accounting test 3

depreciation

an allocation of a cost of an asset

disposition

an asset that is sold or retired

contigent liability

an existing uncertain situation that might result in a loss depending on the outcome of a future event

contigent gain

an existing uncertainty that might result in a gain

private placement bonds

are bonds sold by a single large investor

depreciation cost

assets cost minus its residual value

convertible bonds may be beneficial to lenders

bc they require a lower interest rate than bonds issue without the conversion feature

formula for double declining balance

book value at the beginning of the year x 2 x 1/service life

callable bonds

can be redeemed at the choice of the issuer

depreciation for unit of production formula

cost - residual value /total estimated productions current year activity or production

working capital formula

current assets- current liabilities

assessing financial risk

debt to equity ratio and the times interest earned ratio

if a liability is classified as current rather than concurrent the companies working capital will

decrease

which depreciation method typically results in the highest depreciation expense during the firs year of an assets life.

double declining balance method

patent

exclusive right to manufacture a product or to use a process is called

interest formula

face amount x annual interest rate x fraction of the year

amortization of intangible assets:

goodwill is the most common intangible asset with an indefinite useful life, residual value of most intangible assets are zero intangible assets with a limited useful life are amortized

land has a

indefinite life

line of credit

informal agreement that permits a company to borrow up to a prearranged amount without having to follow formal loan procedures

goodwill

intangible asset that is measured as the consideration paid less the fair value of the net identifiable assets is called

a liability

is a present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past

straight line depreciation

is calculated as the depreciation cost divided by the estimated service life of the asset

declining balance depreciation

is the depreciation rate per year times the book value at the beginning of the year

return on assets

net income / average total assets

profit margin ratio

net income divided by net sales

asset turnover ration is

net sales divided by average total assets

bonds

obligate the issuing company to pay a specific amount, they obligate the issuing company to repay to bonds at a specific date

equity financing

obtaining investments from stockholders

when the rights and risks of ownership are retained by the lessor the lease is classified as a

operating lease

term bonds

payment of full principle amount of the bond

amounts that are subtracted from an employees gross pay are referred to as

payroll withholds

installment notes

promissory notes requiring periodic payments of interest and principle

secured bonds

supported by a specific asset the issuer pledges as collateral

serial bonds

systematically mature over a series of years

a contigent liabiltiy is accrued if which condition is met

the amount of the loss can be reasonably estimated and its probable that a future loss will occur

the depreciation cost

the cost of the asset minus the residual value

convertible bonds may be beneficial to bond investors bc

the value of the common stock shares recieved in the conversion may exceed the amount of the bond

straight line and declining methods allocate the cost of a long term asset based on

time

debt to equity ratio

total liabilities divided by total stockholders equity

other terms for an activity based depreciation method are

units of output method, units of production method

activity based method allocates the cost of an asset based on

use

for a manufacturer the most commonly reported contingent liability relate to product

warranties

when an expenditure is recorded as an asset we say that

we capitalize the expenditure

the residual value of an intangible asset is

zero

if equipment is retired which account would be debited

accumulated depreciation

the ratio that is a more conservative measure than the current ratio of a companies ability to pay its current liabilities are

acid test ratio

fringe benefits

additional benefits such as health insurance, retirement benefits, life insurance

amortization

allocating the cost of intangible assets to expense is referred to as

by law employers must without

FICA and federal taxes

operation lease

a lease that specifies that the rights and risks of ownership are retained by the lessor is classified as a