MGMT 200 Exam 3

Average Total Assets

(Beginning Total Assets + Ending Total Assets) / 2

cash inflows from operating activities on the statement of cash flows

-collection from customers -interest received on notes receivable

par value

-legal capital per share that is set when the corporation is first established -has no relationship to the market value of common stock

Cash flow ratios

-often used to supplement analysis of a company -substitute cash flow from operations in place of net income -positive cash flow from operations is important to a company's survival in the long run

authorized stock

-total number of shares that can be issued issued + unissued stock

Pay monthly installment on note

Debit: Interest Expense Notes Payable Credit: Cash (should be same for each)

establishment of note payable

Debit: Cash Credit: Notes Payable

interest payment for bonds issued at discount

Debit: Interest expense Credit: Discount on bonds payable Cash

nonoperating items that require adjustments under the indirect method

Gains on the sale of long-term assets Losses on the sale of long-term assets

Return on Assets

Net Income/Average total Assets -shows profitability

Adjustments to net income in calculating operating cash flows include

Noncash items Nonoperating items Changes in current assets and current liabilities

Disadvantages of a corporation

1. additional taxes- taxed twice, at corporate level and individual stockholder level 2. more paperwork-fed and state gov requirements

Advantages of a corporation

1. limited liability- stockholder can lose no more the the amount invested 2. ability to raise capital and transfer ownership-attracting outside investment and transferring ownership is easier

ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes

a debit to Interest expense of $500 a credit to Interest payable of $500

board of directors

a group of persons elected by the stockholders to manage a corporation

common stock is NOT

a primary source of corporate debt financing

convertible

able to be converted to common stock

unsecured bond

bonds that are not backed by collateral

capital structure

mixture of liabilities and stockholders' equity a business uses

venture capital firms

provide additional funding and business expertise

Both cash dividends and stock dividends

reduce retained earnings

Bonds issued at a discount

stated interest rate < market interest rate -carrying value and interest expense increases over time Debit: Cash Discount on bonds payable Credit: Bonds Payable

Bonds issued at a premium

the stated interest rate > market interest rate -Price > issued -interest decreases over time Debit: Cash Credit: Bonds Payable Premium on bonds payable

quality of earnings

usefulness of reported earnings to predict future earnings

early extinguishment of debt

when the issuing company retires debt of any type before its scheduled maturity date

Financing Activities on statement of cash flows

transactions such as: -Cash inflows, such as borrowing money and issuing stock -Cash outflows, such as repaying amounts borrowed and paying dividends to shareholders, like entries affecting notes payable Can be determined by examining changes in long-term liabilities and stockholders' equity accounts from the balance sheet

Taking on more debt (higher leverage) can be good or bad depending on

whether the company earns a return in excess of the cost of borrowed funds

cash collected for the period=

Sales on account + cash sales + beg accounts receivable - ending accounts receivable

advantage of debt financing

interest on borrowed funds is tax-deductible

simple interest

interest we earn on the initial investment only

compound interest

interest we earn on the initial investment plus previous interest

callable

issuing company can pay off bonds early at a fixed price -Even when bonds are not callable in this way, the issuing company can retire bonds early by purchasing them on the open market -can be redeemed prior to maturity

conservative accounting practices

lower income lower assets higher liabilities -ex. adjusting the allowance for uncollectible accounts to a larger amount record the inventory at lower of cost rather than at market

Average Collection Period

measures the days it takes to convert receivables into cash = 365 / Receivables turnover ratio -the shorter the average collection period, the better

receivables turnover ratio

net credit sales / average accounts receivables -tells whether a company can turn its receivables into cash -a higher inventory ratio usually is a good sign

When accounts receivable decrease

net sales are less than cash receipts from customers -Cash from sales revenue will increase because there have been more collections from accounts receivable than credit sales during the year.

