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Accounting > All Accounting (Accounting Oasis) > Flashcards

All Accounting (Accounting Oasis) Flashcards

1
Q

Cash received or paid in transactions involving the sale or purchase of trading securities involves which cash flow category?

A

CFO

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2
Q

What should I generally understand about AOCI?

A

It holds the unrealized gains and losses to the firm’s economic position.

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3
Q

Why is it important to understand which stage of a life cycle a firm is in?

A

Helps us to understand its capital needs and allows us to better predict its future.

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4
Q

Balance sheet Liabilites are listed in order of ____?

Owners Equity is listed in order of ____? What is that order?

A

Maturity- when they have to be paid.

Permanence- the degree to which the firm would pay owners a return on their investments. The order is stock, then retained earnings.

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5
Q

Interest expense and interest income fall under which cash flow category?

A

CFO

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6
Q

A firm buys $30 of inventory on account. That inventory costs $10 to the seller.

Record the transaction from the buyer’s and seller’s perspective.

A

Buyers Perspective

$30 inventory

$30 accounts payable

Seller’s Perspective

($10) inventory

$30 AR

$30 Revenue

($10) COGS

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7
Q

Debt and stock journal entries would be which type of cash flow adjustment?

PP&E/Investment journal entries would typically be which type of cash flow adjustment?

Inventory, sales, and wages journal entries would be which type of cash flow adjustment?

A

Financing

Investing

Operating

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8
Q

Taxes paid falls under which cash flow category?

A

CFO

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9
Q

Why would a company want to utilize double declining balance as a method for depreciation?

Explain double declining balance concept.

A

Companies recognize that little R&M will be spent in the early years of the asset, but it will have greater R&M as the asset gets older. Thus, depreciation expense will be greater in the beginning, offset by low R&M. Conversely, in the latter years high R&M will be offset by low depreciation expense.

A factor of 2 is applied to the straightline rate. For example, if the useful life is three years, then 1 year of depreciation via straightline will be 1/3. However, for a double declining balance method, it would be 2/3. That 2/3 would be used for future years’ calculations.

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10
Q

How are CFI and CFF derived?

A

Use the indirect method. Go account by account. Assume that increases in PP&E and availabe for sale securities are the result of cash purchases.

Investigate retained earnings to see if change is solely NI driven or due to dividends.

Assume financing involves cash transactions.

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11
Q

What is the 10-K, 10-Q, 8-K, and Proxy?

A

10-K: Annual filing including financial statements

10-Q: Quarterly filing including financial statements

8-K: Filing after a significant event occurs, such as M&A or a change in management, directors, accountants, etc

Proxy: Request for voting rights to be exercised at the next annual shareholder’s meetings

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12
Q

Make the entry for $12 in dividends declared and then distributed.

A

Declared

$12 Dividends payable

($12) retained earnings

Paid

($12) cash

($12) dividends payable

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13
Q
  1. Assume a company issues 10 shares of common stock for $10 per share. The stock’s par value is $1 per share. Make the initial journal entry.
  2. Assume a company issues 10 shares of preferred stock for $20 per share with a par value of $5. Make the entry.
A
  1. $100 cash

$10 Common Stock

$90 APIC

  1. $200 cash

$50 Preferred stock

$150 APIC

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14
Q

What is unique about municipal bond interest?

A

The interest is added to pre-tax income, but it is NOT taxed. So, do NOT include municipal bond interest in tax calculations.

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15
Q

What is the revenue principal?

What is the matching principal?

A

Book revenue when it is earned and is realized/realizable. The two points are that you EARNED the revenue by performing a serivce, etc. And, the payment MUST be realizable, meaning you are likely to get paid.

Matching Principal: book the expense when the benefit is received

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16
Q

Operating Lease: Assume that a firm, a lessee, signs a lease contract that requires it to make annual lease payments of $121 for two years to the lessor. Assume the leases expected life is also 2 years. Assume the interest rate charged is 10%.

  1. Make the entries required for showing an operating lease
A

($121) cash

($121) lease expense

The above entry is the same entry for both years.

