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June 24, 2005
Ratio Analysis. Short-term liquidity. Part 2.
Accounts receivable turnover ratio (AccRTurn) equals Net Credit Sales divided by Average Accounts Receivable (AvAccR). If credit sales data is not available, we will use Net Sales.
Note that the Balance Sheet component (Accounts Receivable) and the Income Statement component (Net Credit Sales) meet in the same ratio, hence the Balance Sheet amount should be an average for the period (if the average of the beginning and ending receivables is not representative because of cyclical factors, a monthly or quarterly average is preferable).
AvAccR = (AccR1 + AccR2)/2,
where AccR1 - beginning Accounts Receivable, AccR2 - ending Accounts Receivable.
Days sales in receivables, also called the average collection period, is the average number of days to collect a receivable. Days sales in receivables (DaysR) equals Average Accounts Receivable divided by Average daily sales (AvDailySales). The identical definition: Days sales in receivables equals the number of days in the period (365, 360 or 300) divided by the Account receivable turnover.
Continue reading "Ratio Analysis. Short-term liquidity. Part 2."
Posted by mazoo at 4:25 PM | Comments (1)
June 17, 2005
Treasury Stock. The Par Value Method.
The accounting for Treasury Stock transactions under the Par value Method is a little more involved than under the Cost Method because journal entry for the acquisition of Treasury Stock uses Additional paid-in capital - Common Stock account.
Assume that XYZ Corp. uses the Par value Method to account for treasury stock transactions. XYZ Corp. issued 1 000 shares of 10$ par common stock at 15$ per share.
Dr Cash..........15*1000 = 15 000$
Cr Common stock.....................................10*1000 = 10 000$
Cr APIC-CS......................................(15 - 10) *1000 = 5 000$
The Par Value Method:
1) XYZ Corp. acquires 200 shares for 13$ each. The first step is to debit Treasury Stock account for the amount of the par value of the reacquired shares and APIC – Common Stock account for the amount related to the first issuance of these reacquired shares.
Dr Treasury stock........10*200 = 2 000$
Dr APIC - CS.................5*200 = 1 000$
Cr Cash.........................................................13*200 = 2 600$
Cr APIC-TS (APIC-Treasury stock).......2000 + 1000 - 2600 = 400$
The balancing amount of the first three lines appears on credit side, therefore it is going to APIC-TS account. The credit means the gain (and this is a gain, because purchase price 13$ is less than original sales price 15$). Note, that Retained Earnings account can never be credited from treasury stock transactions.
2) XYZ Corp. acquires 300 shares for 20$ each.
Dr Treasury stock.............10*300 = 3 000$
Dr APIC – CS.....................5*300 = 1 500$
Dr APIC – TS.............6 000 - 4 500 = 400$ (total possible amount)
Dr Retained Earnings...6 000 - 4 500 - 400 = 1 100$ (remaining loss)
Cr Cash.......................................................................20*300 = 6 000$
The balancing amount appears on debit side therefore it is a loss (and this is a loss, because purchase price 20$ is more than original sales price 15$). First, the loss is taken from APIC-TS account (if there is a balance on it) and the remaining amount is going to Retained Earnings.
3) XYZ Corp. reissues 100 shares for 23$ each.
Dr Cash............23*100 = 2 300$
Cr Treasury stock..........................10*100 = 1 000$
Cr APIC-TS..........................2 300 - 1 000 = 1 300$
The accounting for reissuance of Treasury Stock under the Par value Method is same as under the Cost Method. The only difference is that the Treasury Stock account is credited at par value amount of reissued shares.
Let’s resume:
1. In all stock transactions, no gains or losses are shown on the income statement.
2. The amount that goes into the Treasury Stock account is the Par value of the shares.
2. Gains are credited APIC-TS account.
4. Losses are debited APIC-TS account (if there is a balance in it) and then Retained Earnings account.
That is why Retained Earnings account cannot increase by share transactions.
Posted by mazoo at 6:43 PM
June 10, 2005
Treasury Stock. The Cost Method.
This is a memorandum note for accounting of treasury stock transactions under the cost method.
Assume that ABC Corp. uses the Cost Method to account for treasury stock transactions. ABC Corp. issued 1000 shares of 10$ par common stock at 15$ per share.
Dr Cash.............15 * 1000 = 15 000$
Cr Common stock.....................................10*1000 = 10 000$
Cr APIC-CS......................................15 000 - 10 000 = 5 000$
Where APIC-CS is Additional paid-in capital - common stock
The cost method:
1) ABC Corp. acquires 200 shares for 20$ each:
Dr Treasury stock........20*200 = 4000$
Cr Cash................................................20*200 = 4000$
There is no gain and no loss when the company acquired the shares under the Cost Method.
2) ABC Corp. reissues 100 shares for 23$ each (this is a gain, because selling price 23$ is more than the purchase price 20$):
Dr Cash.................23*100 = 2 300$
Cr Treasury stock.........................................20*100 = 2 000$
Cr APIC-TS (APIC-Treasury stock).............2 300 - 2000 = 300$
Gains are recorded in Additional paid-in capital - treasury stock account.
3) ABC Corp. reissues remaining 100 shares for 12$ each (this is a loss, because selling price 12$ is less than the purchase price 20$)
Dr Cash...............................12*100 = 1 200$
Dr APIC-TS............................................300$
Dr Retaining Earnings......2000-1200-300=500$
Cr Treasury stock........................................20*100 = 2 000$
Losses are debited to APIC-TS account, reducing its balance to zero and remaining losses are debited to Retaining Earnings Account.
Let's resume:
1. In all stock transactions, no gains or losses are shown on the income statement.
2. There is no gain and no loss when the company acquired the shares under the Cost Method.
3. Gains are credited APIC-TS account.
4. Losses are debited APIC-TS account (if there is a balance in it) and then Retained Earnings account.
That is why Retained Earnings account cannot increase by share transactions.
Posted by mazoo at 6:01 PM | Comments (1)