Wednesday, April 25, 2012

Practice Earnings Per Share EPS Problem

Practice Calculating Earnings Per Share (EPS) with this Problem:

A small retail company had 20,000 shares of common stock issued to the public and 2,000 shares of 10%, $100 par value cumulative preferred stock that has been issued to selective investors. During the current financial accounting year, no dividends on common stock were declared by the company and the preferred stock paid its dividend.

Overall Net income was $2,000,000 for the entire year. What is the small retail company's basic earnings per share (EPS) ?

$2,000,000 - ( $20,000 x $100 Par Value x 10% )] / $200,000 = $9 Earnings Per Share (EPS)

The small retail company had EPS of $9

Sunday, April 22, 2012

What is the difference between a Cash Budget & Cash Flow Statement?

A cash budget is mainly concerned about the future cash estimation or predicting how much cash will needed in future by a corporation to continue its normal operations.

By contrast, a cash flow statement is focused on cash inflow and outflow of business. Generally in financial accounting, a cash flow statement is only used as a financial statement that shows how changes in balance sheet accounts and income affect current cash and cash equivalents over a specific period of time (usually a year).  It then breaks the cash flow analysis down to categories that include operating expenses, investment decisions, and financing activities.

Saturday, April 21, 2012

What is a Letter of Credit?

What is a Letter of Credit?

Generally in accounting terms, a letter of credit is a certified document that a bank or other type of financial institution will issue to a seller. This financial document provides that the issuer will pay the seller for goods or services that the seller in fact delivers to a third-party buyer.

Basically, the letter of credit is a guarantee to the seller that it will be paid on time by the issuer of the letter of credit. This will happen regardless of whether the buyer ultimately fails to pay the seller of goods or services directly.

After the letter of credit is issued, the issuer can seek reimbursement from the buyer or from the buyer's bank or other financial institution.   Therefore, the risk that the buyer will fail to pay the seller is transferred from the seller to the letter of credit's issuing institution.

Thursday, April 19, 2012

Amount of Interest to be Capitalized on Loan

On April 1, 2010, a real estate development company develops a commercial property, which is expected to take five years of construction to complete, at a cost of $6,000,000.

A bank loan of $6,000,000 with an effective interest rate (EIR) at 6% was taken out on March 31, 2010 and put fully into the company's bank account.  During this time,  investment income was also earned at 3% on the un-applied funds during the period by an amount of $114,000.

Answer to Accounting Problem:

The amount of interest to be capitalized is $156,000

(270,000-114,000). 270,000= 6%*9/12*6,000,000

Explanation to Accounting Example: If the loans are specifically taken for the construction of qualifying assets, then the interest income is deducted to the capitalizable interest expense. but if the loans is taken generally or not specifically to finance the construction, the interest income is not deducted to the capitalizable interest expense.

Wednesday, April 18, 2012

Calculate Earnings Per Share EPS Example

A shoe manufacturing corporation had 15,000 shares of common stock outstanding on January 1 of 2010, and issued an additional 5,000 shares on June 1 of 2010. There was no preferred stock outstanding that was issued by the shoe company. The manufacturing corporation reports net income of $200,000 on its income statement for the year of 2010.

Calculate basic earnings per share (EPS) for the calendar year? 

a. $11.05
b. $11.16
c. $11.73
d. $12.43

Correct Answer:

Earnings Per Share (EPS) = Net Income /Weighted Average Common Shares Issued 

Weighted Average Common Shares Issued = 15,000 x (5/12) + 20,000 x (7/12) = 17,917

200,000/17,917 = $ 11.16

The Correct Answer to this Accounting  Example is B (11.16)

Additional Accounting Examples:

Saturday, April 14, 2012

What is a Non-current Asset?

What is a Non-Current Asset? 

A Non-Current is considered an asset whose complete value will not be realized during one accounting year. Non-Current assets are capitalized rather than expensed by a firm.  This capitalization means that the company allocates the cost of the asset over the number of years for which the asset will be  used, instead of allocating the entire cost to the accounting year in which the asset was purchased by the company.

Examples of Non-current assets that are commonly held by companies include stock investments, intangible assets such as goodwill, patents, and property, plant and equipment. Non-Current assets will always appear on the company's balance sheet and must be kept updated by an accountant.

By contrast, examples of current assets include inventory, accounts receivables, and case. 

Friday, April 6, 2012

Basic Components of Corporation's Capital Structure

Basic Components of Corporation's Capital Structure

A corporation's capital structure mainly consists of the securities issued by the corporation in exchange for  cash, property, or services contributed or that will be contributed to it in the future. See also information about a corporation's financial leverage.

  1. Common Stock (Corporate Adventure): Every Corporation must have common stock and it is the must junior type in liquidation of a corporation. Equity must demonstrate the stockholders intention to embark upon the corporate adventure taking upon the risk of loss along with the profits too.
  2. Preferred Stock: The are fixed rights which are more senior to common stock and provide investors more certainty in their rates of return
  3. Debt (Most Certainty): Senior in liquidation, no voting powers 
  4. Options: A right to purchase stock at a future time for a fixed price from the corporation.
  5. Hybrid Securities: The most common form of hybrid security is the convertible security, which combines a stock option with another form of investment. 
    1. The terms of a debt instrument allow the debt holder to exchange the debt instrument for a fixed number of shares of common or preferred stock in the corporation when a certain event happens.
    2. Hybrid securities can present difficult problems of classification for tax purpose,

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The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.