 5,000 interest per month
19,333 (5,000 = interest & 14,333 = principle)
2nd payment:
First adjust the liability 1,000,000-14,333 = 985,667
985,667 x 6% x (1/12) = 4,928
19,333 (4,928 = interest & 14,405=principal)
3rd payment:
985,667-14,405 =971,262
971,262 x 6% x (1/12) = 4,856
19,333 (4,856 = interest & 14,476 = principal)
A.
Liability is decreasing so interest is decreasing
B.
Oct 1 Cash 1,000,000
Mortgage Payable 1,000,000
BONDS
Example: running company want to raise moneycould issue shareholders or could issue a bond
Will give bond to public
A company might issue bonds because they dont want more shareholders
Basically barrowing money but from public
If company goes bankrupt must first pay liabilities, so bond holders get money first
before shareholders
Often times theres a collateral for the bonds in case they cant pay back bonds, unless
the company has a good reputation
Face value: is the money we give back to bond holders at the end of the contract
Interest rate = nominal rate or stated rate use to calculate interest /6 months
Interest rate on bond = stated interest rate
AP10-4)
A.
Cash 80,000
Notes payable 800000
*Pay in march and September (every 6 months)
**need to adjust ??
Dec 31 2016 Interest expense (80,000,000 x 10% x 3/12 = 2,000,000
Interest payable 2,000,000
Recall:
1st scenario: Issuing bonds at par = money collected = principal par value
2nd scenario: offer bonds with discounts, giving discounts = more attractive, but lower than face value
3rd: offering bond with premium = higher interest rate compared to market
AP10-8 (p.472)
Maturity date 20 years, so in 20 years must pay back the 20,000,000
Journal entry when you issue the bond: (equal to face value)
a.
Cash 100,000,000
Notes Payable 100,000,000
b.
Now with bond issued at 6.5% (issued at 94.448%) need to issue with discount
How much discount do we give? (We collect cash from investors less than 100,000,000)
Cash 94,448,000
Notes Payable 94,448,000
This is when you issue the bond; journal entry same but amount of cash collected is different
@ The maturity date must pay face value (100,000,000)
(Real interest = more than 3,000,000)we gave a 6.5 discount socalculate real amount based on market interest rate so6.5%
*Need to CR notes payable, to increase, to increase balance each period
Notes Payable
94,448,000
69,560
94,517,560
Note:
94,448,000 million is the present value of future 100,000,000 due to inflation/interest rate
C.
Issuing the bond with premium: market interest rate: 5.5% our interest is higherso our bond more
attractive, so more demands, so we will offer the bond with premium, so people willing to give us more
(look at percentage)
1,000,000*106.02% = 106,020,000
Cash 106,020,000
Notes Payable 106,020,000
*But we will pay back in 20 years 100,000,000decrease the notes payable to pay back bondholders the
100,000,000
They accept the higher rate because later on in the market they will accumulate more with the interest
Journal entries for first two payments:
Calculate interest expense
Willkeep doing this until the 20th yearnotes payable will become equal to face value of 100,000,000
2nd payment:
Interest expense * balance of notes payable
Notes Payable
106,020,000
84,450
105,935,550
86,772
105,848,778
Shares
Authorized shares
The maximum number of shares that a company can issue, as specified in the articles of
incorporation
Many companies establish an unlimited number
Issued shares
Shares that have been sold by the company
Are considered to be outstanding shares
Example:
Starting company in Quebec, need t look up Inc. laws, then number of shares we will issue, ex: I will issue
1,000,000.These become authorized shares. After 25 years issued all the shares, then want more, must
request (meeting with all shareholders), then change Inc. documents
Outstanding shares
Are shares that are issued and out there (two conditions must be met) and in the hands of
investors (issued and outstanding can differ) because of the buy back, theyre now back in the
company (issued) so no longer outstanding
Treasury shares:
When the company has bought back their own shares
Legal capital:
The total money you have raised by issuing different types of shares, must be kept intact, cannot
be paid out as dividends (money that shareholders have invested and must stay in the account)
Par value
A specified dollar amount attached to each share
Used in the past, no longer permitted in most CDN jurisdictions (Canadian companies no longer
assign a value to their shares)
When shares are sold, par value is credited to share capital account and any excess is credited to
an account called contributed surplus
No par value
Commonly used today
Total amount received for the shares is credited to the share capital
Common vs. Preferred Shares
Dividends: preferred shareholders have priority in terms of dividends
Voting: preferred shareholders have no say in voting
Major classes of shares
Common shares (usually for one common share you have one vote)
Preferred shares (not able to vote in annual meetings, even if allowed to be present)someone
whom is just looking for dividends would take this because they are looking to make profit
Differ in the rights that accrue to the shareholders
Disclosed in the notes to the financial statements
Preferred Shares
Will get dividends before shareholders
They receive a return on their share capital in the event of company liquidity
PAYING DIVIDENDS
In order to declare dividends a company must have both:
Sufficient retained earnings
Sufficient cash
Four key dates for dividends declaration include:
Date of declaration (when BOD approves dividends)
DR dividends
CR dividends payable
Ex-dividends date (2 days before date of record, important because transaction takes
time
Date of record (usually two weeks after date of declaration), no journal entry prepared
Date of paymentcash going down and dividends payable going down (close dividends playable
to retained earnings)
Cash dividends:
Payments to be made to shareholders from the total net icome retained in he ponapny..