Examples of debt

notes, leases, and bonds

direct method for cash flows

-adjust the items in the income statement to directly show the cash inflows and outflows from operations -if used, company must also report the indirect method either with the statement of cash flows or in the notes

Indirect Method of Cash Flows

-begin with NET INCOME -list adjustments to net income to arrive at operating cash flows -most popular method -easier and less costly -differs in presentation for operating activities -reports all others the same

Operating Activities

-changes in current asset and current liability accounts -also deals with the collection of interest and dividends and payment of income taxes

cash dividends

-distributions by a corporation to its stockholders -Not all companies pay dividends (growth companies prefer to reinvest earnings rather than distribute them)

Debt Analysis

-long-term debt is one of the first places decision makers look when trying to get a handle on risk 2 Ratios: 1. Debt to equity ratio 2. Times interest earned ratio

Debt to Equity Ratio

-measure of risk -measure of financial leverage -the higher the debt to equity ratio, the higher the risk of bankruptcy -When a company assumes more debt, risk increases = total liabilities / stockholders' equity

privately held corporation

-no public investment -fewer stockholders -not regulated by SEC

noncash activities

-significant investing and financing activities that do not affect cash -reported after the cash flow statement or in a note to the financial statements Examples -purchase of long term assets by issuing debt -purchase of long term assets by issuing stock -conversion of bonds payable into common stock -exchange of long term assets

Noncash Income Statement Adjustments

To calculate operating cash flows using the indirect method, we first adjust net income for income statement items Two of the most common adjustments relate to: Noncash items -depreciation expense and amortization expense Nonoperating items -gains and losses on sale of land, equipment, and buildings

Angel Investors

Wealthy investors, like those featured on the television show Shark Tank

secured bond

a bond backed with some form of collateral

lease

a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time -recorded by the lessee as a debit to lease asset and a credit to lease payable for the present value of the lease payments and at the beginning of the lease term

Investing Activities on Statement of Cash flows

cash transactions (inflows and outflows) involving long-term assets and current investments such as: -buying and selling property, plant, and equipment -buying and selling investments in other companies Can be determined by analyzing changes in long-term asset accounts from the balance sheet.

a company incurred a material gain on the sale of land. This gain should be reported as:

other revenues

issued stock

outstanding + treasury stock

legal capital

per share of stock that's assigned when the corporation is first established

most notes payable require

periodic installment payments

convertible bonds provide

potential benefits to both the issuer and the investor

preferred stock

preferred in 2 ways: 1. Preferred stockholders usually have first rights to a specified amount of dividends (a stated dollar amount per share or a percentage of par value per share). If the board of directors declares dividends, preferred shareholders will receive the designated dividend before common shareholders receive any. 2. Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.

Discontinued Operations

Sale or disposal of business or component of business representing strategic shift that has a major effect on an organization's operations and financial results ex. -major geographical area -major line of business -major investment in which company has significant influence -any gains or losses on discontinued operations in the current yr are reported separately

decrease in accounts payable

Since the cash payments were more than the credit purchases, the decrease must be added to purchases to calculate cash payments to suppliers

Balance sheet adjustments

To reconcile net income to operating cash flows, we also adjust for changes in the balances of related balance sheet accounts These accounts predominantily include: -Current assets other than investments and notes receivable -Current liabilities other than various forms of borrowing

Treasury Stock

a company's own issued stock that it has repurchased -we record treasury stock as a "negative" or "contra" account -NOT an asset -recorded as a reduction of stockholder's equity

Corporation

a legal entity with authority to act and have liability apart from its owners -must pay its own income taxes -dominant form of business organization

acid test ratio

a more conservative measure of a company's ability to pay current liabilities -more conservative bc it eliminates current assets such as inventories and prepaid expenses that are less readily convertible into cash, the acid-test ratio often provides a better indication of a company's liquidity than does the current ratio

when treasury stock is resold at a price above cost

additional paid-in capital is increased

Stock dividends

additional shares of a company's own stock given to stockholders -declared primarily due to the effect they have on stock prices -has no effect on each stockholder's ownership percentage

debt financing

arranging funding by borrowing money

serial

bond issue matures in installments

term

bond issues matures on a single date

decrease in carrying value

cash paid - interest expense

Investing Activities

cash transactions involving the purchase and sale of long-term assets and current investments -also deals with notes receivable

