ACCT FINAL EXAM

time interest earned formula

(net income + interest expense + income tax expense) / interest expense

return on common stockholder's equity

(net income - preferred dividends) / average common stockholder's equity

declining balance method

- accelerated method - double declining-balance rate is double the straight-line rate - rate applied to book value - decreasing annual depreciation expense over the asset's useful like (greater depreciation in early years and less deprecation in later years)

limited life intangibles

- amortize to expense (amortization expense) - credit asset account

advantages of leasing

- assets and liabilities not reported - reduced risk of obsolescence - little/no down payment - shared tax advantages

allowance method

- better matching of expenses with revenues - receivable stated at new realizable - required by GAAP

bond trading

- bondholders can sell their bonds at anytime on national securities exchanges - prices are quoted as percentage of face value - corporation makes journal entries only when it issues or buys back bonds, or when bondholders convert bonds into common stock

bonds at a premium

- borrower pays only the face value of the bonds at maturity - not required to pay the bond premium at maturity date - considered a reduction in the cost of borrowing

types of dividends

- cash - property - stock

selling company

- collects tax from the customer - remits the collections to the state's department

units-of-activity method

- companies estimate total units of activity to calculate depreciation cost per unit - expense varies based on units of activity - depreciable cost is cost less salvage value

sale of plant assets

- compare book value of the asset with the proceeds received from the sale - if proceeds EXCEED the book value, a GAIN on disposal occurs - if proceeds ARE LESS THAN the book value, a LOSS on disposal occurs

issuing corporation must PAY....

- contractual interest payments over the term of the bonds - face value of bonds at maturity

bonds at a discount

- corporation must pay contractual interest rate over the term of the bond and the face value at maturity - sale of bond below the face value causes total cost of borrowing to be MORE than bond interest paid

bonds may be issued at

- face value - below face value at a discount - above face value at a premium

no par value stock

- fairly common today - board of directors assigns a stated value to no par shares

cash inflows - financing activities

- from the sale of common stock - from issuance of debt (bonds & notes)

cash inflows - operating activites

- from the sale of goods or services - from interest received and dividends received

cash inflows - investing activities

- from the sale of property, plant and equipment - from sale of investments and in debt for equity securities - from collection of principal loans to other entities

disadvantages of a corporation

- governmental regulations - additional taxes

corporation records bond transactions when

- it issues (sells) bonds - redeems (buys back) bonds - bondholders convert bonds into common stock

sales of receivables to a factor

- method of disposing of accounts receivable - receivables are sold to a finance company or a bank

retirement of plant asset

- no cash received - debit accumulated depreciation - credit the asset account - record the book value as LOSS ON DISPOSAL OF PLANT ASSETS

indefinite life intangibles

- no foreseeable limit on the time the asset is expected to provide cash flows - no amortization (similar to land, which does not require depreciation)

direct write off method

- no matching of expense with revenues - receivables not stated at net realizable value - not acceptable fro financial reporting (prohibited by GAAP)

to be classified as a current liability, a debt must be expected to be paid...

- out of existing current assets - by creating other current liabilities - 1 year and the operating cycle --> whichever is longer

common types of intangible assets

- patens - copyrights - franchises / licenses - trademarks - trade names - good will

goodwill is record as the excess of...

- purchase price over - the FMV of identifiable net assets acquired *** internally created goodwill should not be capitalized***

historical cost principle

- requires that companies records plant assets at cost - cost consists of all expenditures necessary to acquire and asset and make it ready for its intended use

advantages of a corporation

- separate legal existence - limited liability of stockholders - transferable ownership rights - ability to acquire capital - continuous life

cash outflows - investing activities

- to purchase property, plant and equipment - to purchase investments in debt or equity securities - to make loans to other entities

cash outflows - financing activities

- to stockholder's as dividends - to redeem long-term debt or reacquire capital stock (treasury stock)

cash outflows - operating activities

- to suppliers for inventory - to employees for wages - to government for taxes - to lenders for interest - to others for expenses

accounting for treasury stock

- use cost method - DEBIT treasury stock for the price paid to acquire shares - considered to be shares issued but not shares outstanding

information needed to prepare cash flow statement

1. comparative balance sheet 2. current income statement 3. additional information

5 steps in managing accounts receivable

1. determine to who to extend credit 2. establish a payment period 3. monitor collections 4. evaluate the liquidity of receivables 5. accelerate cash receipts from receivables when necessary

corporations can issue common stock....

