Chapter 7 and 8

Calculate the amount of interest (straight basis) on a 6-month loan of $2,000 at a 15 percent interest rate.

$2,000 x 0.15 x 6/12 = $150 principal x rate x time (in years)

Accumulated other comprehensive income (loss) is a stockholders' equity category that may include which of the following components?

- Gains or losses on certain derivative instruments - Cumulative foreign translation adjustments - unrealized gains or losses on available-for-sale marketable securities -changes during the period in certain pension or other postretirement benefit items

Identify the requirements that must be met for a corporation to pay a cash dividend.

- The corporation must have enough cash to be able to pay the dividend. - The corporation must have a sufficient balance in the Retained Earnings account to absorb the dividend. - The board of directors must declare the dividend first to pay a cash dividend. - The declaration of a cash dividend must not result in a violation of any existing contractual agreements such as bond covenants.

Common Stockholders:

- are the ultimate owners of the corporation; they have a residual ownership claim to the corporation's asset. - experience no upper limit to the value of their ownership interests. - have a claim to all assets that remain in the entity after all liabilities and preferred stock claims have been satisfied. - do not have any personal liability for corporate debts and thus cannot be forced by creditors to invest additional amounts to make up for losses.

The financial leverage characteristic of long-term debt results in:

A magnification of ROE relative to what it would be without long-term debt

A transaction that is likely to cause an increase in a current liability is:

Accrual of interest expense

The liability for product warranty claims is an example of a liability that:

Also resulted in a reduction of net income, has been calculated using estimates, has been recorded in process of matching revenue and expenses

Retained earnings represents:

Cumulative net income of the firm since its beginning that had not been distributed to its stockholders in form of dividends

Financial leverage refers to which of the following?

Difference between the rate of return earned on assets (ROI) and the rate of return earned on SE (ROE)

if bond is *below* market rate ==>

Discount

The entry to record the purchase of treasury stock is:

Dr. Treasury Stock Cr. Cash

Identify the frequently listed other noncurrent liabilities.

Estimated liabilities under lawsuits, Obligations to pension plans

The employer's Wages Expense for a payroll period represents the employees' __ (gross/net) pay.

Gross Pay

Identify the impact of allocation of unearned revenue to the fiscal year in which the product is delivered and the revenue is earned.

Liabilities decrease, working capital increases, Revenues increase.

what is a premium bond?

Market IR < State IR - annual interest expense is *less than* amount interest paid

What is a discount bond?

Market IR > Stated IR - annual interest expense is *greater* than amount interest paid

Another term frequently used to describe stockholders' equity is:

Net Assets

The employer's Wages Payable or Accrued Payroll for a payroll period represents employees' ___ pay

Net Pay

Which of the following statements regarding net income (loss) and retained earnings are correct?

Net income for the period increases retained earnings. (net loss decreases RE) Retained earnings represent the cumulative earnings the corporation has retained for use in the business. Dividends declared during period decrease RE

Identify the impact of recording the cash received in advance from customers.

Net income is not affected, Cash increases, Current liabilities increase.

Factors that usually affect retained earnings directly include:

Net income or loss, and dividends

The portion of equity in a subsidiary not attributable, directly or indirectly, to the parent company (reporting entity) is referred to as the ___ (unusual/noncontrolling/extraordinary) interest.

Noncontrolling

The payment of a current liability will:

Not affect working capital - working capital is measure of company's liquidity, difference between current assets and current liabilities

Current maturities of long-term debt:

Permit a more accurate determination of working capital

Identify an item that is commonly included with noncurrent liabilities.

Product warranties

An Accounts Payable normally results from which of the following transactions?

Purchasing goods and services from suppliers on credit

The financial statements prepared by the not-for-profit organizations focus on the requirement of _____.

Resource providers

True or false: The determination of a contingent liability depends on one or more future events.

TRUE

what is financial leverage?

The use of debt (with fixed interest rate) that causes a difference between ROI and return on equity = a reason for using debt is to obtain favorable financial leverage

Any salary paid to the proprietor of a firm is _____.

Treated as reduction to proprietor's capital

The entry to record an issuance of a small stock dividend (when the market price per share of stock is greater than the par value per share) includes:

a credit to Additional Paid-in Capital account for the difference between the market price and par value per dividend share issued. a debit to Retained Earnings account for the market price per dividend share issued.

