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Technology Stocks : Hewlett-Packard (HPQ) -- Ignore unavailable to you. Want to Upgrade?

To: Oeconomicus who wrote (1847)	10/3/2002 10:43:36 PM
From: The Duke of URL©	Read Replies (2) \| Respond to of 4345

Google showed 19,311 hits. this was the third one, smart ass: CHAPTER 10 EXPENDITURE CYCLE: OTHER OPERATING ITEMS 1. EMPLOYEE COMPENSATION More is involved then just salary expense (payroll) for work done in the current period. Employees working for a company earn their current salary, but must pay employee taxes. The company, as employer, must collect the employee taxes from the employee (this is done through deductions from the salary prior to payment of the salary to the employee) and then remit these withheld taxes to the proper taxing authorities. The taxes that must be withheld from an employee’s paycheck are: Federal income tax, State income tax (none in Florida), Social Security taxes (FICA). In addition, the Employer also has to pay taxes to taxing authorities. The Employer (company) has to pay an equal share of FICA taxes, Federal unemployment taxes and State unemployment taxes. Employees are also entitled to compensated absences. Compensated absences means a company pays employees for a certain number of days when the employees do not work. This includes vacation leave days and sick leave days. The expense should be recognized in the period in which the days are earned, not in the period in which the actual cash payment occurs. Therefore, at the time company pays salary to employee, these are some of the journal entries that must be made: Salary Expense 10,000 Federal Income Tax Withheld 1,000 State Income Tax Withheld 300 Fica Tax Withheld 800 Salary Payable 7,100 Payroll Expenses 1,000 FICA tax payable 800 Federal unemployment tax pay. 150 State unemployment tax pay. 50 (all expense items above are approximations). BONUSES Bonus plans allow employees to receive additional compensation if certain earnings objectives are met These plans are usually restricted to top management One possible danger is that managers will attempt to manipulate reported earnings EMPLOYEE STOCK OPTIONS Under employee stock option plans, managers are given the option of purchasing shares of the company’s stock in the future at a price that is specified today (option price) EMPLOYEE STOCK OPTIONS Two methods of accounting for employee stock options Intrinsic value method Is based on the assumption that the value of an option, if any, is measured on the day it is granted (market price minus the option price) Fair value method Is based on the assumption that the value of the option lies in the chance that the stock price will increase above the exercise price INTRINSIC VALUE METHOD Most companies set the option price above the market price at the date of grant so that no compensation expense is measured and recorded For example, if the option price is set at $60 when the market price is $50, there is no compensation to employees, and thus, no expense recorded under this method FAIR VALUE METHOD The fair value is estimated by a formula that considers several factors including the expected volatility of the stock price and the length of the exercise period The fair value of the options is reported as compensation expense on the income statement FASB’S ACCOUNTING TREATEMENT Companies are encouraged, but not required, to adopt the fair value method The intrinsic value method is allowed, but if used, companies must disclose what net income would have been under the fair value method Most U.S. companies use the intrinsic value method POSTEMPLOYMENT BENEFITS Are benefits that occur after an employee has ceased to work for an employer but before an employee retires E.g., a severance pay package The cost must be estimated and reported when the decision is made to downsize the labor force PENSIONS A pension is cash compensation received by an employee after the employee has retired There are two types of pension plans: Defined contribution plan Defined benefit plan DEFINED CONTRIBUTION PLAN This type of plan requires the company to contribute a fixed amount of money to a pension fund each year on behalf of the employee The amount of cash contributed to the pension fund during the year is reported as pension expense DEFINED BENEFIT PLAN This type of plan requires the company to pay employees a fixed monthly cash amount after they retire based on a pension formula that considers years of service and highest salary DEFINED BENEFIT PLAN Estimation of the pension liability The amount that would have to be deposited in a bank today to accumulate enough interest to pay employees their pension benefits at retirement (actuarial present value) This pension liability is called the projected benefit obligation (PBO) The PBO is offset against the plan assets fair value when reported on the balance sheet DEFINED BENEFIT PLAN Three components of pension expense: Interest cost Service cost Expected return on pension fund assets DEFINED BENEFIT PLAN Interest cost The increase in the PBO due to the passage of time (PBO x discount rate) The discount rate used is the settlement rate The implicit rate of interest necessary to purchase annuity contracts settling the pension obligation DEFINED BENEFIT PLAN Service cost The increase in the PBO from service provided by employees during the current period Expected return on pension fund