Price Earnings Ratio

compared to growth stocks, the value stocks' price-earnings ratio is typically lower

current ratio

compares current assets to current liabilities = current assets/current liabilities -used to evaluate liquidity

Times Interest Earned Ratio

compares interest payments with a company's income available to pay those charges -classified as a solvency ratio rather than a liquidity ratio =(net income + interest expense + income tax expense) / interest expense -higher ratio is better

vertical analysis

comparing operating expenses as a percentage of sales -also known as common-size analysis for example: -balance sheet items expressed as a percentage of total assets

horizontal analysis

comparing the growth of sales over time for a single company over time % increase or decrease = (current yr amt - prior yr amt) / prior yr amt

Cash paid to suppliers=

cost of goods sold + increase in inventory - increase in accounts payable

Declaring stock dividends and stock splits is like

cutting a pizza into more slices. Everyone has more shares, but each share is worth proportionately less than before.

declaration date

date on which board of directors announces the next dividend to be paid

Companies obtain external funds through

debt financing (liabilities) and equity financing (stockholders' equity)

the payment of cash dividends...

decreases Dividends Payable and decreases Cash

the declaration of cash dividends...

decreases Retained Earnings and increases Dividends Payable

in each succeeding payment on an installment note, the carrying value...

decreases as time goes on

bond

formal debt instrument issued by a company to borrow money -the issuing company promises to pay back to the investor (face amount and periodic interest payments) -traditionally interest is paid semiannually

aggressive accounting practices

higher income higher assets lower liabilities

which of the following is recorded by the leese at the beginning of the lease

increase in liabilities

Financing Activities

inflows and outflows of cash resulting from the external financing of a business -deals with bonds, notes payable from borrowing, stock, or payment of dividends -also includes purchase of treasury stock

inventory turnover ratio

measures how many times average inventory is sold during the yr = cost of goods sold/average inventory -A inventory turnover high ratio indicates that inventory is selling quickly. -An extremely high ratio might indicate lost sales due to inventory shortages

average days in inventory

measures the average number of days it takes to sell its entire inventory during the year =365 / inventory turnover ratio -shorter days is better

equity financing

obtaining investment from stockholders

Lease Payable

present value of obligation to make payments n= time periods i = % / 12

net effect of declaration and payment of dividends

reduction in both retained earnings and cash

lease asset

right to use the asset over lease period

outstanding stock

shares issued and held by investors

paid-in capital

the amount stockholders have invested in the company

In a statement of cash flows, the sum of cash inflows and outflows is equal to

the change in the cash balance

payment date

the date of the actual distribution of dividends

record date

the date on which the company looks at its records to determine who the stockholders of the company are

dividends are based on

the number of outstanding shares since dividends ARE NOT paid on treasury stock

Depreciation expense and amortization expense is added back to net income when preparing the cash flow from the operating activities section because

they represent a noncash reduction to net income

Initial Public Offering (IPO)

The first time a corporation issues stock to the public

interest expense formula

carrying value x % x (__/12)

cash dividends received on stock investments are classified as

cash flows from operating activities

discount=

(discount x 12%/2) - (100,000 x 10%/2) 12% market int rate 10% coupon rate

Cost of Financing

-Debt: interest expense (tax-deductible) -Equity: dividends (not tax-deductible)

dividend yield

-Measures how much a company pays out in dividends relative to its share price = dividends per share / stock price

earnings per share

-Measures net income earned per share of common stock = (net income - dividends on preferred stock) / average shares of common stock outstanding

installment notes

-Most car loans and home loans call for payment in monthly installments rather than by a single amount at maturity Each installment payment includes both: 1. interest on borrowed amount 2. reduction of outstanding loan balance

retained earnings

Amount of earnings the corporation has retained -has a normal credit balance =net income - all dividends since company first began

The dividend declared by Canadian Falcon is paid on April 15

Debit: Dividends Payable 500 Credit: Cash 500

-On June 30, 2024, California Coasters records the first semiannual interest payment based on the bond's stated interest rate. -The stated interest rate is the rate specified in the bond contract used to calculate the cash payments for interest.