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17
Q

Example:

An investor purchases stock for $100. At the next few reporting periods, the following values result- $110, $90, $150. The investor cashes out at $150. Show the journal entries if classified as an Available-for-sale Security.

A

($100) Cash

$100 investment

Then

$10 investment

$10 AOCI

Then

($20) investment

($20) AOCI

Then

$60 investment

$60 AOCI

Then

$150 cash

($150) investment

($50) AOCI

$50 gain

It is when the investment is sold that the gain is recognized in the income statement and removed from the balance sheet (AOCI).

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18
Q

Describe the mature phase of a company.

A

CFO remains positive and starts to flatten.

CFI flattens and moves towards neutral territory.

CFF moves to 0/negative as the company pays off debt.

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19
Q

Assume a firm issues a $1000 face value bond at 10% interest for 2 years. Make the entries from the bond issuer perspective.

A

$1000 cash

$1000 bond payable

Then

($100) cash

($100) interest expense

Then

($100) cash

($100) interest expense

Finally

($1000) cash

($1000) bond payable

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20
Q

Example:

A company buys a piece of equipment for $1,200. The salvage value is $300. The useful life is 3 years. What are the entries to record the purchase and the depreciation in the first year?

Then

Show impact with new CapEx Deduction

A

($1,200) cash

$1,200 equipment

Then

($300) AD

($300) Depreciation expense

IS:

(300) depreciation
(60) taxes
(240) NI

CF:

(240) NI

300 depreciation

180 DTL

240 cash

BS:

Assets: 240 cash, (300) AD

Liabilities: 180 DTL

SHE: (240) RE

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21
Q

What is the formula to derive gains/losses on sale of equipment?

A

Sale price - book value

book value = historical cost - accumulated depreciation

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22
Q
  1. Non current assets fall under which cash flow section, and non current liabilities fall under which section?
  2. Owners Equity falls under which cash flow section?
A
  1. Non current assets=CFI

Non current liabilities=CFF

  1. Owners Equity=CFF, except for retained earnings which is both CFO (due to NI) and CFF (due to dividends)
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23
Q
  1. What is the owner’s equity formula?
  2. Describe preferred stock
  3. Describe common stock
  4. Descrbie Additional Paid in Capital
A
  1. Assets-Liabilities
  2. Has traits of both debt and equity in that it is equity financing that receives a dividend payment and has the ability to appreciate in value
  3. Common stock is the preferred type of equity financing but has the lowest claim to assets in the event of bankruptcy.
  4. Additional paid in capital is the excess amount of equity financing from investors that is above par value
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24
Q

What are the 3 most important predictions one should make about a company?

A
  1. Can the company generate enough cash to support its daily operation
  2. to invest in activities to support its growth
  3. to satisfy the demands of lenders and investors?
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25
Q

What is the difference between statutory and effective tax rates?

How are effective tax rates derived?

What is the current corporate tax rate?

A

Statutory rates are set by a nation and state’s government. Effective rates are a blend of the two across multiple countries. The formula to derive the effective rate is:

GAAP Tax Expense/ GAAP Pre-Tax Income

Current corporate tax rate is 21%

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26
Q

What would the entry be if you sold $20 worth of inventory for $80 cash?

A

Cash increases $80. Inventory ($20).

Revenue increases $80. COGS ($20).

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27
Q

Assume a face value of $1000. The stated interest rate is 10%, but the market interest rate is 12%. 2 year period. Make the entries from the bond issuers perspective (firm receiving the money)

A

$966 cash

$966 bond payable

Then

($100) cash

$16 bond payable

($116) interest expense

Then

($100) cash

$18 bond payable

($118) interest expense

Finally

($1000) cash

($1000) bond payable

The above was created via an accretion table because the bond was sold at a discount. The reverse would occur if the bond was sold at a premium.

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28
Q

What does retained earnings represent?

A

The cumulative net income excluding dividends since the inception of the company.

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29
Q

Describe the decline phase of a company.

A

CFO starts to decline.

CFI, remains flat or starts to increase to deter falling CFO.

