AC210 Test 4 Flashcards
Liabilities:
Debt you owe to someone else.
Accrued Liabilities:
expenses you haven’t paid yet.
Payroll deductions =
gross - net
What are things you’ll pay no matter what?
FICA and Federal Income Tax
What would an employees J/E look like?
dr wage expense cr withheld income taxes payable cr FICA payable cr united way payable cr cash
What would an employers J/E look like?
dr payroll tax expense
cr FICA payable
cr federal unemployment tax payable
cr state unemployment tax payable
FICA is a ____, which means what?
matching contribution. this means your company matches what you pay to FICA.
Corporations have to pay ___% for employees.
35
If someone has a taxable income of 1M. what is the corresponding J/E?
dr income tax expense 350k
cr income tax payable 350k
Make a J/E for this transaction.
Sell a $1000.00 TV with 5% sales tax.
dr cash 1,050
cr sales revenue 1,000
cr sales tax payable 50
bonds:
Ways a company can capitalize. There’s a bond market.
J/E for bond at face value:
dr cash
cr bonds payable
J/E for bond at premium:
dr cash
cr bonds payable
cr premium on bonds payable
J/E for bond at discount:
dr cash
cr discount on bonds payable
cr bonds payable
J/E for interest on bond at face value:
dr interest expense
cr interest payable
J/E for retiring a bond at face value:
dr bonds payable
cr cash
What is a contingent liability?
a liability that you may or may not have.
What are the questions to ask when you have a contingent liability?
How likely?
Can amount be estimated?
What are the answers to the questions about a contingent liability?
How likely? - probable - possible - remote Can the amount be estimated? - if probable, yes - if possible, no
If a contingent liability is probable and the amt. can be estimated, what should you do?
record the liability and estimate loss.
How to you record a possible contingent liability with a J/E?
dr product litigation expense
cr product litigation liability
If a contingent is possible, what should you do?
describe in financial statement notes
If a contingent liability is probable, but the amt. can’t be estimated, what should you do?
Describe in financial statement notes.
If a contingent liability is remote, what should you do?
don’t mention it.
Quick Ratio:
(cash + short-term investments + netAT) / current liabilities
What does the quick ratio tell you?
How easy is it to pay liabilities with current assets.
Times Interest Earned Ratio:
(Net Income + Interest Expense + Income Tax Expense) / Interest Expense
What does the times interest earned ratio tell you?
How able am I to cover the cost of my debt.
Benefits of Common Stock:
- Voting rights.
- Dividends
- Residual Claims- you have some claim on what’s left over if they go out of business.
- Preemptive rights: you have first dibs on new stocks.
How much power to stockholders have? Explain.
A lot. Stockholders pick Board of Directors. Board of Directors choose officers. Officers choose vice presidents.
Advantages of equity:
does not have to be repaid.
dividends are optional
advantages of debt (bonds):
interest on debt is ta deductible
debt does not change stockholder’s control.
authorized shares:
maximum number of shares that can be issued
unissued shares:
have never been issued
treasury stock:
stock that the company decided to buy back.
outstanding shares:
stocks that have been issued.
IPO / Initial Public Offering
the first time someone sells stock.
What is the dividends date timeline look like and what are the corresponding J/E?
a. declaration date:
dr dividends declared
cr dividends payable
b. date of record
no J/E
c. date of payment
dr dividends payable
cr cash
What kind of account is treasury stock?
A contra-equity account.
- Reacquire 50,000 shares of its common stock at $25/ share.
- Reissue 5,000 shares at $28/ share
dr treasury stock (+xSE, -SE) 125,000 cr cash (-A) 125,000
dr cash (+A) ($28x 5,000) 140k
cr treasury stock (-xSE, +SE) (5,000x 25) 125k
cr APIC 15k
J/E if issued 20% stock dividend on 38M outstanding shares.
dr retained earnings 7,600,000
cr common stock
What are stock splits?
Have 7 shares of stock. We are going to split those in half to make 14 shares of stocks.
retained earnings doesn’t change and there is no j/e for split. par value gets cut in half..
Characteristics of preferred stock:
Usually has a fixed dividend rate
Priority over common stock
no voting rights
Current Dividend preference:
Current preferred dividends will get dividends before common stock does
Cumulative dividend preference
any unpaid dividends from previous years must be paid before common stock builds up.
EPS formula and meaning.
net income / average number of common shares outstanding.
