FA - Midterm 3 Smartbook Questions
If ABC Company issues its $5,000,000, 8% bonds payable at a premium and records Bonds Premium, then the ______
debit to Cash is greater than the credit to Bonds Payable market rate of interest must be less than the stated rate of interest
the audit committee of the board of directors...
must consist of non-management, independent directors with financial knowledge and is responsible for hiring the independent auditors
Return on assets (ROA) equals ______
net income / average total assets
net profit margin =
net income / revenues
The income statement for ABC Company shows Gross profit of $144,000; Operating expenses of $130,000; and Cost of goods sold of $216,000. What is net sales revenue?
net sales rev - COGS = gross profit aka COGS + gross profit = net sales rev 216,000 + 144,000 = 360,000
The ________ in the annual report should be reviewed to determine the significant accounting rules used
notes
When a company borrows money from a bank and signs a formal written contract that specifies the amount borrowed, the date it must be repaid and the interest rate, the company will debit Cash and credit _________
notes payable
A bond's maturity date is the date _____
on which the bond principal will be repaid in full
Many current liabilities on the balance sheet, such as Accounts payable, Accrued wages and Deferred revenue, have a direct relationship to __________ activities on the statement of cash flows
operating
When the market interest rate is the same as the stated interest rate, then the bond will sell at _____
par
Which of the following is not a typical element of a company's annual report?
press release
If a bond pays interest semi-annually, when determining the price of a bond, the present value of interest payments will equal the present value of an annuity x ______
principal x annual stated rate x 1/2
who uses accounting information?
private investors institutional investors managers government creditors
The feature that distinguishes loss contingencies from other liabilities is the _______ that a loss will occur
probability
Which of the following may be classified as contingent liabilities? deposits from customers product warranties future litigation losses unearned revenues environmental problems
product warranties future litigation losses environmental problems
The bond issuer prepares a ______, which is a regulatory document that describes the company, the bonds, and how the proceeds of the bonds will be issued.
prospectus
The purpose of an independent auditor's report is to
reduce the risk that the company's financial condition is misrepresented in the financial statements provide assurance that the financial statements represent what they claim to represent
corporate governance
refers to procedures designed to ensure that the company's managed in the interests of the shareholder's
he notes to financial statements may include ______
relevant information, not disclosed on the statements revenues broken out by geographic region accounting policies applied segment information
Which of the following would result in a deferred revenue? sales collected within the discount period sales of gift cards sales on account sales of subscriptions
sales of gift cards sales of subscriptions
Which of the following would be found under Cash Flows from Investing Activities? sales of productive assets dividend payments purchases of productive assets investments in other companies
sales of productive assets purchases of productive assets investments in other companies
The issue (sale) price of a bond equals the ______
sum of the present value of the principal and interest payments
______ tax differences occur when the company reports different net income under financial reporting and tax reporting.
temporary
Temporary differences result in deferred taxes when ______
the IRS depreciation differs from GAAP depreciation
US GAAP are ______
the accounting rules developed by the FASB for use in the United States
Today's Fashions has a debt that has been properly reported as long-term debt before this year. Part of this debt is due this year. If Today's Fashions continues to report the current position of the debt as a long-term liability, then ______
the current ratio, which equals current assets divided by current liabilities, will be overstated
The reason bonds sell at their face value is because ______.
the market interest rate equals the stated interest rate
The journal entry to record the purchase of an asset in exchange for $100,000 due in 3 years at a market rate of interest of 12% compounded annually includes a debit to the asset in the amount of ______
the present value of $100,000 discounted at 12% for 3 years
At maturity, a bond issued at a discount will have ______ bonds payable balance compared to the maturity value had the bond had sold at a premium or par.
the same All bonds will equal the same maturity value regardless of whether it was issued at par, a premium or discount.