CFF may turn positive if CFO isn’t enough to sustain operations.

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30
Q

Explain how returns are different for equity and debt holders. Explain the different returns in different economic environments.

A

Debt holders receive payment based on the interest rate %. The execess returns flow to the stockholders. In high return situations, the stockholders benefit more. Conversely, in declining situations, creditors typically receive their expected return, whereas stockholders will have negative returns.

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31
Q

What is the difference between basic EPS and diluted EPS?

A

Basis EPS use only common shares outstanding as the denominator.

Diluted EPS uses fully diluted shares, which incorporates convertible debt and stock options. In addition, it can adjust the numerator (NI) to remove the effect of non-recurring items, etc.

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32
Q

What are the two types of leases?

Do both types of leases have the same impact to the P&L? How are they different?

A

Capital leases and operating leases

Yes, both impact the P&L but in different ways. Capital leases impact the P&L via interest and depreciation expense. Also, a lease asset and lease liability are created. In an operating lease, the only expense is lease expense, which is the intially agreed upon payments.

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33
Q

Is land depreciated?

What is book value of PP&E?

A

No, land is NOT depreciated.

Book value = Acquisition cost - Accumulated Depreciation

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34
Q

Is depreciation expense and interest expense included in pre-tax income?

Where do they fall on the income statement and cash flow statement?

A

Yes.

Both are adjusted for in cash flow from operations, but only depreciation is included in operating income. Interest expense/income are not in operating income.

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35
Q

What are the two main methods of depreciation?

What is salvage value?

What is the depreciable value?

A

Straightline and double declining balance.

Salvage value is the value at which a company plans to sell a piece of equipment at the end of it’s useful life.

Depreciable value = Acquisition cost - salvage value.

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36
Q

What are identifiable intangible assets, and what are amortizable intangible assets?

A

Identifiable intangible assets have specific, known rights such as patents, copyrights, and logos.

Amortizable intangible assets have a definite life span.

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37
Q

What happens to depreciation on equipment and facilities involved in production of goods to sell?

Example:

Show the journal entry for $100 in depreciation for the facility housing equipment.

A

It becomes capitalized as a part of inventory.

($100) AD

$100 Inventory

Capitalized depreciation as a part of inventory IS expensed but only when inventory is sold.

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38
Q

What is the journal entry for $7 in taxes that were incurred for a specific period but will be paid at a later date?

A

Taxes payable $7

Tax Expense ($7)

39
Q

Cash paid as dividends falls under which cash flow statement?

A

CFF

40
Q

What are the two main principals of accrual accounting?

A

Revenue and matching principals.

41
Q

What is fair value accounting? What is another term for this?

A

Reflect current market value of certain assets and liabilities.

Also known as mark-to-market accounting.

42
Q

What 4 criteria designate something as a capital lease?

A
  1. At the end of the lease, the title of the leased asset transfers from the lessor to the lessee.
  2. The lease includes a bargain purchase option. This is an option that allows the lessee to purchase the leased asset at the end of a lease at an option price less than the expected fair market value.
  3. The lease term is 75% or more than the expected life of the asset
  4. The PV of the lease payments is 90% or more of the fair market value of the asset at the inceptoion of the lease.
43
Q
  1. If the stated interest rate > market interest rate, the bond is issued at what?
  2. If the stated interest rate < market interest rate, the bond is issued at what?
  3. If the stated interest rate = market interest rate, the bond is issued at what?
  4. The stated rate is also know as?
  5. The market rate is also known as?
A
  1. Premium
  2. Discount
  3. Par
  4. Coupon payment or nominal interest
  5. Yield/Effective Interest rate
44
Q

A firm sells a piece of equipment for $1000 cash. The equipment is listed on the balance sheet at $800.

List the two different outcomes if the transaction was a part of a firms on-going operations or the result of a peripheral activity.

A

On-going Operations:

Cash $1000

Equipment ($800)

Revenue $1000

COGS ($800)

Peripheral Operations

Cash $1000

Equipment ($800)

Gain $200 (Owner’s Equity portion)

45
Q

How are bonds payable valued?