- earnings per share
- high as possible
ROE formula and meaning
net income / average stockholder equity
- return on equity
- amount earned for each dollar invested
- high as possible.
Price/ Earnings Formula
current stock price (per share) / earnings per share (annual)
- measure of value that investors place on a company common stock.
Issued 1,000 shares with par value $1.00
$50.00 / share
dr cash 50k
cr common stock 1k
cr APIC 40k
What is the statement of cash flow?
How did we use cash and how did we bring it in?
Operations:
Collect cash from customers, pay cash to suppliers, employees, etc. Day to day activities.
Investing:
Cash paid and received from selling and buying long term assets.
Financing:
cash received and paid for exchanges with lenders and stockholders.
Order of statement of cash flows
OIF
What are the inflows for cash flow of operations?
- collecting cash from customers
- receiving dividends
- receiving interest
What are the outflows for cash flow of operations?
- pay for services
- pay for wages
- pay income tax
- pay interest.
What are the inflows for cash flow of investing?
- sale or disposal of property, plant or equipment
- sale or maturity of investments in securities.
What are the outflows for cash flow of investing?
- purchase of property, plant, or equipment
- purchase of investments in securities
What are the inflows for cash flow of financing?
- borrow money from lenders through formal debt contracts.
- issuing stocks to owners
What are the outflows for cash flow of financing?
- repaying principal to lenders
- repurchasing stocks from owners.
- paying cash dividends to owners.
How does the indirect method work?
net income + non-cash expenses such as depreciation and amortization…… then address the changes in current assets and current liabilities.
If current assets increase, what should you do on the cash flow of operations? Decreases?
subtract from net income.
add to net income.
If current liabilities increase, what should you do on the cash flow of operations? Decreases?
add to net income.
subtract from net income.
Ex.
You purchased equipment for 30M.
You purchased equipment for 11M.
What is the cash flow from investing activities?
(30M)
(11M)
= (41M) outflow of 41M
Ex.
Borrowed $9M from bank.
Paid off a long-term debt of $5M.
Issued new stock worth $3M.
cash flow from financing activities?
9M
(5M)
3M
= 7M
If you issue stock, which bucket would it be located in?
Financing
Ex.
- net income: $200.00
- cash paid to suppliers: $30.00
- cash received from customers: $35.00
- cash paid to purchase building: $15.00
- cash received from issuance of stock: $4.00
- cash paid to repurchase our own stock $1.00
- cash received from sale of equipment: $3.00
a. cash flow from investing.
b. cash flow from financing.
a. (15.00) + 3.00 = (12) outflow
b. 4.00 + (1) = 3 inflow
Ex. Net Income: 1,000 A/R in 2009: 15. A/R in 2010: 10 A/P in 2009: 10 A/P in 2010: 40
cash flow from operations.
1,000 + 0 + (5) + (30) = 965 inflow
DO EXERCISES AT END OF POWERPOINTS AND IN BOOK. LOOK OVER THE MULTIPLE CHOICE QUESTIONS AND MAKE SURE YOU KNOW ALL OF THESES. YOU NEED TO DO REALLY GOOD ON THIS TEST OR ELSE.
OKAY? OKAY!
If the market rate is 4% and the stated rate of a bond is 6%, then what is the bond at?
Premium
If the market rate is 6% and the stated rate of a bond is 6%, then what is the bond at?
Face Value
If the market rate is 8% and the stated rate of a bond is 6%, then what is the bond at?
Discount
If the face value of a bond is $1,000 what will the premium be? The discount? Don’t get technical.
More than face value i.e. 1,050
Less than face value i.e. 950
Timeline and corresponding journal entries for notes payable.
- at issuance:
dr cash
cr n/p - accrued interest at year end
dr interest expense
cr interest payable - at end
dr n/p
dr remaining interest payable
cr cash
J/E for a large stock dividend
dr R/E
cr common stock
J/E for a small stock
dr R/E
cr common stock
If you have a large stock dividend, what is the effect of net change in equity?
no net change in equity.
You have $20,000 worth of dividends to pay.
100 shares of preferred stock
$1.00 par value
6% cumulative
250 shares of common stock
$1.00 par value
2 years of dividends in arrears
How much do preferred stockholders get this year?
And common stockholders?
100 x 1 x .06 = $6.00 x 2 prior years = $12 plus the current year: $6.00 = $18.00 total
$20,000 - $18.00 = $19,982
