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ACC 305 > Exam 3 > Flashcards

Exam 3 Flashcards

1
Q

Identification, measurement, and communication of financial information about economic entities to interested parties

A

Financial accounting

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2
Q

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions

A

Assets

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3
Q

Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations

A

Revenue

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4
Q

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions

A

Liabilities

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5
Q

Residual interest in the assets of an entity that remains after deducting its liabilities

A

Shareholders’ equity or stockholders’ equity

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6
Q

Stock repurchased by the issuer and intended for retirement or resale to be public

A

Treasury stock

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7
Q

Increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests in it

A

Investments by owners

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8
Q

Decreases in equity of a particular enterprise resulting from transfers to owners

A

Distributions to owners

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9
Q

Financial assets held by an enterprise for earning income by way of dividends, interest, or capital appreciation, or for other benefits to the investing enterprise

A

Investments

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10
Q

Represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences and operating loss carry forwards existing at the end of the current year

A

Deferred Tax Asset

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11
Q

Represents in the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year

A

Deferred Tax Liability

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12
Q

An arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years

A

Pension

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13
Q

A contract between two parties which guarantees the lessee (the renter) use of an asset and guarantees the lessor (the property owner) regular payments from the lessee for a specified number of months or years

A

Lease

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14
Q

No-par stock reasons for issuance: Avoids ____ and avoids confusion over ________

A

Contingent liability

Recording par value versus fair market value

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15
Q

General rule: companies should record stock issued for services or property other than cash at the ______ or ______ whichever is more clearly determinable

A

-Fair value of the stock issued

or

-Fair value of the non-cash consideration received

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16
Q

Direct costs incurred to sell stock, such as _____ costs, _____ fees, ____ costs, and ____ should be reported as a _____ of the _______

A
  • Underwriting costs
  • Account & legal fees
  • Printing costs
  • Taxes

Reduction of the amounts paid in (Paid-in Capital in Excess of Par)

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17
Q

Corporations purchase their outstanding stock to (5):

A
  • Provide tax-efficient distributions of excess cash to stockholders
  • Increase earnings per share and return on equity
  • Provide stock for employee stock compensation contracts or to meet potential merger needs
  • Prevent takeover attempts or to reduce the number of stockholders
  • Make a market in the stock
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18
Q

Sale of treasury stock above cost and below cost both increase ____ and ____

A

Total assets and stockholders’ equity

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19
Q

Retiring treasury stock decision results in ____ of the ____ and a ____ in the number of _______

A

Cancellation of the treasury stock

and

Reduction in the number of shares of issued stock

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20
Q

Few companies pay dividends in amounts equal to their legally available retained earnings. Why? (5)

A
  • Maintain agreements with creditors
  • Meet state incorporation requirements
  • To finance growth or expansion
  • To smooth out dividend payments
  • To build up a cushion against possible losses
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21
Q

A company should not pay a dividend unless both the ___ and ____ financial position warrant the distribution

A

Present and future

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22
Q

The SEC encourages companies to disclose their dividend policy in their annual report, especially those that ______ or ______

A
  1. Have earnings but fail to pay dividends

or

  1. Do not expect to pay dividends in the foreseeable future
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23
Q

The SEC encourages companies that consistently pay dividends to indicate whether they ___________

A

Intend to continue this practice in the future

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24
Q

Types of dividends (3):

A
  • Cash dividends
  • Property dividends (dividends in kind)
  • Liquidating dividends
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25
Q

All dividends, except for stock dividends, ________ in the corporation

A

Reduce the total stockholders’ equity

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26
Q

Board of directors vote on the declaration of ____

A

Cash dividends

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27
Q

A declared cash dividend is a ____

A

Liability

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28
Q

Companies do not ___ or ______ on treasury stock

A

Declare or pay cash dividends

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29
Q

Cash dividends three dates:

A

a. Date of declaration
b. Date of record
c. Date of payment

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30
Q

Property dividends are dividends payable in assets other than ___ and are to restate at ________, recognizing any gain or loss

A

Cash

Fair value the property it will distribute

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31
Q

Liquidating dividends:

Any dividend not based on ____ reduces ______.

The portion of these dividends in excess of _______ represents a return of part of the ______

A

Earnings
Corporate paid-in capital

Accumulated income
Stockholder’s investment

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32
Q

Issuance by a company of its own stock to shareholders on a pro rata basis, without receiving any consideration

A

Stock dividends

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33
Q

Stock dividends are used when management wishes to “_____” part of _____

A

Capitalize

Earnings

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34
Q

If stock dividend is less than ____% of the common shares outstanding, company transfers ______ from _____

(small stock dividend)

A

20-25%

Fair market value

Retained earnings

(small stock dividend)

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35
Q

Stock splits are used to ______ of shares.