Voluntary disclosures of financial accounting information, such as press releases, may be issued ______
to guide market expectations
True or false: Companies listed on US stock exchanges are required to file quarterly financial information with the SEC
true
True or false: Comparative financial statements include separate columns for more than one period's results
true
True or false: Employers are required to withhold income taxes from employees' pay checks.
true
True or false: The SEC, FASB, external auditors, and management of companies are involved in ensuring the integrity of financial statements.
true
True or false: The statement of stockholders' equity indicates the changes in the various equity accounts
true
private investors
venture capitalists who include the original investors in a company
Sally Company manufactures large kitchen appliances. For the first year of purchase, the company will repair any manufacturing defect free of charge. Sally apparently sells its appliances with a
warranty or guarantee
Which of the following has the highest present value? $1 compounded annually over 3 years at 5% $1 annuity compounded annually over 3 years at 5% $1 compounded annually over 3 years at 7% $1 annuity compounded annually over 3 years at 7%
$1 annuity compounded annually over 3 years at 5% The present value factor given 3 years is highest for the $1 annuity at 5% with a present value factor of 2.7232, then the $1 annuity at 7% of 2.6243, then the $1 at 5% of 0.8638 and lastly the $1 at 7% of 0.8163.
Which of the following have the same present value given a 10% interest rate compounded annually?
$1 today $1.10 one year from today
On January 1, Year 1, Burrows, Inc. received $8,900 and agreed to pay $10,000 on January 1, Year 3. The market rate of interest is 6% compounded annually. Assuming Notes Payable includes the accrued interest through year-end December 31, Year 2, the journal entry to record the payment of this note on January 1, Year 3 includes a ______
$10,000 debit to Notes Payable $10,000 credit to Cash At the end of year 1: $534 (=$8,900 x 6%) is debited to Interest Expense and credited to Notes Payable, resulting in a $9,434 Notes Payable balance. At the end of year 2: $566 (=$9,434 x 6%) is debited to Interest Expense and credited to Notes Payable, resulting in a Notes Payable balance of $10,000 (=$9,434 + 566). On the next day, January 1, Year 3, $10,000 is debited to Notes Payable and credited to Cash.
On the maturity date, the bondholders of $100,000 of bonds payable that were issued at $90,000 will receive ______.
$100,000 in cash plus the interest owed
If a company's 12%, $1,000 bond pay interest quarterly, how much will the bondholder interest payment equal?
$30 1,000 x 0.12 = 120 120/4 = 30
Discounters, Inc. issued $50,000, 4-year, 6% bonds that pay interest annually on January 1 when the going market interest rate was 7%. On the issue date, the carrying value of bonds, net of discount or including premium, rounded to the nearest $1, is ______.
$48.307 $48,307 = ($50,000 x 0.7629) + (($50,000 x 0.06) x 3.3872)
The entry to record the purchase of equipment that requires a $10,000 payment in 2 years includes a ______. The market rate of interest is 9% compounded annually
$8,417 debit to Equipment $8,417 credit to Notes Payable The present value (or current cost) of the equipment is $8,417=$10,000 x 0.8417.
Ace Electronics signed a 10-year, $100,000, 4% note payable on January 1. When the note is signed, Ace should record a liability of ______
100,000 A liability is first recorded at its cash-equivalent amount, which excludes interest charges. Interest arises only when time passes
Cellem, Inc.'s Beginning Accounts Payable is $4,000 and its Ending Accounts Payable is $2,000. The accounts payable turnover is 6. Cost of Goods Sold must equal ______.
18,000 COGS / Avg A/P X/ 3000 = 6
On January 1, 2017, Burrows, Inc. received $16,834 and agreed to pay off the note and interest owed on January 1, 2019. The market rate of interest is 9% compounded annually. The payment made on January 1, 2019 equals a ______ credit to Cash.
20,000 The future value of $16,834 at 9% in two years equals $20,000 (=$16,834 x 1.1881 (FV at 9% and 2 periods))
A $1,000, 6% bond that matures in 10 years is issued for $1,010. The interest is paid semiannually. Each interest payment equals $_____
30
ABC Corporation issued $100,000, 6% bonds that mature in 10 years for $101,000. The annual interest payments made on these bonds equals $
6,000
Cashews, Inc. issued $100,000, 6% bonds at face value on January 1. The bonds pay interest semiannually on June 30 and December 31. For the year ended December 31, the amount of interest paid equals ______ and is reported on the statement of cash flows as a(n) ______ activity
6,000 operating
Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal income tax $18,000 and State income tax $3,850. What is the net pay to employees?
70,000
Which of the following correctly describes a bond indenture?
