ACC 423 week 5
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ACC423Week5TeamAssignment.pptxLearning Team Week 5 Presentation
ACC 423
Week 1- Stock
Stockholder’s Equity
Common Stock
Preferred Stock
Treasury Stock
Dividends
Stockholder’s equity usually consists of a large number of units or shares and has three categories: capital stock, additional paid-in capital, and retained earnings. The number of shares possessed determines each owner’s interest. Each share of stock has certain rights and privileges. Common stock shareholders are allowed voting rights. Preferred stock shareholders are unable to vote, but receive preference for receipt of dividend payments. The different types of preferred stock are cumulative, participating, convertible, callable, and redeemable. Together, common and preferred stock reflect the par value of the corporation’s issued shares. Treasury stock is where a company reacquires its own stock and then reissues it. Two ways to handle treasury stock is either by the cost method or the par (stated) value method. Dividends are payouts made to the stockholders. These payouts can be important signals to the markets. The more a company pays out dividends, they are viewed as a stronger company and has good cash flow.
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Week 1 - Securities and Earnings Per Share
Debt
Equity
Convertible Bonds
Stock Warrants
Stock Compensation Plan
Restricted Stock
Earnings Per Share
Questions arise as whether to record stock options, convertible securities, and preferred stock as liabilities or equity. Dividends are at the discretion of the issuers so the preferred and common stock should be recorded as equity. Convertible bonds can be changed into other securities during a specific time period after issuance. These combine the benefits of a bond along with the privilege of exchanging it like a stock option. The preferred convertible bond allows a shareholder to convert preferred shares into a fixed number of common shares. Stock warrants are certificates entitling the holder to acquire shares of stock at a certain price within a stated period. They usually have a dilutive effect where they reduce earnings per share. Some companies have stock compensation plans where they give their employees stock based on certain requirements. They may be based on employee tenure and employee and company performance. They issue them to try and retain top executives and motivate employees performance. Restricted stock plans transfer stock to employees under the agreement that the shares are not sold, transferred, or pledged until vesting has occurred. Some employees may also be allowed to purchase company stock at a discounted price. Earnings per share are used by investors and stockholders to evaluate the profitability of the company. Earning per share indicates the income earned by each share of common stock. Earnings per share is found by dividing net income less preferred dividends by weighted-average of common shares outstanding. (Seibert, J. E., C.P.A. (2015).
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Week 2
Investments in Debt Securities
Debt Securities
Held to Maturity Securities
Available for Sale Securities
Trading Securities
Debt Securities are a representation of the relationship between a creditor and a entity. Some examples of debt securities are US government securities, municipal, corporate bonds, convertible debt and commercial paper. A held to maturity security is a debt security that would be classified as a held to maturity if it meets two criteria. The first is that it has positive intent. The second is that it must have the ability to hold the securitiy to its maturity. A available for sale security is a security that would not be classified as either a trade security or a held to maturity security. A trade security is a security that that is bought and held onto so that it can be sold to bring in income.
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Week 2
Investments in Equity Securities
Equity securities
Fair Value Method
Equity Method
Consolidated Statements
A equity security is what represents a owners interest, for example; common preferred, or capital stock. This also gives the owners the right to either obtain or dispose of the interest. How the investments is classified would depends on how much stock the investor has. If the investor has less than 20% (fair value method) then the investor has little influence. If the investor has between 20% and 50% (equity method) then that investor would have signification influence. If the investor has more than 50% (consolidated statements) than that investor would have control.
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Week 3
Current and deferred tax assets and liabilities
Financial Income
Taxable Income
Pretax financial income is a financial reporting term. It also is often referred to as income before taxes, income for financial reporting purposes, or income for book purposes. Companies determine pretax financial income according to GAAP. They measure it with the objective of providing useful information to investors and creditors.
Taxable income (income for tax purposes) is a tax accounting term. It indicates the amount used to compute income taxes payable. Companies determine taxable income according to the Internal Revenue Code (the tax code). Income taxes provide money to support government operations.
(Kieso, Wygandt, & Warfield, 2016, p.1054).