Which interest rate do you use to calculate the above- stated interest rate or market interest rate?

A

At present value

Use both. Use market interest rate to discount. Use stated interest rate to calculate interest payments used in the PV calculation.

46
Q

What are impairments?

Example:

A company buys a piece of machinery for $36,000. It used straightline depreciation over two years with no residual/salvage value. After year 1, due to changes in the economy, the asset needs to be written down to $14,000. Currently, the book value is $18,000, which is the historical cost minus 1 year of depreciation. Make the entry.

A

Impairments occur when the future benefits of the asset are not expected to occur. thus, they must be written down. This also applies to Goodwill.

Example:

($4,000) machine

($4,000) impairment loss

47
Q

Assume a firm has $100 in revenues and spends $20 on an asset that has a 2 year life. Using straight line depreciation, show the current income statement and then the tax return if the government allowed accelerated depreication for the current tax return. Assume a 40% tax rate.

Also, make the appropriate entry showing taxes.

A

Income statement

$100 revenues

($10) depreciation expense

$90 pre-tax income

($36) taxes

Tax Return

$100 revenues

($20) depreciation expense

$80 taxable income

($32) taxes

Entry

($32) cash

$4 Deferred Tax Liability

($36) Tax Expense

48
Q

What do you do when you see gains/losses in the income statement relating to the cash flow statement?

A

I need to perform transaction analysis to get the true amount of cash received. For example, if the change in investments is (4), that indicates that the firm sold the investment and recieved money. However, that does not reflect all of the cash received, becuase of the way gains are accounted for. Thus, if the change was (4) and the gain was 5, then the total cash received for that sale was 9. So, that will be the adjustment for CFI, but I have to subtract the gain of 5 in order to avoid double counting.

49
Q

What is included in the operating section of the income statement?

What is in the non-operating, pre tax income portion of the income statement?

A

Revenues, COGS, SGA expenses, R&D expense, depreciation expense

Interest expense, investment income, other income, interest income, dividends received, taxes

50
Q

What are the three levels of ownership for accounting purposes, what is the corresponding % ownership, and which type of accounting method is used to record that ownership?

All three initial stock purchases are recorded at ____?

A

Passive, significant influence, control

Passive:

Less than 20%. Fair Value Method or (rarely) cost method

Significant Influence

20% to 50%. Equity method

Control

Greater than 50%. The investors consolidates its financial results with the investee’s financial results

Initial stock purchases are recorded at acquistion cost, which includes brokers fees.

51
Q

What is the future value/compound interest formula?

What is the present value formula, given a future value and you need a present value?

Why do I need to understand present value for accounting?

What are annuities?

A

Principal x (1 + (r/t))^(nt)

Future Value/(1 + rate)^# of periods

Many components of the balance sheet are measured in present value.

Multiple payments that are the same amount and spread across an equal interval/

52
Q

Labeling the follow events as CFO, CFI, or CFF:

  1. Firm issues $100 in stock for cash
  2. The firm borrows $10
  3. The firm buys PPE by paying in both cash/debt
  4. The firm buys inventory.
  5. The firm sells $15 of inventory for $28.
  6. The firm records interest expense on debt.
A
  1. CFF
  2. CFF
  3. CFI
  4. CFO
  5. CFO
  6. CFO
53
Q

What are seasoned equity offerings?

A

Stock offerings (sales of shares) that occur after an IPO.

54
Q

What is the cost principal? What is another term for that?

A

Assets are recorded on the balance sheet at their cost, which means cash value or cash equivalent value (PV).

Another term: Historical cost

55
Q

What is the term for forecasted financial statements?

A

Pro-forma financial statements

56
Q

Are there recordable events to the cash flow statement if the source is credit?