______ recorded for a stock split.

____ par value and ____ number of shares

A

Reduce the market value

No entry

Decrease

Increase

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36
Q

Large stock dividend is _____% of the number of shares previously outstanding

A

20-25%

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37
Q

Large stock dividend has same effect on market price as a _____. Par value is transferred from ______ to ______

A

Stock split

Retained earnings

Capital stock

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38
Q

Disclosure of Restrictions on Retained Earnings:

Restrictions are best disclosed by ___.

Restrictions may be based on the retention of a certain ______, the ability to maintain certain _______, additional _____, and other considerations

A

Note

Retained Earnings balance

Working capital requirements

Borrowing

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39
Q

Analysts use stockholders’ equity ratios to evaluate a company’s ____ and _______

Three ratios:

A

Profitability

Long-term solvency

  1. Rate of return on common stock equity
  2. Payout ratio
  3. Book value per share
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40
Q

Ratio shows how many dollars of net income the company earned for each dollar invested by the owners

A

Rate of Return

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41
Q

Rate of return formula:

A

[Net income - Preferred dividends]/Average common stockholders’ equity

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42
Q

Payout ratio formula:

A

Cash dividends/[Net income - Preferred dividends]

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43
Q

Amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet

A

Book value per share

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44
Q

Book value per share formula:

A

Common stockholders’ equity/Outstanding shares

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45
Q

The acquisition cost adjusted for the amortization of discount or premium, if appropriate

A

Amortized cost

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46
Q

Classify a debt security as held-to-maturity only if it has both 1. the _______, and 2. the ability to _______.

A

Positive intent

Hold securities to maturity

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47
Q

Held-to-maturity is accounted for at ____ cost, not fair value

A

Amortized

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48
Q

Companies report available-for-sale securities at _____, with unrealized holding gains and losses reported as _______, a separate component of stockholder’s equity, until realized

A

Fair value

Other comprehensive income

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49
Q

Any discount or premium on available-for-sale securities is ____

A

Amortized

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50
Q

If company sells available-for-sale securities before maturity date:

It must make entries to remove from the ______ account the ____ cost of bonds sold

Any realized gain or loss on sale is reported in the “___” section of the ________

A

Debt investments

Amortized

Other

Income statement

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51
Q

Companies report trading securities at ____, with unrealized holding gains and losses reported as part of _____

A

Fair value

Net income

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52
Q

Net change in the fair value of a security from one period to another, exclusive of dividend or interest revenue recognized but not received

A

Holding gain or loss

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53
Q

Investments in equity securities cost includes price of the ____, plus _______ related to purchase

A

Security

Broker’s commissions and fees

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54
Q

Investor has passive interest up to __% and investment is valued using _____

A

20%

Fair value method

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55
Q

Investor has significant influence between ___% and ___% and investment is valued using _____

A

20%-50%

Equity method

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56
Q

Investor has controlling interest between ___% and ___% and investment is valued on parent’s books using cost method or equity method (investment eliminated in _____)

A

50%-100%

Consolidation

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57
Q

Holding of less than 20% without readily determinable fair value: value and report the investment using a _______

A

Practicability exception

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58
Q

Practicability exception:

Entities report equity investments at ______ for changes in observable prices minus impairment. Entities recognize dividends when _____ and generally recognize gains or losses when _____

A

Cost adjusted

Received

Selling the securities

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59
Q

Holdings of less than 20%:

Upon acquisition, companies record equity securities at ____

A

Cost

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60
Q

An investment (direct or indirect) of 20% or more of the voting stock of an investee should lead to a presumption that in the absence of evidence to the contrary, an investor has the ability to exercise _____ over an investee

A

Significant influence

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61
Q

In instances of “significant influence,” the investor must account for the investment using the _____

A

Equity method

62
Q

Comparison of Equity method to Fair value:

Record the investment at ____ and subsequently adjust the amount each period for the _______ and _______

A
  • The investor’s proportionate share of the earnings (or losses)
  • Dividends received by the investor
63
Q

If investor’s share of investee’s losses exceeds the _____ of the investment, the investor ordinarily should discontinue ______ and not recognize _____

A

Carrying amount

Applying the equity method

Additional losses

64
Q

Investor corporation is referred to as the ____

A

Parent

65
Q

Investee corporation is referred to as the ____

A

Subsidiary

66
Q

Parent (investor) generally prepares _______

A

Consolidated financial statements

67
Q

When one corporation acquires a voting interest of more than 50 percent in another corporation

