Accounting Final

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1. What does it mean it a bond is sold for 97.4, 100, and 104.3 (for example)?

97.4% of par, 100% of par, and 104.3% of face value. Bonds that sell below 100 (this is not a dollar amount) are issued for less than the face value. These are known as bonds issued at discount. Bonds that sell for more than 100 are issued for more than the face value. These are known as bonds issued at a premium. Bonds that sell at 100 are issued at exactly the face amount of the bond. These are known as bonds issued at par.

1. What is the difference between depreciation, amortization, and depletion?

Amortization: Intangible assets (except goodwill) Depreciation: Property, plant, equipment Depletion: Natural resources

1. What is the difference between an accrued liability, accounts payable, and a note payable?

An account payable arises when a business purchases goods or services on credit. Unlike accounts payable, which are recognized when goods or services change hands, accrued liabilities are recognized by adjusting entries. They usually represent the completed portion of activities that are in process at the end of the period.When a company borrows money from the bank for longer than a year, the obligation is called a long-term note payable. The borrower receives the principal amount and promises to repay the principal plus interest.

Explain to me the differences between Authorized Shares, Issued Shares, and Outstanding Shares.

Authorized shares are the maximum number of shares of stock a company is allowed to issue as stated in the corporate charter. If we were looking at a pizza, authorized shares would be the whole pie. Issued shares are the shares of stock purchased or issued to owners. They are the total number of shares put in the hands of owners. Usually, you do not want to issue 100% of the shares because you would not be able to prevent a takeover. Outstanding Shares are shares of stock owned by stockholders. They are the shares still in the hands of owners. Outstanding shares can equal issued shares, however outstanding cannot be higher than issued.

Leashold Improvements

Balance sheet-non current asset

1. What is a discount or premium on a bond? How can you tell?

Bond Premium: is an adjunct-liability that is added to bonds payable on the balance sheet; it is the difference between the face value of the bond and its selling price, when the selling price is more that the face (par) value. Bond Discount: is a contra-liability that is deducted from bonds payable on the balance sheet; it is the difference between the face value of the bond and its selling price is less than the face (par) value

1. What are warranties and how do you account for them?

Companies provide warranties as a sales or marketing tool. An accountant estimates the future repairs and replacement costs related to current sales. Warranty expense is estimated and a liability (warranties payable) is created. When a warranty is honored in the future, the warranties payable account will be reduced for the costs.

Explain what Contributed Capital represents:

Contributed Capital represents a dollar value of what owners have put in to the company when they put it in. Contributed capital is sub divided into capital stock and additional paid in capital.

1. How do you calculate the inventory turnover ratio and what does it mean?

Cost of Goods Sold Average Inventory the rate at which a company sells and replaces its stock of goods during a particular period

Explain to me the difference between the designation of Current & Non-Current Liabilities, and why is it important to understand this difference:

Current liabilities are cash-like debts that are due in one year of the balance sheet. Non-current liabilities, however, are debts due in more than a year. It is important to understand this difference because investors, lenders, and company executives want to see how much will be owed now, so they know how much money to have on hand to pay off their liabilities. If it is a long-term liability, the company will need to plan to pay off their debt over the course of however many years they agreed to. It is also important to distinguish between the two because non-current liabilities generally have interest associated while current liabilities do not.

1. How do you record the issuance of a bond?

Debit cash, debt discount, credit premium, credit bonds payable

1. How can you find out how much a company declared/paid in dividends by looking at their financial statements?

Financing section of SCF

1. What types of costs are capitalized into property and equipment?

Labor, transportation, materials, sales tax

How do you account for dividends and how do they affect the financial statement?

Once a dividend is declared (date of declaration), A liability, Dividends Payable, is recorded and the amount of dividends is deducted from the Retained Earnings account. They are subtracted from retained earnings which flows through to net income. It also decreases cash.

What does each section of the statement of cash flows mean and communicate?

Operating: Core Bus. Activities. What a company does on a daily basis. Investing: reinvesting into the company or purchasing/selling investments in other companies. Also the sale of PPE. Buying stock and long term assets. Financing: Sources of cash, but not from selling the product. Issuing stock, issuing bonds, borrowing from lenders.