1. directly to investors 2. indirectly through an investment banking firm

present value of a bond is a function of three factors

1. dollar amounts to be received 2. length of time until amounts are received 3. market rate of interest

primary objectives fro accounting for common stock

1. identify the specific sources of paid-in capital 2. maintain the distinction between paid-in capital and retained earnings

national credit card sales ADVANTAGES

1. issuer does credit investigation of customer 2. issuer maintains customer accounts 3. issuer undertakes collection and absorbs losses 4. receives cash more quickly

companies dispose of plant assets in three ways

1. retirement 2. sale 3. exchange

reasons why corporations issue stock dividends...

1. satisfy stockholder's dividend expectation without spending cash 2. increase the marketability of corporations stock 3. emphasize a portion of stockholder's equity has been permanently reinvested in the business

advantages to bond financing

1. stockholder control is not affected 2. tax savings result 3. return on common stockholder's equity may be higher

in order to pay a cash dividend it must have....

1. sufficient retained earnings (payment of cash dividends from retained earnings) 2. adequate cash 3. a declaration of dividend by the board of directors

stockholders rights

1. vote in election of board of directors and on actions that require stockholders approval 2. share corporate earnings through receipt of dividends 3. preemptive rights 4. residual claim

carrying (book) value formula

BONDS PAYABLE - DISCOUNT ON BONDS PAYABLE

book value formula

BOOK VALUE = ORIGINAL COST - ACCUMULATED DEPRECIATION

return on assets formula

NET INCOME / AVERAGE TOTAL ASSETS

asset turnover formula

NET SALES / AVERAGE TOTAL ASSETS

to the MAKER, the promissory note is a...

NOTE PAYABLE

to the PAYEE, the promissory note is a....

NOTE RECEIVABLE

dishonor of notes receivable

a dishonored (defaulted) note is not paid in full at maturity - are no longer neogtiable

honor of notes receivable

a not is honored when its maker pays it in full at its maturity date

stock dividend

a pro rata (proportional to ownership) distribution of the corporations own stock to shareholders

cost

all expenditures necessary to acquire the asset and make ti ready for intended use

land

all necessary cost incurred in making land ready for its intended use increase (debit) the land account

accounts receivable

amounts customers owe on account that result from the sale of goods and services

receivables

amounts due from individuals and companies that are expected to be collected in cash

goodwill is only recorded when....

an entire business is purchased

seller records losses that result from extending credit as....

bad debt expense

declaration date

board authorized dividends

discount on bonds payable CONTRA ACCOUNT TO

bonds payable

convertible bonds

can be converted into common stock at the bondholder's option

callable bonds

can be redeemed (bought back) by the issuing company, at a stated dollar amount prior to maturity

par value stock

capital stock that has been assigned a value per share in charter

report short-term notes receivable at their...

cash (net) realizable value

payout ratio formula

cash dividends declared on common stock / net income

investing activities

changes in investment and long-term asset items

financing activities

changes in long-term liabilities and stockholder equity items

continuous life

continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder employee or officer

construction costs

contract price plus payments for architect's fees, building permits and excavation costs

lease

contractual agreement in which owner of an asset (LESSOR) allows another party (LESSEE) to use the asset for a period of time at an agreed price

franchises

contractual arrangement between franchisor and franchisee EX: Toyota, Shell, Subway, Marriott - franchise (or license) with a limited life should be amortized to expense over the limited life of the franchise - franchise with an indefinite life should be carried at cost and not amortized

if bonds are issued at a premium, this indicates that

contractual interest rate exceeds market interest

separate legal existence

corporation acts under its own name rather than in the name of the stockholders

ability to acquire capital

corporation can obtain capital through issuing stocks

treasury stock

corporations own stock that it has reacquired from shareholders

double taxation

corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends

capital expenditures

cost included in a plant asset account

additions and improvements

costs incurred to increase the operating efficiency, productive capacity, or expected useful life of the plant asset

revenue expenditures

costs not included in plant asset and must be expensed immediately

par value stock is meant to protect who??

