EXAM 3

Question 1

promissionary note

Answer 1

a credit agreement, the terms are legally documented

Question 2

the promissionary note includes the:

Answer 2

maker
payee
principle
interest
maturity date
collateral

Question 3

contingent liability

Answer 3

is a potential obligation arising from a past event
- if its probable and the amount can be reasonably estimated, a liability is recognized
- if the likelihood is reasonably possible but not likely or if it is probably but cannot be reasonably estimated, the potential liability is disclosed in the notes
- if the likelihood is remote, no liability needs to be recognized

Question 4

current (short-term) assets and an operating cycle

Answer 4

anything expected to be converted to cash or consumed within one year
- cash, accounts receivable, inventory, market securities

the average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash

Question 5

current (short-term) liabilities

Answer 5

those due within one year or an operating cycle
accounts payable
current notes payable
wages payable
taxes payable
interest payable

Question 6

classified balance sheets

Answer 6

balance sheets that distinguish between current and concurrent items, to enhance the usefulness of accounting information

Question 7

sole proprietorship

Answer 7

owned by a single individual who is responsible for making business and profit distribution decision

Question 8

partnership

Answer 8

allow persons to share their talents, capital, and risks and rewards of ownership
partnership agreement

Question 9

corporation

Answer 9

separate legal entity created by the authority of a state government. all states require the application to provide articles of incorporation

Question 10

securities act of 1933 and securities exchange act of 1934

Answer 10

regulate issuing stock and govern the exchanges

Question 11

double taxation

Answer 11

corporations only
they pay income taxes on their earnings and then owners pay income taxes on distribution(dividends) receives from corporations

Question 12

limited liability

Answer 12

the corporation form limits an investors potential liability as an owner of a business venture
creditors cannot claim owners personal assets as payment for the company’s debts

Question 13

continuity

Answer 13

unlike partnerships or proprietorships, which terminate with the departure of their owners, a corporation’s life continues when a shareholder dies or sells his or her stock

Question 14

transferability

Answer 14

an investor simply buys or sells stock

Question 15

corporations have 3 tiers of management authority:

Answer 15

the owners (stockholders)
the stockholders elect a board of directors
the directors hire professional executives to manage the company on a daily basis

Question 16

treasury stock

Answer 16

when a corporation buys back some of its issued stock from the public

Question 17

all corporations issue

Answer 17

common stock

Question 18

par value and legal capital

Answer 18

represents the maximum liability of investors
par value x shares issued = minimum amount of assets that must be retained (legal capital)

Question 19

the price an investor must pay to purchase a share of stock is the

Answer 19

market value

Question 20

book value per share is calculated

Answer 20

by dividing total stockholders equity (assets - liabilities) by the number of shares of stock owned by investors

Question 21

the maximum number of shares of stock corporations are legally permitted to issue

Answer 21

called authorized stock

Question 22

outstanding stock

Answer 22

total issued stock minus treasury stock =
stock owned by investors outside the corp

Question 23

horizontal analysis aka

Answer 23

trend analysis
refers to the studying of behavior of individual financial statement items over several accounting periods

Question 24

working capital aka current ratio

Answer 24

current assets minus current liabilities

Question 25

profitability ratios

Answer 25

asses a company success in generating profits and how these profits are used to reward investors

Question 26

The party who borrows money in a note payable is known as the:

Answer 26

issuer and the maker

Question 27

Where is treasury stock reported on a corporation’s balance sheet?

Answer 27

a deduction from stockholders equity

Question 28

Flagler Corporation has issued 135,000 shares of common stock. This is calculated by

Answer 28

dividing the total amount in the Common Stock account ($675,000) by the par value per share ($5).

Question 29

dept to equity ratio =

Answer 29

total liability/total stockholders equity

Question 30

return on investment =

Answer 30

net income/ average total assets

Question 31

earnings per share =

Answer 31

net earnings available for common stock/ average number of outstanding common stock