Date of declaration
Dr. Stock dividends declared
CR. Stock dividends issuable
Stock splits
Usually stated as a ration
No change to shareholders equity account
As a result no accounting retry is necessarily
Why would a company want to divide the share: because splitting it makes it cheaper to buy
Is there effect on SH/E?
No, and no journal entry, but note must be made
PROBLEMS
AP11-6 (equity transactions)
a.
1. No journal entries required
2. Cash 1,200,000 = (240,000*5$)
Common Shares 1,200,000
6. Dividend-common 24,000=(0.10*240,000)
Dividends payable 24,000
Declaration
*Need to close to retained earnings in order to prepare financial statement
7. Normal balance of revenue is CR, to close we DR
Sales Revenue 750,000
Retained Earnings 750,000
Retained earnings 600,000
Operating expense 600,000
b.
Shareholders equity, December 31,2016
c.
Common vs. preferred, which would an investor choose, why?
Depends on what looking for (preferences, and economic status)
In bad year, preferred will still get
In good year, common good, good for risky investor, also have say in decisions
d)
b.
Common dividend per share = 2,750,000/750,000 = $3.67
c.
Stock dividend (1-%*750,000*$59) = 4,25,000
Stock dividend issuable 4,425,000
Stock dividend issuable 4,25,000
Common Share 4,425,000
no effect on total shareholder equity because one going up and down, no asset involved or liabaility so
theyre not effected
d. because cash is valued, and want to keep in the company and decide to pay stock dividend instead and
this way no cash leaving company
CHAPTER 5CASH FLOW STATEMENT
Now calculate how much cash has been generated from each activity
Example:
Account Receivable
10,000
15,000
Change of 10,000 to 15,000 so more people owe you, but not cash yet, so must subtract
If A/R going down then people are paying you, cash going up
Go to current assets: what is changingincrease or decrease?
Account payable
40,000
20,000
cash has gone out of company to pay liability
or
Account payable
10,000
20,000
increase in current liability = add
building
Building accumulated
depreciation
Common shares
1,000,000
0
1,500,000
Retained earnings
Cash dividend xx
Stock dividend Net income
xxx
Note payable
100,000
Payment of note payable New note payable (issuing)
200,000
*must have one of the values to calculate other ex: issued 200,000 during the year
so
100,000 + 200,000 x = 200,000
=100,000 payment of notes payable
PROBLEMS
AP5-1
a. Financing
b. Financing
c. Investing
d. Investing
e. Operating
f. Operating
g. Financing
h. Financing (getting or paying back a loan = financing)
i. Investing
j. Operating (changing current asset/liabilities)
AP5-3
AP5-9
Organic developments LTD
Statement of cash Flows
For the year ended October 31st, 2016
Cash flow from investing activities *Use T-account to help with investing
Purchase of equipment (120,000) *cash going out of company
Sale of Equipment 6,000
Because cash not involved not recorded in investingissuing shares
Equipment
540,000
X? 134,000
(sold)
620,000
6,000 cash (investing activities)
134,000 original cost
54,000 + x 134,000 = 62,000 14,000 book value
Book value = cost Accu.Dep.
Accumulated 14,000 = 134,000 x
Depreciation x = 120,000
equipment
120,000 360,000 x? = 214,000
60,000
300,000
Bank loan
Dividends payable
120,000
36,000
14,000
X=?
74,000
30,000
The process for analyzing financial statements includes the following steps:
1. Determine the purpose and context of the analysis
Why are you analyzing? Is there an investment purpose? Is someone asking for a loan?