creditors

current ratio formula

current assets / current liabilities

maturity rate

date final payment is due

current liability

debt that a company expects to pay (1) from existing current assets or through the creation of other current liabilities and (2) within one year or the operating cycle, whichever is longer - includes notes payable, accounts payable, unearned revenues and accrued liabilities such taxes, salaries and wages, and interests

which two dividend dates record an accounting entry

declaration date and payment date

stock dividends effect on retained earnings

decrease

stock splits effect on par value

decrease

net loss effect on retained earnings

decreases

straight-line method

depreciation expense is the same amount every year

free cash flow

describes the cash remaining from operations after adjustments for capital expenditures an dividends

step 2

eliminate asset by (1) debiting accumulated depreciation (2) crediting the asset account (3) record a gain or loss if needed

corporate management ADVANTAGES

enables a company to hire professional managers

salvage value

estimate of the asset's value at the end of its useful life

useful life

estimate of the expected life based on need for repair, service life and vulnerability to obsolescence

contingencies

events with uncertain outcomes that may represent potential liabilities

additional paid-in capital

excess amounts paid in over par or stated value and paid-in capital form treasury stock

patents

exclusive right to manufacture, sell or otherwise control an invention fro a period of 20 years from the date of the grant - capitalize cost of purchasing a patent and amortize over 20 years or its useful life (whichever is shorter) - expense any R&D costs in developing a patent in house (accounting conservatism) - legal fees incurred for successfully defending a patent are capitalized to patent account

research and development

expenditures that may lead to patents, copyrights, new processes, and new products - all R&D costs are expense when incurred

ordinary repairs

expenditures to maintain the operating efficiency and expected productive life of the plant asset

cash equivalent price

fair value of asset given up or fair value of asset received, whichever is more clearly determinable

issuance of capital stock

financing activity

payment of dividends

financing activity

redemption of bonds

financing activity

retirement of bonds

financing activity

bonds

form interest-bearing notes payable issued by corporations, universities, and governmental agencies - sold in small denominations ($1000 or multiples of $1000) - when a corporation issues bonds, it is borrowing money - the person who buys the bonds (the bondholder) it investing in bonds

authorization of common stock does not result in ....

formal accounting entry

copyrights

give the owner the exclusive right to reproduce and sell and artistic or published - granted for the life of the creator plus 70 years - capitalize costs of acquiring and defending it - amortized to expense over useful life

accounting for preferred stock

have priority... - distribution of earnings (dividends) - assets in the event of liquidation

secured bonds

have specific assets of the issuer pledged as collateral for the bond

equipment

include costs incurred in acquiring the equipment and preparing for use

buildings

includes all costs related to purchase / construction

land improvements

includes all expenditures necessary to make the improvements ready for their intended use - EX: driveways, parking lots, fences, landscaping, underground sprinklers

goodwil

includes exceptional management, desirable location, relations, skilled employees, high quality products, etc..

depreciation expense is reported on....

income statement

operating activities

income statement items

net income effect on retained earnings

increase

stock dividends effect on paid-in capital

increase

stock splits effect on shares outstanding

increase

stock splits

increase number of shares owned by a shareholder but does not change the percentage of ownership

when a company receives advanced payments from customers...

increases (credits) a current liability account, unearned revenue

asset turnover

indicates how efficiently a company uses it assets to generate sales

return on assets

indicates the amount of net income generated by each dollar of asset

what method is favored by companies for cash flows?

indirect method

purchase of equipment

investing activity

purchase of land

investing activity

sale of building

investing activity

sale of building at book value

investing activity

impairment

is the permanent decline in the fair value of an asset - to not overstate the asset on the books, the company writes the asset down to its new fair value during the year in which the decline in value occurs

the market interest rate

is the rate investors demand for loaning funds

unsecured bonds

issued against the general credit of the borrower

bond certificate

issued to the investor, provides name of the company issuing bonds, face value, maturity date and contractual (stated) interest rate

when the company recognizes the revenue......