1. What types of transactions are reported in the different sections of the statement of cash flows?

Operating: core business: cash sales, collection of A/R, cash dividends received from investments, interest received from investments like bonds, payments to vendors, payments to employees for wages/salary, taxes owed, payments to lenders for interest on debt Investing: sale of PPE, sale of investments in other companies, purchasing ppe, investing in other companies. Financing: Issuing company stock, issuing debt like bonds, repaying principle amounts of debt, repurchasing our own stock/T-stock, paying dividends to shareholders.

Explain what Retained Earnings represents:

Retained Earnings is the amount of all the earnings of the firm (net income & net loss) ,since the beginning, that have not been distributed to the Shareholders. They are profits retained and kept in the company. Basically, all the profits and losses kept in the company instead of paying dividends. Retained Earnings is the link between the balance sheet and income statement.

1. What are the different types of bonds (secured, unsecured, junk, callable, redeemable, convertible)?

Secured is a term used for a bond that has some collateral pledged against the corporation's ability to pay. Unsecured is a term used for bonds in which the lender is relying on the general credit of the borrowing corporation rather than on collateral. A callable bond is a bond that give the borrower the right to pay off (or call) the bonds prior to their due date. The borrower typically "calls" debt when the interest rate being paid is much higher than the current market conditions. Junk bonds are bonds that have high risk of default and are rated BB or below by Moody's and Standard & Poor's. They are unsecured bonds where the risk of the borrower failing to make the payments is relatively high. Convertible bonds that allow the bondholder to convert the bond into another security—typically common stock.

1. What is the purpose and format of an income statement?

Shows revenues, expenses, profits and losses over the accounting period. (Quarterly, semi annually, anually)The Income Statement was communicating to us whether or not the company was profitable in a given timeframe.

1. What are current assets and liabilities?

Sold or used within a year. A particular asset could/should be converted into cash (or used in the business cycle) within the next year. Current liabilities are those obligations that are Expected to be retired with existing current assets or creation of new current liabilities. Due within one year or one operating cycle, whichever is longer.

1. What is the purpose and format of the statement of cash flows?

Tells you where a company gets their cash and spends their cash.Is the company generating enough cash to sustain the company's future?Forecasting the firm's capability to generate future cash inflow, and it's needs for future cash outflows. Determining if a firm will need external financing. Analyzing a firm's capabilities to pay their obligations

Please explain the Matching Principle to me.

The Matching Principle is the idea that when you call something revenue, you have to show what expenses helped generate that revenue. Basically, your revenue recognition is tied to expense recognition.

1. What is the LIFO conformity rule?

The federal income tax code requires businesses that use LIFO for tax purposes to use LIFO for financial reporting purposes as well.

1. How do you prepare a statement of cash flows using the indirect method? (using the beginning and ending balance sheets and the income statement)

The indirect method begins with net income and then adjusts it for noncash items (from the Income Statement) and nets this amount with the changes in current assets and liabilities.

1. What is depreciation?

The matching principle requires that part of the acquisition cost be expanded in periods when the future revenues are earned.Expensing the cost of the asset over time.

Regarding the allowable inventory methods, what are the "advantages" to each method when it comes to their affect in the financial statements?

The methods are SID, FIFO, LIFO and Average Cost. SID is advantageous for high cost items. Using SID for high cost items is helpful because you would know exactly what the specific unit costs. In times of rising cost, FIFO is advantageous because it produces the highest earnings calculation legally possible. In times of rising cost, LIFO is advantageous because it produces lower profit, and with lower profit comes lower taxes (legally). Average Cost (Weighted Average) is advantageous because its outcomes are in between LIFO and FIFO. You produce a higher profit than LIFO but pay less taxes than FIFO.

Explain to me Treasury Shares.

Treasury shares are shares of stock bought back by the corporation that originally issued them. The company buys back the shares from investors. They can do this for many reasons, for example buying the shares back to issue to employees without increasing the number of shares issued. You will see that there is treasury stock when outstanding shares is less than issued shares.