2. Collect the information needed
Get dates and information from last 5 years, need FS and see if company is able to
generate cash and payback what they might owe
3. Prepare common size analysis and calculate other ratios or metrics
Right now we have dollar amounts, common size means you need to convert everything
to a percentage (%), when you work with percent its much easier to compare numbers
Ex: apple made 100,000 profit, Microsoft 150,000based on this data you would chose
Microsoft, but in reality you cant choose or compareneed to make these two numbers
comparable, need to look at assets and efficiency
#s not the best way to measure, % is.but for financial ratios must use dollar amounts
Income Statement
Converted to % A B
Revenue 100,000 100,000/100,000 = 100% 100%
Cost of goods sold 60,000 60,000/100,000 = 60% 50%
Gross margin 40,000 40,000/100,000 = 40% 50%
Operating expense (20,000) 20,000/100,000 = 20% 40%
Net income 20,000 20,000/100,000 = 20% 10%
Basis for converting to % is using total revenue. everything is in terms of percentage of total revenue
Net income is the most important margin
But depends on what you are doing with the companyinvesting? Getting loan payment back?
Ex: loanCOGS is an expense short term how will this effect the payback
So when preparing divide all $ amounts by / sales revenue
Categorizing FS analysis:
See how the company will be doing in the future
RATIOS
Can be used to compare a companys results from one period to the next or compare one
company with others
Also allows users to compare companies of different sizes more easily
Often several ways to calculate a given ratio
Common categories:
Liquidity ratios
Activity ratios
Solvency ratios
Profitability ratios
Equity analysis ratios
Liquidity ratiosrefers to a companys ability to convert assets to cash in order to meet day to day
liabilities
-And important part of liquidity analysis considers the companys ability to meet its short-term obligations
with its short-term assets
-Two common ratios used:
Current ratio
Quick ratio
=
*Look at problem below RI12-3
Taking out inventory and prepaid expenses because: cant get cash back from prepaid expenses and
inventory (hard to convert to cash)include on assets that you can quickly convert to cash
Activity ratiosprovide insight into how efficiently the company manages its operations, also known as
operating efficient ratios
-Includes these ratios:
Accounts receivable turnoverhow fast can get money back form customers
Inventory turnoverseeing how fast you can get rid of products
Accounts payable turnoverseeing how fast we can pay back this liability
These help us see how efficiently we are managing
Accounts receivable turnover =
365
=
Will tell you how many days will take to collect money from customersfrom time of sale to time of
collect.ex: 35 daysdepends on the policy of the company.if normally give 30 days and this average is
30 days then this is not goodwe are not managing well
365
Will tell you how long it takes you to sell ex: if keeping 120 days in companysometimes if these
inventories stay long in stock ex: TV.the cost of this inventory will lose value or vice versawith wine will
increase value
Industry is important in terms of products.ex: bombardier.takes long to make product.normal that
it takes long
365
=
Ex: say takes 40 days to pay your liabilitybut contract says 45 days then you are managing well this
ratio provides information about the companys payable policy
Solvency Ratios
For exam: for this chapterdo reading and interpreting financial statements try to spend more time of
this part
=
helps measure net debt
If 1 = total liability = total S/E but if more than 1 than liability higher than S/E
Solvency-leverage ratios
% =
+
Solvencycoverage ratios
Profitability Ratios
Measures the profit product costs available to cover other operating costs
For 1$ sales revenue I have how much is left after expenses, how much profit?
Measures the return on the assets that are used by the company
EQUITY RATIOS
PRICE/EARNING RATIO
P to E
Compares the price per share on the stock market with the companys EPS
Companies with high growth expectations or low levels of risk will have higher P/E multiples
DIVIDEND PAYOUT
Cash flow generated from operating activities that would be available to common shareholders
PRACTICE PROBLEMS
Recall: focus on reading & interpretation of financial statement problems
a/b.
c.
i. Significant decrease in 2012, more $ made of off assetsto find problem go back to income
statement and compare 2012 and 2013also look at change in assetsbut comparing net
income higher in 2012so main issue = decrease in net incomemeans either 1. Sales
revenue going down or 2. Expenses are increasing
ii. Trend similar to ROAnormally will follow same trend
d. Leverage:
Look at liabilities section in financial position statement:
Solvencymainly looking at long-term liabilitieswe have decreasing long term liabilitiesis because they
have paid off their long term liabilities, now they are better off because less debtincrease in current
liabilities (but these will be paid soon so no problem) so no problems in terms of solvency
e. Net free cash flow from 2013 to 2012what does this say about the companys financial flexibility?
2013
Net free cash flow = 7,897 2,964 4,855 78
2012
Net free cash = 10,454 1,468 4,850 4,136
Interpret: in 2012 cash flow was much higherless becausepaid a lot of dividends, paid off one long-
term liability