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