1. How do you account for treasury stock? (Buying and selling back to the market)

Treasury stock is recorded at cost. The account, Treasury Stock, is contra to all of Equity and subtracted at the end of the section on the Balance Sheet. If the treasury stock is subsequently resold for more than the cost, a special paid-in capital account called APIC - Treasury Stock would be credited for the excess over cost

1. What is unearned revenue and how do you account for it?

Unearned Revenue is the liability created when customers pay you for goods or services in advance of you doing any of the work. Unearned Revenue is also referred to as Deferred Revenue. In such instances, the amount of the prepayment is a liability for the seller. This liability is reduced or removed either by providing the goods or services purchased (at which time revenue is recognized) or by refunding the amount of the prepayment

1. How do you record accounts receivable?

When a company shows Accounts Receivable on their balance sheet, they are saying that a customer owes them money. The customer owes them money, because the company has already performed services for the customer. Since we allow companies to record Revenue & Accounts Receivable......we also REQUIRE them to record an account called Allowance for Doubtful Accounts (or Allowance for Uncollectible Accounts).

1. What is a contingent liability and how do you record a contingent liability?

When a liability depends on a future event. Like a lawsuit. A contingent liability is not recognized in the account unless: The event on which it is contingent is probable and a reasonable estimate of the loss can be made.

1. How do you record the issuance of common stock?

When stock is issued, the equity account Common Stock is increased for the par or stated value of the stock. Common Stock account = Par Value. If the stock sold for more than par (which is normally the case), the additional amount is added to the equity account Additional Paid-in Capital (in excess of par) Common Stock

1. What is the accounting equation?

a. A= L + OE

1. What are common accounts for each element of the equation (including contra accounts)?

a. Assets: Cash, Inventory, Accounts Receivable, ADA (Contra account), Equipment, Furniture, Office Supplies, Accumulated Depreciation (Contra) ect. b. Liabilities: Accounts payable, ST and LT notes payable, interest payable, dividends payable, wages payable, deferred revenue, discounts on bonds payable (contra), premium on bonds c. Equity: retained earnings, APIC, contributed capital, treasury stock (contra), common stock

Allowance for doubtful accounts

balance sheet- current asset

cash

balance sheet- current asset

inventories

balance sheet- current asset

marketable securities

balance sheet- current asset

short term investments

balance sheet- current asset

supplies

balance sheet- current asset

accounts payable

balance sheet- current liability

accrued liabilities- short term

balance sheet- current liability

current portion of debt payable

balance sheet- current liability

customer deposits- current portion

balance sheet- current liability

salaries payable

balance sheet- current liability

unearned revenue-current portion

balance sheet- current liability

warranties payable- short term portion

balance sheet- current liability

wages payable

balance sheet- current liabiltiy

additional paid in capital- treasury stock

balance sheet- equity

additional paid in capital-common stock

balance sheet- equity

capital stock

balance sheet- equity

contributed capital

balance sheet- equity

retained earnings

balance sheet- equity

treasury stock

balance sheet- equity

buildings

balance sheet- non current asset

computers

balance sheet- non current asset

intellectual property

balance sheet- non current asset

long term investments

balance sheet- non current asset

vehicles

balance sheet- non current asset

patents

balance sheet- non current assets

bonds payable- long term portion

balance sheet- non current liability

deferred revenue-long term portion

balance sheet- non current liability

discount on bonds- long term

balance sheet- non current liability

notes payable-long term portion

balance sheet- non current liability

premium on bonds-long term

balance sheet- non current liability

unearned revenue- long term portion

balance sheet- non current liability

furniture and fixtures

balance sheet- noncurrent asset

accounts receivable

balance sheet-current asset

income tax payable

balance sheet-current liability

sales taxes payable

balance sheet-current liability

common stock

balance sheet-equity

preferred stock

balance sheet-equity

goodwill

balance sheet-non current asset

land

balance sheet-non current asset

accumulated depreciation

balance sheet-noncurrent asset

1. How do you account for a bond after its been issued using the effective interest rate method?

create an amortization schedule. Calculate both the interest expense and the amortization of the bond discount when each interest payment is made.

1. What is a liability?

different flavors of debt

advertising expense

income statement- operating expense

legal expenses

income statement- operating expense

wage expense

income statement- operating expense

Repairs and Maintenance Expense