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Week 3
Loss carrybacks and Loss carryforwards
Net operating loss
Temporary and Permanent Differences
A deferred tax asset is the deferred tax consequence attributable to deductible temporary differences. A net operating loss (NOL) occurs for tax purposes in a year when tax-deductible expenses exceed taxable revenues. Loss carryback is when a company may carry the net operating loss back two years and receive refunds for income taxes paid in those years. Loss carryforward involves offsetting future taxable income for up to 20 years. Taxable temporary differences are temporary differences that will result in taxable amounts in future years when the related assets are recovered. Deductible temporary differences are temporary differences that will result in deductible amounts in future years, when the related book liabilities are settled. Permanent differences result from items that enter into pretax financial income but never into taxable income, or enter into taxable income but never into pretax financial income
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Week 4: Accounting for Pensions
Defined benefit plan
Defined contribution plan
Actuaries
Pension Expense
Pensions come in two main forms: a defined benefit plan or a defined contribution plan. A defined contribution plan is one in which the employee contributes money towards an eventual payout. A defined benefit plan is one in which the employer comes up with the money and promises the employee a specific amount when they retire. A 401k would be an example of a contribution plan, where as a pension would be an example of a defined benefit plan. Defined benefit plans can be difficult to account for as the future benefit amounts are based on unknown future variables. Actuaries are typically charged with defining, implementing, and accounting for pension programs. They are highly trained individuals who help determine the liability amounts that companies will need to cover for their particular plans. Lastly, the pension expense a company incurs consists of five components: service cost, interest on liability, actual return on assets, gain or loss, and amortization of prior service cost. Service cost and interest on liability both increase pension expense as does amortization of prior year service cost in most instances. On the other hand, actual return on assets typically decreases pension expense and gains and losses increase or decrease pension expense.
Picture courtesy of Pixabay
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Week 4: Accounting for Pensions
Pension Worksheet
| General Journal Entries | Memo Record | |||||
| Items | Annual Pension Expense | Cash | Other Comprehensive Income Prior Service Cost | Pension Asset/ Liability | Projected Benefit Obligation | Plan Assets |
| Balance December 31st, 2017 | ||||||
| Prior Service Cost | ||||||
| Balance January 1st, 2018 | ||||||
| Service Cost | ||||||
| Interest Cost | ||||||
| Actual Return | ||||||
| Journal Entry for 2018 | ||||||
| Balance December 31st, 2018 |
Extremely valuable tool
Not an official document
Two components: General Journal Entries and Memo Record
Helps to determine proper entries to make in the general ledger
Helps to prepare financial documents
Pension worksheets are an extremely valuable tool when determining pension expense and liability. While they are not an official document in and of themselves, they provide the information needed to proceed with in making journal entries and preparing the financial statements. The above illustration shows an abbreviated version of a pension worksheet. The worksheet has two components illustrated by the different colors above. The general journal entries side is where all the entries that effect the general ledger accounts are listed. The appropriate debit or credit is listed under the correct heading. The memo side is used to keep a running total of both the projected benefit obligation (how much the company will owe its employees) and the plan assets (what it currently has on hand). The difference between these two numbers is the pension asset/liability from the opposite side of the worksheet.
Another important topic for pension reporting is the “smoothing” of gains/losses. When the projected benefit obligation is raised or lowered, unexpected increases or decreases in the expected liability occur. These gains/losses are reported in the other comprehensive income (G/L) account. While these gains/losses can offset each other, sometimes that does not occur and the balance grows quite large n one direction or the other. Too large is considered, “10 percent of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets” (Kieso, Wygandt, & Warfield, 2016, p. 1132). When this occurs, a smoothing technique called the corridor is used. In a nutshell, the corridor requires the amortization of the gains/losses that occur in excess of the allowed 10%.
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Week 5 Accounting Changes
3 Types of Accounting Changes
Change in Accounting Principle
Change in Accounting Estimate
Change in Reporting Entity
There are three types of accounting changes the first being a change in accounting principle. This would be changing the policy of how certain items are accounted for. For example changing the inventory method or the depreciation method. The second are changes in the accounting estimate this means that additional information has been received that has changed the value of an asset for example from what was initially received. The third is a change in reporting entity, this is a change to the type of entity for example a sole proprietorship changes and becomes incorporated.
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Week 5 – Errors and Guidelines
The three types of changes can in turn cause accounting errors that need to be addressed. The illustration provided from the text shows the guidelines for handling the accounting changes.
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References
Seibert, J. E., C.P.A. (2015). Pensions. Pennsylvania CPA Journal, 86(1), 24-27. Retrieved from https://search-proquest-com.contentproxy.phoenix.edu/docview/1664924497?accountid=35812
Kieso, D.E., Weygandt, J.J., & Warfield, T.D. (2016). Intermediate Accounting, (16th ed). Hoboken, NJ: John Wiley & Sons.
