Liabilities and Stockholder’s Equity

Financing Operations Businesses must finance operations through one of two ways: Debt Financing – includes all liabilities owed by a business Equity Financing – investments from owners of the business. Stock is issued to represent ownership interest in a corporation.

Liabilities Debts owed to others Current liabilities – due within a short time, usually 1 year Long-term liabilities – due beyond 1 year Some liabilities are contingent on the outcome of future events

Notes Payable Longer and more formal than accounts payable Usually bear interest Issued to creditors when merchandise or other assets are purchased

Income Taxes Includes federal income taxes and possibly state and local income taxes Most corporations are required to pay federal income taxes in four installments throughout the year

Taxable Income vs. Income Before Taxes Taxable Income – determined according to federal tax laws (IRS Code) Income Before Taxes – determined according to generally accepted accounting procedures (GAAP) Differences between the two may need to be allocated between various financial statement periods

Contingent Liabilities

Payroll The amount paid to employees for services they provide during a period Salary – payment for managerial, administrative, or similar services Wages – payment for manual labor, both skilled and unskilled Payroll and related taxes significantly impact the net income of most businesses

Recording Payroll

Payroll Taxes Employer Taxes FICA Federal and State Unemployment Taxes Employee Taxes FICA Federal and State Income Taxes Payroll taxes become a liability when the related payroll is paid to employees. The liability is relieved when the taxes are paid to the appropriate agencies.

Bonds A form of interest-bearing note Bonds include interest that must be paid on a regular basis Bonds face value must be repaid at maturity. Bond indenture – contract between the company issuing the bonds and the bondholders A bond issue is normally divided into several individual bonds. The most common face value is $1,000 per bond.

Stock Major means of equity financing Shares Authorized – total number allowed to issue Issued – shares issued to shareholders Outstanding – shares currently in the hands of stockholders

Shares of Stock Can be issued with or without a monetary amount: Par: monetary value stated on stock certificate No-par: some states might require a stated value Legal Capital Minimum stockholder contribution required by some states

Stock Rights Right to vote in matters concerning the corporation Right to share in distributions of earnings Right to share in assets on liquidation

Common and Preferred Stock Each share has equal rights Each share has voting rights Has preference rights over common stock Dividend rights stated in monetary terms or % of par CommonStock PreferredStock

Financial Reporting of Liabilities and Equity Liabilities Current are due within 1 year Long-term are due beyond 1 year Stockholders’ Equity Part of the balance sheet Details of the changes in stockholders’ equity are disclosed in a separate statement

Balance Sheet

Earnings Per Share Major profitability measure reported in the financial statements Followed closely by the financial press Net Income – Preferred Dividends Number of Common Shares