A document detailing the promises made by the bond issuer
What factors will result in a higher present value of $1?
A lower interest rate A compounding of interest less frequently If rates are lower than more will need to be invested at the present to receive a specified amount in the future. Thus lower (not higher) rates will cause the present value to be higher.
The book value of bonds payable equals bonds payable ______
minus any discount on bonds payable
What appears on the statement of stockholders' equity?
Additional paid-in capital Net income Beginning balance of retained earnings Common stock Dividends
The entry to record the retiring of a bond at maturity that was issued at a premium would be debit ______
Bonds payable and credit Cash
Who has primary responsibility for making sure that a company's financial statements follow GAAP?
CFO, CEO
What are sections found in a statement of cash flows?
Cash Flows from Investing Activities Cash Flows from Financing Activities Cash Flows from Operating Activities
If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a debit to ______.
Cash of $100,000 and a credit to Bonds payable of $100,000
What are reasons a company would want to issue bonds instead of stock?
Current stockholders maintain control Interest expense is tax-deductible
Gilmore issued $100,000 face value 6% bonds for $95,000. The journal entry to record the issuance of the bonds would include which of the following entries?
Debit Cash for $95,000 Debit Discount on bonds payable for $5,000 Credit Bonds Payable for $100,000
What is not a significant part of the financial reporting process?
Form Y2-K, which reports technological difficulties
financial regulatory changes are enforced by the _____, while financial reporting changes are recommended by the FASB
SEC
what are the major actors involved in ensuring the integrity of financial statements of a publicly-traded company?
SEC PCAOB independent auditors board of directors management
SEC stands for
Securities and Exchange Commission
What are the principal components of the financial disclosures in a Form 10-K?
Select summarized financial data for a 5-year period Management's discussion and analysis Financial statements and supplemental data
What statements are true regarding an annual report and Form 10-K?
The 10-K includes significantly more information than the annual report Both include the Report of Independent Accountants (Auditor's Opinion) Both include the four basic financial statements
Which of the following are true when a bond is issued at a premium?
The bond will issue for an amount above its face value. The market interest rate is lower than the stated interest rate.
Accumulated amortization is ______
a contra-asset account similar to accumulated depreciation similar to depreciation except it is netted against intangible assets instead of tangible assets
purchase of inventory
accounts payable
cash paid for employee compensation
accrued salaries
cash paid for income taxes
accrued taxes payable
The straight-line method of amortization ______
adjusts interest expense for differences between its stated interest rate and market interest rate evenly allocates the amount of bond premium or discount over each period of a bond's life
The SEC's "Fair Disclosure" requires publicly traded companies to provide access to ______
all important company news
Bonds ______
allow companies to raise more debt capital than a note payable because the bonds are issued to many creditors are sold in established markets making them liquid
a ______ is a series of consecutive equal payments such as mortgage payments.
annuity
IFRS and US GAAP ______
are similar but have differences that are currently being resolved with the aim of having one set of standards
Which of the following are parts of a Form 10-K? auditor reports financial statements internal control policies and procedures manual management's discussion and analysis
auditor reports financial statements management's discussion and analysis
_________ financial statements report financial statement values for the current period and one or more other prior periods
comparative
Income before income tax expense is an important measure of financial performance as it allows investors ______
compare companies' pretax levels of income
Discounts on bonds payable are recorded with a debit and are ______
contra-liabilities
institutional investors
control the majority of publicly traded shares of US companies and invest on behalf of many individual investors
If ABC Company issues 100 of its $1,000 bonds at a price of $1,100 for a total of $110,000, the journal entry to record the transaction includes a ______.
credit to Premium on bonds payable of $10,000 The bonds sold for 110% of face value, which is a premium, not a discount Debit to Cash=100 x $1,000 x 110%=$110,000
If ABC Company issues 100 of its $1,000 bonds at a price of $1,100 each for a total of $110,000, the journal entry to record the transaction includes a ______
credit to Premium on bonds payable of $10,000 debit to Cash of $110,000 credit to Bonds payable of $100,000
XYZ borrowed $50,000 this year. Half of the loan will be repaid next year and the remainder will be paid the following year. How will the $50,000 be reported on its balance sheet at the end of this year?
