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Accounting > Chapters 7 and 9 > Flashcards

Chapters 7 and 9 Flashcards

1
Q

Name the current liabilities items

A

Operating liabilities:
1. Accounts/trade payable
2. Accrued liabilities/expenses
3. Deferred performance liabilities

Nonoperating liabilities:
1. Short-term debt
2. Current maturities of long-term debt

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2
Q

What are accounts payable/ trade payables?

A

These are debts to suppliers. They are often paid within 12 months and increases ROE due to low interest rate.
Excessive use damages relationship with suppliers, which often give a discount if payment is fulfilled within a specific timefrime.

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3
Q

what are accrued liabilities/expenses?

A

Costs that are already incurred but not yet paid. This is reported as a decrease in equity becasue cost is already expensed. Once the liabilities/expenses have been paid, the accrued liabilities decrease. Different types are provisions and contingent liabilities.

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4
Q

What are deferred performance liabilities?

A
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5
Q

What is short-term debt?

A
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6
Q

What is meant by the current maturities of long-term debt?

A
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7
Q

What is the net-of-discount method?

A

If there is a discount, the amount of accounts payable will be reported as the amount of how much the firm would need to pay if it used the discount.

If payment is not fulfilled within the discount timeframe, the ‘Interest expense, discount lost’ is reported.

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8
Q

How is a discount on accounts payable noted?

A

Discounts on accounts payable as 1/10 n/30.
This means you get a 1% discount if paid within ten days, within 30 days you have to pay full amount.

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9
Q

What are the types of accrued liabilities/expenses?

A
  1. Provisions
  2. Contingent liabilities
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10
Q

Wat are provisions?

A

Sometimes accounts payable are uncertain. Provisions will be recognised if it’s probable (+50%) and amount to be paid is reasonable estimable at expected value of all possible amounts. Te present obligation is due to past event.

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11
Q

What are contingent liabilities?

A

Contingent liabilities is an expense that may be occured due to the outcome of an uncertain event in the future.
It’s contingent when:
1. Happens in future
2. Payment amount will be uncertain
3. It’s unlikely that it will have to be paid

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12
Q

How is short-term interest bearing debt reported?

A

1-1: + Cash + Notes payable
31-3: + Interest Payable (BS) + Interest expense (IS)
1-4: - Interest payable - Cash
31-12: - Cash and notes payable

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13
Q

What is the interest expense on debts that are not financed by bonds?

A

Principal * Annual interest rate * portion of the year outstanding

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14
Q

What is short-term interest bearing debt?

A

Bank lends money to a given level and the company will pay it back within a year.

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15
Q

What are warranties?

A

Warranties are commitments of companies to custoers to replace/repair defective products within a certain timeframe. Costs can be estimated based on historical data and should be noted as a liability (provision) and expense (repairment costs)

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16
Q

What are instalment loans?

A

Loans that require a fixed payment for a specific time period. These payments are often sceduled in a loan amortisation table. This is an annuity-loan. These are often smaller amounts.

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17
Q

What are bonds?

A

Debt instruments that pay the bondholder a specific amount (coupon rate) and the face amount (principal) is often paid back at maturity.
Underwriters sell these bonds to retail clients and portfolo managers.

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18
Q

What are current maturities of long-term debt?

A

This is the portion of long-term debts that needs to be repaid within a year.

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19
Q

Factors that influence bond pricing

A
  1. Coupon rate: Interest paid on face value of bond. This is fixed
  2. Market rate: The interest rate required by the market. This changes constantly
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20
Q

How is the bond price determined?

A

The bond price is the present value of future cash flows (both interest payment and principal payment at maturity)

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21
Q

What are the methods of bond pricing?

A
  1. Pricing at par value (coupon rate = market rate)
  2. Pricing at discount (coupon rate< market rate)
  3. Pricing at premium (coupon rate > market rate)
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22
Q

What is the effective cost for the different bonds?

A
  1. At par it’s the interest payment
  2. At discount it’s the interest + discount (expensed)
  3. At premium: Interest - premium amortization)

Discount and amortization costs are expensed over life of the bond.

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23
Q

How is bond financing reported when bond is priced at par value?

A

+1000 Cash
+ 1000 Bonds payable

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24
Q

How is bond financing reported when bond is priced at a discount?

A

+ 900 Cash
+ 1000 bonds payable
+ 100 bond discount (expensed over life of bond)

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25
Q

How is bond financing reported when bond is priced at a premium?

A

+ 1100 Cash
+ 1000 Bonds payable
+ 100 bond premium (premium amortised over lifetime of bond and reducted from interest payment.

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26
Q

How is interest expense calculated over bond priced at discount?

A

Coupon payment + Amortisation of discount = Interest expense

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27
Q

How is interest payment reported when bond is priced at discount?

A
  • 100 Cash
  • 10 Bond discount
    -110 Interest expense
  • 110 retained earnings & net income

Total is 110 in interest expense

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28
Q

How is interest expense calculated when bond is priced at premium?

A

Cash interest paid (coupon) - Amortisation of premium

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29
Q

How is interest payment reported when bond is priced at premium?

A
  • 100 Cash
  • 10 bond premium
  • 90 interest expense/net income / retained earnings
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30
Q

How is the value of the bond reported?

A

Value of bond is reported at fair value = net historical cost + fair value adjustment

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31
Q

How is the value increase of a bond reported?

A

+ 1000 liabilities (fair value adjustment)
+ 1000 expense/ net income / retained earnings

32
Q

How is the value decrease of a bond reported?