Debit: Interest Expense Credit: Cash

Record 100% large stock dividend

Debit: Stock Dividends 10 Credit: Common stock 10 (par value of the shares issued) 10 = 1000 x 100% x $0.01

record a 10% small stock dividend

Debit: Stock Dividends 3000 Credit: Common Stock 1 Additional Paid-In Capital 2,999 3000 = 1000 x 10% x $30 1 = 1000 x 10% x $0.01

Canadian Falcon repurchases 100 shares of its own $0.01 par value common stock at $30 per share

Debit: Treasury stock 3000 Credit: Cash 3000 3000 = 100 shares x $30

On March 15, Canadian Falcon declares a $0.25 per share dividend on its 2,000 outstanding shares.

Debit: dividends 500 Credit: dividends payable 500 500 = 2000 shares x $0.25

Reba wishes to know how much would be in her savings account if she deposits a given sum in an account and leaves it there at 6% interest for five years. She should use a table for the:

FV of $1

On January 1, 2024, California Coasters raises money for development of its new roller coaster by issuing $100,000 of bonds paying a stated interest rate of 7% each year. The bonds are due in 10 years, with interest payable semiannually on June 30 and December 31 each year.

Face amount = 100,000 (at maturity) Interest Payment = 100,000 x 7% x (1/2) yr

Cash flows from investing activities

Purchased investments for 35K cash Sold land originally costing 10K for only 6K cash Purchased 20K in equipment by issuing a 20K note payable due in 3 yrs (no cash) Cash flows from investing activities (35K) +6K = (29K) Note: Noncash activities = 20K

Net cash flows from operating activities

Income statement adjustments + Depreciation expense + Amortization expense + Loss on sale of assets - Gain on sale of assets Balance sheet adjustments - Increase in a current asset (like inventory) + Decrease in a current asset (like inventory) + Increase in a current liability - Decrease in a current liability

If a company issues 1,000 shares of $1 par value common stock for $20 per share, what would be the effect on the accounting equation?

Increase assets (cash) and increase stockholders' equity (common stock)

A company signs a 5 yr installment note on Jan 1, 2021 At which of the following dates would the carrying value be the lowest

A. Aug 1, 2021 B. Nov 30, 2023 C. April 30, 2024 D. Dec 31, 2022 C.

Operating Activities - Indirect Method

Adjustments to net income include: Income statement items -Remove noncash revenues and noncash expenses, such as depreciation expense and amortization expense -Remove nonoperating gains and nonoperating losses Balance sheet items -Adjust for changes in current assets and current liabilities

times interest earned ratio

An indication to creditors of how many "times" greater earnings are than interest expense -measures a company's ability to meet interest payments as they become due = (net income + interest expense + tax expense) / interest expense

On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries

Interest expense: 95,830 x 12% x (6/12)

cash flows from financing activities

Issued common stock for 5K Paid a cash dividend of 12K Cash flows from financing activities 5K (12K) = (7K)

Declares a cash dividend of $1.55 per share to all stockholders

Outstanding Jan 1st + additional shares purchased - purchases (of treasury)

What are the effects of a stock split accounted for as a 100% stock dividend?

Par value per share stays the same The number of shares outstanding increases

Canadian Falcon resells the 100 shares of treasury stock for $35. Recall that these shares originally were purchased for $30 per share

Debit: Cash 3500 Credit: Treasury stock 3000 Additional Paid-in capital 500 3500 = 100 shares x $35 300 = 100 shares x $30

On January 1, Year 1, Saturn Corporation issues $100,000 of bonds with a stated rate of 8% for $107,020. The bonds pay interest on June 30 and December 31. The market interest rate at the issue date was 6%. The journal entry to record the interest expense on June 30 will include which of the following

Debit: Interest expense 3211 Premium on bonds payable Credit: Cash 4000

recording lease payable at the beginning of the lease

Debit: Lease Asset Credit: Lease Payable

Assume Canadian Falcon resells the 100 shares of treasury stock for only $25 rather than $35. Recall that these shares originally were purchased for $30 per share.