it decreases (debit) the unearned revenue account and increases (credit) the revenue account

preemptive rights

keep the same percentage of ownership when new shares of stock are issued

common types of contingencies

lawsuits, product warranties, environmental cleanup obligations

limited liability of stockholders

limited to their investments

(ordinary repairs) DEBIT...

maintenance and repairs expense

maturity date

may be stated in one of three ways 1. one demand 2. on a stated date 3. at the end of a state period of time

solvency ratios

measure the ability of a company to survive over a long period of time

liquidity ratio

measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash

payout ratio

measures the percentage of earnings a company distributes in the form of cash dividends to common stockholders

note terms are expressed in

months and days

free cash flow formula

net cash provided by operating activities - capital expenditures - cash dividends

retained earnings

net income that a corporation retains for future use in business

stock splits effect on paid-in capital

no effect

stock splits effect on retained earnings

no effect

stock splits effect on total SE

no effect

outstanding stock

number of shares of issued stock that are being held by stockholders

accumulated depreciation is reported....

on the balance sheet as a deduction from plant assets

amortization of a patent

operating activity

cash received from sale of goods

operating activity

depreciation

operating activity

loss of disposal of plant assets

operating activity

what does the issuance of common stock affect??

paid-in capital accounts

account title for common stock

paid-in capital in excess of par value - common stock

account title for preferred stock

paid-in capital in excess of par value - preferred stock

stockholders equity balance sheet items

paid-in capital, retained earnings, accumulated other comprehensive income, treasury stock

(additions and improvements) DEBIT....

plant asset affect (are capital expenditure)

capital stock

preferred stock appeals before common stock because of the preferential rights

cumulative dividend

preferred stockholders must be paid current-year dividends and dividends in arrears (preferred dividends not paid in prior years) before common stockholders receive dividend

face value

principal due at the maturity

depreciation

process of allocating the cost of a plant asset to expense over its useful life in a rational and systematic manner

discounting

process of finding the present value of bonds

purchase costs

purchase price, closing costs (attorney's fees, title insurnace, etc) & REB commission

contractual interest rate (stated rate)

rate to determine cash interest paid, is stated as annual rate

step 1

record depreciation up to the date of disposal

service organization

records a receivable when it preforms service on account

merchandiser

records accounts receivable at the point of sale of merchandise on account

corporate management DISADVANTAGES

reduces an owner's ability to manage the company and owner's interest may not be aligned with manager's interest

record date

registered shareholders are eligible for dividend

plant assets

resources that... - have physical substance (a definite size and shape as opposed to intangible assets) - are used in operations of a business (not investments) - are not intended for sale to customers (not inventory) - are expected to provide service to the company for a number of years (except for land, and which has indefinite life) -- supplies

unearned revenye

revenues that are received before goods are delivered or services are performed

intangible assets

rights, privileges, and competitive advantages that result from ownership of long-lived assets that do no posses physical substance

sales tax payable

sales taxes are expressed as a stated percentage of the sales price

corporate management

separation of ownership and management prevents owners from having an active role in managing the company

transferable ownership rights

shareholders may sell their stock

return on common stockholder's equity

shows how many dollars of net income a company earned fro each dollar of common stockholder's equity

what is treasury stock a contra account to

stockholder's equity account (reduced SE)

authorized stock

the amount of stock that a corporation is authorized to sell as indicated in its charter - number of authorized shares is often reported in the stockholder's equity section

payment date

the company issues dividend check

paid-in capital

total amount of cash and other assets paid in to the corporation by stockholders in exchanges for shares of ownership

debt to assets formula

total liabilities / total assets

residual claim

upon liquidation, share in assets in proportion to their holdings

trademarks & trade names

word, phrase, jingle or symbol that distinguishes or identify a particular enterprise or product EX: wheaties, monoploy, sunkist, kleenes, coca-cola, big mac, jeep - legal protection for indefinite number of 20 year or renewal period - capitalize acquisition costs

notes receivable

written promise (formal instrument) for amount to be received

promissory note

written promise to pay a specified amount of money on demand or at a definite time

notes payable

written promissory note, usually require borrower to pay interest - frequently issued to meet short-term financing needs - issued for varying periods to time