A

Yes, because you have to make adjustments for non cash items

57
Q
  1. Explain the logic behind deferred tax assets in regards to contingent liabilities and restructurings.
  2. Explain how deferred tax liablities result.
A
  1. Contingent liabilities and restructurings are accrued prior to cash disbursement. Thus, tax authorities will not allow a company to realize the tax benefit of those deductions until the cash disbursements have been made. Thus, a deferred tax asset is created.
  2. Deferred tax liabilities result when a company has accelerated deductions, thus leaving future periods with little tax deductions, thus resulting in higher taxes..
58
Q

How is the acquisition of fixed assets and the resulting freight, and trials runs accounted for?

Example:

Assume a company buys a machine with debt. The PV of the cash payments is $10,000. The firm will pay $11,000 to the bank in one year. Make the entries.

A

They are capitalized.

Example:

$10,000 machine

$10,000 note payable

Then

($11,000) cash

($10,000) NP

($1000) interest expense

59
Q

Current assets and current liabilities, excluding ___ and ___ fall under which cash flow section?

A

Excluding current maturities of long term debt (CFF) and dividends payable (CFF) belong under CFO

60
Q

Cash received or paid in short and long term borrowing is part of which cash flow section?

A

CFF

61
Q

What is Allowance for Doubtful Accounts? What type of line item is it?

Assume a firm makes a $100 sale, but does not expect to collect $5 of that sale. Show the journal entry recording the ADA.

Then, show the journal entry that occurs when the expectation of $5 in ADA comes true, and the company only receives $95.

A

Allowance for Doubtful Accounts is a contra asset account that is an estimate of uncollectable receivables.

($5) ADA (Asset)

($5) Bad Debt Expense (Owner’s Equity)

Then:

($95) AR

$95 cash

($5) AR (write off)

$5 ADA

62
Q

Dividends received falls under which cash flow category?

A

CFO

63
Q

Explain the difference between soft vs hard financing.

A

Soft financing is equity financing, because stock does not have to be repurchased. If investors want to sell their shares, they do so to other investors. The only tangible expense directly involved is payment of dividends.

Hard financing is debt financing, since that requires the payment of interest and repayment of principal.

64
Q

Using the fair value method, securities must be classified as which two types? Explain each of the two types.

What happens at every reporting period for reporting using the fair-value method for the two types of securities?

A

Trading or Available for sale.

Trading securities are securities that can be bought and sold relatively quickly. Available for sale securities are securities that aren’t trading securities.

Both types of securities are revalued according to its new value, EVEN IF that results in a gain.

65
Q

What is a contra-account, and why is it used?

A

A contra account is used to revalue another account. An example is the contra account for PPE. This is used show the PPE account shows the historical cost and how much depreciation has accumulated.

66
Q

What is the difference between capitalizing something versus expensing something?

A

Capitalizing something creates an asset, while expensing something decreases owners equity.

67
Q

Example:

A firm (a lessee) signs a lease contract that requires it to make annual lease payments of $121 per year for 2 years to the lessor. The lease asset has a useful life of 2 years. Thus, this becomes a capital lease. The interest rate is 10%. Make the initial entry and the entry for after year 1 of the lease. Assume straightline depreciation.

A

Example:

PV = 210

$210 Leased Asset

$210 Lease Liability

Then

($121) cash

($100) lease liablity

($21) interest expense

Then

($105) AD

($105) Depreciation expense

68
Q

Is Goodwill amortized? If not, then how is it adjusted?

What method is used to amortize intangible assets?

A

No, but it is tested for impairment.

Straight line amortization.

69
Q

How is inventory revalued yearly?

Example:

Firm has inventory valued at $90, but the market values it at $60. What is the entry to make the adjustment.

A

It is revalued according to lower of cost or market. Market value is what it would currently cost to get the inventory currently held.

Example:

($30) inventory

($30) COGS

70
Q

What do restructurings typically refer to?

Example:

Assume a headcount reduction is about to occur and the expect cost of severance packages is $1,000,000. Make the entries.

A

Restructurings typically refer to severance packages for headcount reductions.

Example:

$1,000,000 restructuring liability

($1,000,000) restructuring expense

Then

($1,000,000) cash

($1,000,000) restructuring liability

71
Q

What are the 4 types of inventory costing?

When prices are rising, which type of costing would give the lowest NI?