The entry to record actual warranty costs in the year in which the warranty is honored includes:

a decrease to current liabilities and a decrease to cash, no effect on net income

The effects on the financial statements of the purchase of treasury stock include:

a decrease to total stockholders' equity. a decrease to cash.

what is unearned revenue? (deferred credit)

a liability arising from receipt of cash before the related revenue has been earned; an account with a credit balance that will be recognizing as a revenue you've received cash but didn't do the work yet

Debt financing usually has _____.

a lower cost to a firm as compared to equity financing

Identify the true statements regarding noncontrolling interest.

a. It is sometimes called minority interest. b. It signifies that a portion of the net assets controlled by the reporting entity are attributable to the ownership interests of outside parties.

If a company issues a stock dividend, identify the true effects on the financial statements of the company.

a. Its net income is not affected. b. Its common stock is increased. c. Its total paid-in capital is increased. d. Its total liabilities are not affected. e. It total assets not affected f. Retained earnings is decreased g. Its total stockholders' equity is not affected

Which of the following statements are true regarding owners' equity and ownership rights held in noncorporate entities?

a. Owners' equity for proprietorships and partnerships is usually referred to as capital. b. No distinction is made between invested capital and retained earnings for a proprietorship or a partnership. c. Neither proprietorships or partnerships issue stock.

In the context of determining the ending balance of retained earnings within the statement of changes in retained earnings which of the following is true?

a. Stock dividends need to be subtracted (negative amount) b. The beginning balance of Retained Earnings account needs to be added (positive amount) c. Cash dividends for common and preferred stock need to be subtracted (negative amount) d. Treasury stock purchases have no effect on retained earnings. e. Net income needs to be added (positive amount) to retained earnings f. Stock splits have no effect on retained earnings

Additional paid-in capital:

a. is a component of stockholders' equity. b. is sometimes referred to as capital in excess of par. c. is sometimes referred to as capital surplus. d. is one of the items included in the paid-in capital (or contributed capital) category of stockholders' equity.

Deferred tax liabilities arise because of the _____.

accounting process of matching revenues and expenses, difference between a company's book income and taxable income

The adjusting entry to accrue Interest Expense results in:

an increase in interest expense

The financial statement effects of the accrual of estimated warranty liability in the year in which products are sold include:

an increase to current liabilities and no effect on cash, an increase to expenses and a decrease to net income.

Deferred tax liabilities:

are normally long term in nature, are one of the most significant liabilities shown on the balance sheet for many firms, are provided for temporary differences between income tax and financial statement recognition of revenues and expenses.

Interest on a Note Payable is most appropriately accrued when?

at the end of each accounting period during which the note is a liability

what are items that cause retained earnings to change?

cash dividends stock dividends stock splits

What is a bond discount?

excess of the face amount of a bond over the market value of a bond

What is a bond premium?

excess of the market value of a bond over the face amount of the bond issued - When bond has greater market value than face amount = its trading at a premium

if bond is *equal* to market rate ==>

face amount (at par)

Current maturities of long-term debt are reported _____.

in the current liability section but separately from short-term debt

One of the key advantages of issuing debt as opposed to common stock to raise additional funds is that:

interest expense is deductible in calculating taxable income, whereas dividends are not tax deductible.

a bond is a ...

long term debt

What are examples of current liabilities?

o Accounts payable o Short-term debt (Notes Payable) o Current Maturities of long-Term Debt o Unearned revenue or Deferred Credits o Other Accrued Liabilities

What are examples of noncurrent liabilities?

o Long-term debt (Bonds Payable) o Deferred Tax Liabilities o Other Noncurrent Liabilities

Accounts payable are normally shown:

on the balance sheet as a current liability, but not reduced by anticipated cash discounts.

what is a contingent liability?

potential claim on a company's resources that depends on future events; must be probable and reasonably estimable to be recorded as a liability on balance sheet EX. Pending litigation, environmental hazards, casualty losses to property, product warranties, unsettled disputes with IRS

Paid-in capital includes:

preferred stock common stock additional paid in capital

If bond is *above* market rate ==>

premium

What is a current maturity of long term debt?

principal payments on long-term debt that are scheduled to be paid within 1 year of balance sheet date

accounts payable is a...

short term debt

what is a face amount?

the principal amount of a bond; amount investor will receive at maturity

The difference between the gross and net methods of recording the accounts payable relates to:

the timing of the recognition of cash discounts.

Not-for-profit and governmental organizations normally report to resource providers rather than investors because:

these types of organizations do not have owners who have direct financial interests in the entities.

Current maturities of long-term debt are a current liability representing that portion of long-term debt that:

will be maturing within a year of the balance sheet date.

Potential claims on a company's resources arising from such things as pending litigation, environmental hazards, casualty losses to property, and product warranties are referred to as ___ (callable/contingent/convertible) liabilities.

Contingent

Common stock is an example of what is sometimes referred to as ___ capital

Contributed Capital