Debit: Cash 2500 Additional Paid-in capital 500 Credit: Treasury stock 3000 2500 = 100 shares x $25 3000 = 100 shares x $30

California Coasters retires the $100,000 bond at maturity paying 7% interest for $100,000 (face amount).

Debit: Bonds Payable 100,000 Credit: Cash 100,000 *Regardless of whether bonds are issued at face amount, at a discount, or at a premium, their carrying value at maturity = face amount

California Coasters issues $100,000 of bonds paying 7% interest for $100,000 (face amount).

Debit: Cash 100,000 Credit: Bonds Payable 100,000

If ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries

Debit: Cash 110,000 Credit: Bonds Payable 100,000 Premium on Bonds Payable 10,000

Canadian Falcon issues 1,000 shares of $0.01 par value common stock at $30 per share (issue common stock above par)

Debit: Cash 30,000 Credit: Common stock 10 Additional Paid-in capital 29,990 10 = $0.01 x 1000 shares

Canadian Falcon issues 1,000 shares of no-par common stock at $30 per share (issue no-par value common stock)

Debit: Cash 30,000 Credit: Common stock 30,000

Canadian Falcon issues 1,000 shares of $30 par value preferred stock for $40 per share

Debit: Cash 40,000 Credit: Preferred stock 30,000 Additional Paid-in capital 10,000 30,000 = 1000 shares x $30

Market value per share

-Price at which stock is bought or sold. -normally exceeds the par value

stock split

-a large stock dividend that results in a decrease in the par or stated value per share -when a company declares a stock split, we do not record a transaction

what section of the statement of cash flows would you classify the purchase of equipment by issuing a long term note payable

-since no cash was given or received, noncash activity

Assume Canadian Falcon declares a 2-for-1 stock split on its 1,000 shares of $0.01 par value common stock.

-the balance in common stock account = 1000 shares x $0.01 par value per share = $10 -with no journal entry, the balance remains $10 despite the number of shares doubling -the par value per share is reduced by 1/2 to $0.005

Why do companies buy back their stock? (Treasury Stock)

-to boost underpriced stock -to distribute surplus cash without paying dividends -to boost earnings per share -to satisfy employee stock ownership plans

Features of Preferred Stock

1. Convertible - shares can be exchanged for common stock 2. Redeemable - shares can be returned to the corp. at a fixed price 3. Cumulative - any dividends not declared in a given yr accumulate to be paid in a later yr

Why do companies lease rather than buy?

1. leasing reduces the upfront cash needed to use an asset 2. lease payments often are lower than installment payments 3. leasing offers flexibility and lower costs when disposing of an asset 4. leasing may offer protection against the risk of declining asset values

Stockholder Rights

1. right to vote 2. right to receive dividends- the % of shares a stockholder owns determines his or her share of the dividends distributed 3. right to share in the distribution of assets-the % of shares a stockholder owns determines his or her share of the assets

A company issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $18,000 in 2021. Assuming the preferred stock is CUMULATIVE, how much of the $18,000 will be paid to preferred stockholders and how much will be paid to common stockholders in 2021?

12,000 to preferred stockholders and 6,000 to common stockholders 6,000 = 1,000 x 6% x $100

Fashion, Inc. had a Retained Earnings balance of $12,000 at December 31, 2021. The company had an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000 at December 31, 2024. What was the total amount of dividends paid over the last three years?

19,500 12,000 + (7500 x 3) - 15,000 total dividends = beg Retained Earnings + (total income) - ending Retained Earnings

Neue Inc. reports sales revenue of $200,000; in addition, its accounts receivable balance decreased by $15,000. Neue's cash flows from sales were

200K +15K = 215K

ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2021, for $92,280. The market interest rate when the bonds were issued was 12%. Interest is paid semi-annually on January 1 and July 1. Using the effective-interest amortization method, how much cash will ABC pay bondholders on July 1, 2021

5000= Payment to bondholders: 100,000 x 10% x (6/12)