Money Flow Flashcards
Raise cash
Borrow money or sell shares
Expense and revenue
Expense is accounted for when INCURRED
Revenue is accounted for when EARNED
Conservative!!
Liability
Debtor has received the benefit for which the liability was created for
Asset
Controlled by debtor (owned or leased);
can be reliably estimated; and
Able to produce economic benefit
Net income
After interest and tax
Sell/dispose a long-term asset (produce gain or loss)
Net book value = original cost - accumulated depreciation
Gain/loss on disposal = sale price - NBV
Account for long-term liability (bond and long-term bank loan)
Need DISCOUNT all future payment obligations to the present value.
Firm makes/loses money by early bond redemption (= repurchase)
Premium bond
Discount bond
Price > par value AND coupon rate > mkt interest rate
Price < par value AND coupon rate < mkt interest rate
Account for long-term lease by lessee
Both an asset and liability. Value is PV of all future lease payments.
Common share cash dividend issuance
paid from retained earning (SHE down and cash asset down)
does not affect net income for EPS calculation
- PS cash dividends are deducted from net income thereby reduce net income for EPS calculation
Stock dividends
cash asset does not change; liability does not change; CS and additional paid in go up and retained earning go down.
Secondary market trading after IPO
The corporation does not receive any cash from sales in the secondary market.
Share redemption (callable)
Stipulated some shares as callable and a certain call price onset
Shareholders are obligated to sell and at that price
Share repurchase
shareholders sell voluntarily at market price
Why buy back shares
Reduce number of outstanding shares and thereby boost EPS that makes firm look more profitable.
Make shares scarce thereby price may go up
retain majority status