assets The return that the company earns on the assets in the pension fund This is a negative component of pension expense POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Other employee benefits provided after retirement include Health care plans Life insurance plans Accounting rules require that these benefits be recognized as an expense and a liability as they are incurred INCOME TAXES Income tax expense and the amount paid for income tax during a period are different for two reasons: Income taxes are not paid in the same year in which they are incurred A firm may choose one accounting method for tax purposes and another for financial reporting purposes INCOME TAXES Differences in financial income and taxable income are due to timing differences Timing differences can be Permanent or Temporary TIMING DIFFERENCES Permanent differences Enter into accounting income, but never into taxable income These are statutory differences between GAAP and the Internal Revenue Code For example, interest on state and local bonds is included in financial income, but not in taxable income TIMING DIFFERENCES Temporary differences Some transactions affect taxable income in a different period from financial accounting income Depreciation methods Rent received in advance The affects of these differences are recorded as deferred tax assets or liabilities and shown on the balance sheet DEFERRED TAXES Deferred Tax Liability Requires a payment in the future Is the expected income tax on income earned but not yet taxed Is not an existing legal liability Income Taxes Payable, based on taxable income on the tax return, is an existing legal liability DEFERRED TAXES A typical entry for recording income taxes with a Deferred Tax Liability would be DEFERRED TAXES Deferred Tax Asset Represents the expected benefit of a future tax deduction for an expense item that has already been incurred but is not yet deductible for tax purposes It can only be recognized if it is “more likely than not” that future income will be realized against which the deduction can be offset DEFERRED TAXES A typical entry for recording income taxes with a Deferred Tax Asset would be CAPITALIZE VERSUS EXPENSE An expenditure that is expected to benefit future periods is capitalized as an asset All other expenditures are treated as expenses CAPITALIZE VERSUS EXPENSE Research and development costs Research is defined as Those activities undertaken to discover new knowledge that will be useful in developing new products, services, or processes or that will result in significant improvement of existing products or processes Development Applies the research findings to develop a plan or design for new or improved products and processes CAPITALIZE VERSUS EXPENSE Research and development costs are expensed in the period incurred due to the uncertainty surrounding the future economic benefits of R&D activities CAPITALIZE VERSUS EXPENSE Software development requires special treatment All costs incurred up to the point where technological feasibility is established are to be expensed as research and development After technological feasibility is established, costs incurred are capitalized Determining technological feasibility is a matter of judgement CAPITALIZE VERSUS EXPENSE Oil and gas exploration costs Two methods of accounting for the cost of “dry holes”: Full cost method All exploratory costs are capitalized and allocated to the cost of successful wells Successful efforts method Exploratory costs for dry holes are expensed, and only exploratory costs for successful wells are capitalized CAPITALIZE VERSUS EXPENSE Advertising costs Generally, advertising costs are expensed due to the uncertainty of their future economic benefits In selected cases where the future benefits are more certain, advertising costs should be capitalized CONTINGENCIES A contingency is an uncertain circumstance involving a potential gain or loss that will not be resolved until some future event occurs CONTINGENCIES Three important definitions: Probable Likely to occur Remote Not likely to occur Reasonably possible More than remote but less than likely CONTINGENT LOSSES Likelihood Probable Reasonably possible Remote Accounting Action Recognize a probable liability if the amount can be reasonably estimated. Disclose a possible liability in a note. No recognition or disclosure unless contingency represents a guarantee. Then, note disclosure is required. CONTINGENT GAINS Likelihood Probable Reasonably possible Remote Accounting Action Recognize a probable asset if the amount can be reasonably estimated. If not estimable, disclose facts in a note. Disclose a possible asset in a note, but be careful to avoid misleading implications. In practice, possible contingent gains are often not disclosed. No recognition or disclosure. ACCOUNTING FOR LAWSUITS If the facts of the case indicate that a loss is probable and the amount of the loss can be estimated, a loss should be reported on the income statement and a liability should be reported on the balance sheet ACCOUNTING FOR ENVIRONMENTAL LIABILITIES Most companies do not reflect these loss contingencies as liabilities on the balance sheet because the future cost of the cleanup is very difficult to estimate -------------------------------------------------------------------------------- For problems or questions contact Barbara Gugliotta Pierce, Ph.D.. Last updated: 05/09/2002 . Copyright © 2002