current portion of long term debt 25,000 long term debt of 25,000
ABC Company issues a bond with a face value of $100,000 on January 1 for $100,000. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes a ______ of $6,000.
debit to Interest expense credit to Cash
Using the straight-line amortization, the Premium on bonds payable is reduced for each payment with a ______ to Premium on bonds payable by ______ prior payments.
debit; the same amount as
a company's capital structure is a mixture of _____ and ______ that a business uses to finance its operations
debt, equity
Businesses finance their operations using a mixture of ______
debt, such as issuing bonds, and equity, such as issuing stock
Payroll deductions ______
decrease the amount of cash an employee receives are amounts subtracted from employees' gross earnings to determine their net pay
The book value of bonds payable ______
decreases as a bond sold at a premium is amortized equals the principal at the maturity date increases as a bond sold at a discount is amortized
cash received in advance from customers
deferred revenues
The effect of amortizing bonds sold at a ______ the carrying value of Bonds payable to the face or par value by the time the bonds mature
discount is to increase premium is to decrease
When bonds with a stated rate of 9% are issued when the market rate of interest is 10%, then ______ on bonds payable will be ______
discount, debited
The two methods of amortizing bond discounts or premiums are called the ______ and the ______ methods.
effective-interest straight-line
the board of directors is
elected by the shareholders and is responsible for ensuring that processes are in place for maintaining the integrity of the company's accounting records
Accruing a liability always involves recording both a(n)______ and a liability
expense
The amount to be paid at the end of the bond's life is the called ______ value
face maturity par
A bond's principal may also be referred to as a bond's ______
face value par value
The SEC's ______ requires companies provide all investors equal access to all company news and prohibits managers or other insiders from trading shares based on nonpublic information
fair disclosure
True or false: The effective-interest method results in more interest being expensed over the years to maturity than had the straight-line method been used to amortize interest.
false
Identify various sources of financial information for the investing public
financial analysts' earning forecasts companies' websites SEC's EDGAR service
Public companies file their quarterly reports on the SEC's ______
form 10-Q
creditors
include banks, suppliers and other financial institutions that lend money to companies
Which financial statements are needed in order to calculate the accounts payable turnover ratio?
income statement balance sheet
Issuing a note payable for cash results in a(n) _____
increase in liabilities and an increase in assets
Accruing a liability always involves ______ expenses and ______ liabilities.
increasing, increasing Accrued Liabilities represent the amount of unpaid expenses, not assets. Accrued liabilities include unpaid wages, interest, etc. and are recorded with a debit to an expense and a credit to Accrued Liabilities
The specific promises made to bondholders are described in a document called a bond ______
indenture
Who are the external users of accounting information?
institutional investors, private investors, current and potential creditors
If a company reports Amortization Expense for the period, it must have ______.
intangible assets on its balance sheet
An advantage to financing with debt is that ______.
interest is tax deductible
The Discount on bonds payable account ______
is a contra account to Bonds payable
When determining the effect of a transaction on a financial ratio, the steps include ______
journalize the transaction to see what accounts are affected determine if the accounts affected are included in the financial statement subtotals or totals in the ratio's denominator determine if the accounts affected are included in the financial statement subtotals or totals in the ratio's numerator
To determine how transactions affect ratios, such as the the effect of purchasing land for cash on a company's current ratio, you need to ______
know the journal entry and its effect on the ratio's numerator and denominator and then evaluate the combined effect
a _______ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time
lease
assets are financed with
liabilities and stockholders equity
What kind of account is deferred (or unearned) revenue?
liability
The current ratio and working capital are financial measures of ______.
liquidity
analysts say a company has ______ if it has the ability to meet its current obligations
liquidity
An unqualified (clean) audit opinion, should help ______ the expected rate of return investors charge for providing capital
lower
Who has primary responsibility for preparing and making sure that a company's financial statements follow GAAP?
management
Who has the responsibility to apply accounting standards when communicating with investors and creditors?
management
Investors rely on ______ for information needed to make investment decisions
many sources
If ABC Company issues its $5,000,000, 8% bonds payable at a premium and records Bonds Premium, then the ______.
market rate of interest must be less than the stated rate of interest debit to Cash is greater than the credit to Bonds Payable