A

Specific identification, LIFO, FIFO, and Weighted Average.

LIFO would give the lowest NI in the event of rising prices.

72
Q

What is the fundamental accounting equation?

A

Assets=Liabilities + Stockholder’s Equity

73
Q

What is the indirect method of deriving CFO? (show why it is the preferred method)

A

CFO= NI+Depreciation/Amortization expense - Gains + Losses - Changes in CFO-related assets + Changes in CFO related liabilities

You subtract changes in CFO related assets to avoid double counting within NI. For example, if AR increases, that increase is going to NI. However, that is not a cash increase, but remember that it is reflected in NI. So, remove the AR affect from the cash profile.

On the contrary, imagine AP increasing. That is an expense reducing NI, which is the starting point for CFO. So, to remove the deducation, the change needs to be added.

Gains/losses from investments/PPE need to be adjusted for as well. Refer to the income statement

74
Q

What are the two types of R&M, and how are they treated differently?

Example: A firm spends $1000 to conduct R&M. Show the two scenarios of ordinary R&M vs extraordinary R&M

A

Ordinary and extraordinary.

Ordinary repairs are expensed, whereas extraordinary repairs are capitalized.

Example

Ordinary

($1000) Cash

($1000) R&M expense

Extraordinary

($1000) cash

1000 equipment

75
Q
  1. Make the entry for $100 in stock repurchases.
  2. Make the journal entry if the firm were to resell that $100 in stock for $120.
A
  1. ($100) cash

($100) Treasury Stock

  1. $120 cash

$100 treasury stock

$20 APIC

APIC absorbs in the gains or losses from reselling shares. No specific gain or loss is listed!

Reverse the same amount of treasury stock at which it was initially acquired.

76
Q

How is a contingent loss booked if the loss type is probable and it is estimable?

Are contingent gains booked? Why or why not?

Where are other contingent gains/losses recorded?

A

It is booked in owner’s equity as a contingent loss and booked as a liability.

Contingent gains are NOT booked. This violates the conservatism principal.

Other contingent gains/losses are recorded in the footnotes.

77
Q

What are the three types of inventory production facilities have?

All three types of inventory create ___?

A

DM, WIP, FG

COGM and then COGS

78
Q
  1. What is the difference between taxable and deductible items for taxes?
  2. Postponed deductions will lead to what?
A
  1. Taxable items are taxed, whereas deductible items reduce your taxable income, therefore reducing the amount of taxes a firm owes.
  2. Deferred Tax Assets
79
Q
  1. What is treasury stock?
  2. Why would a firm repurchase stock?
A
  1. Treasury stock is stock that a firm repurchases from investors. It is a CONTRA EQUITY account
  2. Boost EPS

Repurchases are favored over dividend increases because they are taxed at a lower rate

Dilute the effect of employee stock option exercising

Defense against a takeover

80
Q

Why differentiate between gains/revenues and losses/expenses?

A

Revenues and expenses are likely to continue, whereas gains/losses may not persist and MAY be material enough to be considered as one-off items.

This is why I reported “quality of earnings” due to the impact of gains/losses and other one-offs.

81
Q

Balance sheet Asset line items are listed in order of ____?

List the order of 7 assets.

A

Liquidity

Cash, AR, Short Term Investments, Inventory, Pre-Paid expenses, PPE, Intangible assets

82
Q

What is net realizable value and what is the formula?

A

NRV= AR-ADA

It is the amount of AR a company expects to receive after adjusting for ADA.

83
Q

Explain the process of capitalizing depreciation for an asset to inventory.

How would you reconcile depreciation between the IS and Cash Flow?

A

If a piece of equipment or building is used for production, the depreciation for that will be capitalized to inventory and then expensed via COGS.

I would add the depreication in the IS and compare it with the cash flow statement as well as look in note disclosures, etc. I have to recognize that depreciation is hidden in COGS and sometimes SG&A. Therefore, IS depreciation will not always tie to cash flow depreciation.