A
  • 1000 liabilities (fair value adjustment)
  • 1000 expense
    + 1000 net income/retained earnings
33
Q

What is a call provision?

A

Gives company the right to pay off bonds prematureley for a small premium above face value (value at issuance).

34
Q

How do you calculate Times Interest Earned?

A

EBIT/ Interest expense

35
Q

What are covenants?

A

Restriction on the company taking on debt to protect the parties lending out money (debtholders). Most restrictions are on excessive cash payments.

36
Q

Gain/loss on bond repurchase

A

Book (fair) value of bond - repurchase payment

37
Q

Components of contributed capital

A
  1. Share capital reported at par value(stock)
  2. Preference shares
  3. Contributed surplus
38
Q

What is contributed capital?

A

Capital put into the business by owners

39
Q

What are the components of earned capital?

A
  1. Retained earnings
  2. Accumulated other comprehensive income
40
Q

What do dividend payments and share repurchases have for effect on financial statements?

A

Reduce cash and change retained earnings

No expenses booked

41
Q

What are ordinary shares?

A

Common shares give voting rights and primary ownership of the business.

42
Q

What are authorised shares?

A

limit of how much shares a company can issue

43
Q

What is shares issued?

A

Actual number of shares sold to public

44
Q

What is shares outstanding?

A

issued shares - shares repurchased as treasury shares

45
Q

What are preference shares and what are common preferences?

A

Preference shares have some preference over common shares. Common preferences are dividend and liquidation preferences.

46
Q

What is a dividend preference share?

A

Dividend is received before regular shares are paid dividends

47
Q

What are liquidation preference shares?

A

In case of liquidation, shareholders get their money after creditors and tax agency. Liquidation preference means that preference shareholders get back the par value of their shares, or sometimes more = liquidating value

48
Q

What are possible features of preference shares?

A
  1. Call feature
  2. Conversion feature
  3. Participation feature
49
Q

What is the call feature of preference shares?

A

Company has right to repurchase at predetermined price

50
Q

What is the conversion feature of preference shares?

A

Option to convert preference shares to ordinary shares

51
Q

What is the participation feature of preference shares?

A

Option to share in dividend for common shares pro rata when the company pays out a lot of dividend in times of great performance.

52
Q

Reasons for buying back shares

A
  1. Company believes their shares are undervalued. Believes this gives good signal to market
  2. Offset dilutive effects of share option programmes.
  3. Resell later at higher price, recording an increase in contributed surplus.
53
Q

What are treasury shares?

A

The shares that the company buys back in the market are called treasury shares

54
Q

What are dividends in arrears?

A

Dividend preference shares get an annual dividend paid out. If the company fails to do so in a given year, the dividend has to be paid out the following year dividend is being paid out.

55
Q

What is share dividend?

A

Dividend is paid out in shares, not cash. (E.g. 1 share per 20 shares owned)

This decreases retained earnings and increased contributed capital by par value or fair value

56
Q

What are the share dividend valuation methods?

A
  1. Fair value approach
  2. Par value approach
57
Q

What is the fair value approach to valuing share dividends?

A

Retained earnings decrease bu market value and contrinuted capital increases by par value. Remainder goes to contributed surplus

58
Q

What is the par value approach to valuing share dividends?

A

Reduce retained earnings by par value and increase share capital by par value.

59
Q

What is a share split?

A

Distribution of shares based on a certain ratio.

Keep in mind that the par value of those shares has to be adjusted to the new ratio.

60
Q

What is comprehensive income?

A

Net income + gains/losses in other comprehensive income (foreign currency adjustment, PP&E revaluation etc.)

61
Q

What are the methods of reporting comprehensive income?

A
  1. Combine IS with statement of comprehensive income. Starts with IS but Net Income is a subtotal, followed by comprehensive income
  2. Two seperate statements
62
Q

Why do some prefer comprehensive income over net income?

A

Some say Net income reflects on management performance while comprehensive income also takes into account events outside of company control.

63
Q

How do you calculate net income available for common shareholders?

A

Net Income available TO common shareholders - preference dividends

64
Q

How do you calculate common shareholders’ equity?

A

Equity attributable to parent shareholders - Preference shares (share capiatl and contributed surplus)

65
Q

How do you calculate return on common equity?

A

Net income available FOR common shareholders/ average common shares outstanding

66
Q

How do you calculate the company’s book value per share?

A

(Common shareholders equity - preference shares)/ ordinary shares outstanding

67
Q

How do you calculate Basic EPS?

A

Net income available FOR common shareholders/ weighted average ordinary shares outstanding.

68
Q

How do you calculate Dilutive EPS?

A

(Net income available for common shareholders +add-backs)/ weighted average number of common shares outstanding + shares of convertible securities and share options assumed to be converted

69
Q

What are add-backs?

A

Added shares if all convertible securities were exercised at Jan 1.

70
Q

When should Dilutive EPS be reported?

A

It should only be reported if Basic EPS > Dilutive EPS

71
Q

How is Change in Accumulated other comprehensive income calculated?

A

Total comprehensive income - net income

72
Q

When does an accrued liability become an account payable?

A
73
Q

What are the elements of the time value of money?

A
  1. Risk
  2. Expected inflation
  3. Postponed consumption
73
Q

What is a constructive provision?

A

Not legally mandated but it is inevitable

74
Q

How do you calculate the present value of an annuity?

A

A = A * [1- (1+r) ^-n] / r

A = Annuity
r = interest rate
n = number of periods

75
Q

What is a bullet loan?

A

A loan that is paid back at once at the end of the loan’s life.

76
Q

Q

A

S

Accounting (6 decks)

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