84
Q

Example:

A firm purchased machinery for $50,000. The asset had a $5,000 residual value over a 5 year estimated life. The firm uses the double declining balance method. After 2 years, the company sells the machine for $25,000. (Current book value is $18,000). Make the entry to record the disposition.

A

($50,000) machine

$32,000 AD

$25,000 cash

$7,000 gain (owner’s equity)

85
Q

Describe the life cycle stage of an new firm just starting.

A

CFO is typically negative because it takes time to identify a customer base, establish a presence, etc

CFI is usually negative as CapEx is used to buy equipment, infrastructure, etc

CFF is usually positive since CFO and CFI are negative; hence, it needs outside sources of capital. Cash is, of course, coming from lenders and investors.

86
Q

Cash received or paid in the sale or purchase of PPE falls under which cash flow category?

A

CFI

87
Q

When is interest expense capitalized in regard to fixed assets?

What is the formula for Total Interest?

What is the formula for interest to capitalize?

Example:

A company spends $1,500,000 to build a facility. It has $5,000,000 in debt. The interest rate on the debt is 10%. Make the entry to capitalize interest expense.

A

Interest is capitalized when firms construct assets for its own use.

Total Interest=principal x rate x time

Capitalized interest= expenditure x rate x time

Example:

Total interest = $5,000,000 x 10% x 1 = $500,000

Capitalized Interest = $1,500,000 x 10% x 1 = $150,000

Interest expense = $350,000

Journal Entries

$150,000 Building (CIP)

$500,000 interest payable

($350,000 interest expense)

88
Q

Describe the growth phase for a company.

A

CFO moves from being negative to postive as sales increase.

CFI remains negative as the company continues to invest.

CFF continues to remain positive as the company still needs external financing to sustain its operations.

89
Q

Gains and losses for trading securities flow to which statement?

Available-for-sale securities’ gains and losses flow to which statement?

Example:

An investor purchases stock for $100. At the next few reporting periods, the following values result- $110, $90, $150. The investor cashes out at $150. Show the journal entries if classified as a Trading Security.

A
  1. Income statement
  2. Balance sheet in AOCI

Example:

($100) Cash

$100 Investment

Then

$10 Investment

$10 Gain (unrealized) (owner’s equity)

Then

($20) investment

($20) Loss (unrealized) (owner’s equity)

Then

$60 investment

$60 gain (unrealized) (owner’s equity)

$150 cash

($150) investment

90
Q

Why is debt generally cheaper than equity?

A

It is typically a lower risk since lenders can require collateral and other agreements that reduce risk. Lenders also have a higher claim to assets than do equity holders. Interest is also tax deductible.

91
Q

How do you adjust the return of a bond with a stated interest rate?

A

Adjust the issue price. Decrease the price to increase returns (issue at discount), or increase the price for lower returns (issue at premium).

92
Q

Cash received or paid in the sale or purchase for available for sale securities falls under which cash flow category?

A

CFI

93
Q

How are adjustments using the equity method derived?

Example:

Assume an investor buys 25% of an investee for $100. After 1 year, the investee reports $20 of NI. Make the journal entries.

How does this method differ from the fair-value method?

What determines whether equity method investments are a part of operating or non-operating income?

A
  1. Identify what % of ownership occurs
  2. Multiply that % of ownership to the NI and adjust based on that

Example:

($100) cash

$100 investment

Then

$5 investment

$5 investment income

This is different from the fair value method because the investment is not marked to market, but rather the investment account is adjusted based on the investee’s NI. Also, the resulting increase flows to investment income, rather than a gain or AOCI.

Also, the investment income can be a part of the investor’s operating income if the investor and investee are in the same business. If they are different business types, then it would go to non-operating income

94
Q

Assume a face value of $1000. The stated interest rate is 10%, but the market interest rate is 8%. 2 year period. Make the entries from the bond issuers perspective (firm receiving the money)

A

$1036 cash

$1036 bond payable

Then

($100) cash

($17) bond payable

($83) interest expense

Then

($100) cash

($19) bond payable

($81) interest expense

Finally

($1000) cash

($1000) bond payable

Accounting (11 decks)

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