A

Controlling interest

68
Q

Companies that have debt securities that are classified as available-for-sale: If the fair value is ____ than amortized cost, no expected _____ is recognized

A

Greater

Credit loss

69
Q

Three different types of derivatives:

A
  • Financial forwards or financial futures
  • Options
  • Swaps
70
Q

Recognize derivatives in the financial statements as _____

A

Assets and liabilities

71
Q

Report derivatives at ____

A

Fair value

72
Q

Recognize gains and losses resulting from speculation in derivatives _____ in _____

A

Immediately in income

73
Q

The difference between the market price and the preset strike price at any point in time. It represents the amount realized by the option holder, if exercising the option immediately

A

Intrinsic value

74
Q

Option Premium = _____ + _____

A

Intrinsic value + Time value

75
Q

Refers to the option’s value over and above its intrinsic value. Reflects the possibility that the option has a fair value greater than zero.

A

Time value

76
Q

The use of derivatives to offset the negative impacts of changes in interest rates or foreign currency exchange rates

A

Hedging

77
Q

FASB allows special accounting for two types of hedges:

A
  • Fair value

- Cash flow hedges

78
Q

Convertible bond is a ______. Two parts: A debt security, referred to as the _____, and an option to convert the bond to shares of common stock, the ______.

A

Hybrid instrument

Host security

Embedded derivative

79
Q

To account for an embedded derivative, a company should separate it from the _____ and then account for it using the accounting for ______. This separation process is referred to as ____.

A

Host security

Derivatives

Bifurcation

80
Q

Criteria that hedging transactions must meet before requiring the special accounting for hedges (3):

A
  1. Documentation, risk management, and designation
  2. Effectiveness of the hedging relationship
  3. Effect on reported earnings of changes in fair values or cash flows
81
Q

Five-step process for revenue recognition:

A
  1. Identify the contract with customers
  2. Identify the separate performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the separate performance obligations
  5. Recognize revenue when each performance obligation is satisfied
82
Q

Recognize revenue in the ______ when the performance obligation is ____

A

Accounting period

Satisfied

83
Q

Agreement between two or more parties that creates enforceable rights or obligations

A

Contract

84
Q

Contracts can be ___, ___, or ______.

A

Written, oral, or implied from customary business practice

85
Q

Company applies the revenue guidance to a contract according to the following criteria (5):

A
  1. The contract has commercial substance
  2. The parties have approved the contract
  3. Identification of the rights of the parties is established
  4. Payment terms are identified
  5. It is probable that the consideration will be collected
86
Q

A product or service is distinct when a customer is able to (2):

A

-Benefit from a good or service on its own
or
-Together with other readily available resources

87
Q

Variable consideration is based on (2):

A
  • Price dependent on future events (Discounts, rebates, royalties, etc.)
  • Companies estimate amount of revenue to recognize (expected value, most likely amount)
88
Q

Probability-Weighted amount in a range of possible consideration amounts

A

Expected value

89
Q

Expected value may be appropriate if a company has a ____ number of _____ with ______ and can be based on a _____ number of _________

A

Large

Contracts

Similar characteristics

Limited

Discrete outcomes and probabilities

90
Q

The single most likely amount in a range of possible consideration outcomes

A

Most likely amount

91
Q

Most likely amount may be appropriate if the contract has ______

A

Only two possible outcomes

92
Q

Companies only recognize variable consideration if they have _______ and are able to estimate the ______, and based on experience, they do not expect a significant ______ previously ____

A

Experience with similar contracts

Cumulative amount of revenue

Reversal of revenue

Recognized

93
Q

Allocating transaction price to separate performance obligations is based on their _____. Best measure of _____^ is what the company could sell the good or service for on a _____.

A

Relative fair values

Fair value

Standalone basis

94
Q

Company satisfies its performance obligation when the customer obtains control of the good or service.

Change in control indicators (5):

A
  1. Company has a right to payment for asset
  2. Company has transferred legal title to asset
  3. Company has transferred physical possession of asset
  4. Customer has significant risks and rewards of ownership
  5. Customer has accepted the asset
95
Q

Companies recognize revenue over a period of time if one of the following criteria are met (3):

A
  1. The customer receives and consumes the benefits as the seller performs
  2. The customer controls the asset as it is created
  3. The company does not have an alternative us for the asset
96
Q

Recognizes revenues and gross profits each period based upon the progress of the construction

A

Percentage-of-Completion Method

97
Q

Percentage-of-completion method: buyer and seller have ____

A

Enforceable rights

98
Q

Percent complete formula =

A

Costs incurred to date/Most recent estimate of total costs

99
Q

Percentage-of-completion method:

Revenue (or gross profit) to be recognized to date =

A

Percent complete x Estimated total revenue

100
Q

Percentage-of-completion method:

Current-period revenue =

A

Revenue to be recognized to date - Revenue recognized in prior periods

101
Q

The difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will result in taxable amounts or deductible amounts in future years

A

Temporary difference

102
Q

Represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year

A

Deferred Tax Liability

103
Q

Represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year

A

Deferred Tax Assets

104
Q

A company should reduce a deferred tax asset by a _______ if it is more likely than not that it will _____ some portion or all of the deferred tax asset

A

Valuation allowance

Not realize

105
Q

Formula to compute income tax expense:

A

Income taxes payable or refundable +/- change in deferred income taxes = income tax expense or benefit

106
Q

Deferred tax liability

A

Taxable temporary differences

107
Q

Deferred tax asset

A

Deductible temporary differences

108
Q

An asset (ex. accounts receivable or investment) may be recognized for revenues or gains that will result in ______ when the asset is recovered

Examples:

  • Subscriptions received in advance
  • Advance rental receipts
  • Prepaid contracts and royalties received in advance
A

Taxable amounts in future years

109
Q

A liability (or contra asset) may be recognized for expenses or losses that will result in ______ when the liability is settled

Examples:

  • Product warranty liabilities
  • Estimated liabilities related to discontinued operations or restructuring
  • Litigation accruals
  • Bad debt expense recognized using the allowance method for financial reporting purposes
A

Deductible amounts in future years

110
Q

Future sacrifices to provide goods or services (or future refunds to those who cancel their orders) that settle the liability will result in ________.

Examples:

  • Subscriptions received in advance
  • Advance rental receipts
  • Prepaid contracts and royalties received in advance
A

Deductible amounts in future years

111
Q

Amounts received upon future recovery of the amount of the asset for financial reporting (through use or sale) will exceed the remaining tax basis of the asset and thereby result in ______.

Examples:

  • Depreciable property, deplorable resources, and intangibles
  • Deductible pension funding exceeding expense
  • Prepaid expenses that are deductible on the tax return in the period paid
A

Taxable amounts in future years

112
Q

Initial difference between the book basis and the tax basis of an asset or liability

A

Originating temporary difference

113
Q

Occurs when eliminating a temporary difference that originated in prior periods and then removing the related tax effect from the deferred tax account

A

Reversing difference

114
Q

Permanent diferences result from items that (2):

A
  1. Enter into pretax financial income but never into taxable income

or

  1. Enter into taxable income but never into pretax financial income
115
Q

Permanent differences affect only the period in which _____. They do not give rise to future ____ or ____ amounts. There are no _________ to be recognized

A

They occur

Taxable or deductible

Deferred tax consequences

116
Q

Specific differences:
The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes.

A

Future taxable amount = Deferred tax liability

117
Q

Specific differences:

A landlord collects some rents in advance. Rents received are taxable in the period when they are received

A

Future deductible amount = Deferred tax asset

118
Q

Specific differences:

Expenses are incurred in obtaining tax-exempt income

A

Permanent difference

119
Q

Specific differences:

Costs of guarantee and warranties are estimated and accrued for financial reporting purposes

A

Future deductible amount = Deferred tax asset

120
Q

Specific differences:
Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment-sales method for tax purposes

A

Future taxable amount = Deferred tax liability

121
Q

Specific differences:
Proceeds are received from a life insurance company because of the death of a key officer (the company carries a policy on key officers)

A

Permanent Difference

122
Q

Tax-deductible expenses exceed taxable revenues

A

Net operating loss (NOL)

123
Q

Loss carryback is back __ years and forward __ years. Losses must be applied to _____ first.

A

2 years

20 years

Earliest year first

124
Q

Loss carryforward may elect to _______ and carryforward losses __ years

A

Forgo loss carryback

20

125
Q

Pension plans can be (3):

A
  • Contributory
  • Noncontributory
  • Qualified pension plans
126
Q

Employees voluntarily make payments to increase their benefits

A

Contributory

127
Q

Employer bears the entire cost

A

Noncontributory

128
Q

Offer tax benefits (pension plan)

A

Qualified pension plans

129
Q

The two most common types of pension plans are ___ and ___

A

Defined contribution plans and defined benefit plans

130
Q
  • Employer contribution determined by plan (fixed)
  • Risk borne by employees
  • Benefits based on plan value
A

Defined-Contribution plan

131
Q
  • Benefit determined by plan
  • Employer contribution varies (determined by actuaries)
  • Risk borne by employer
A

Defined-Benefit plan

132
Q

Companies must recognize on their balance sheet the full ____ or ____ status of their ____ pension plan

A

Overfunded or underfunded

Defined benefit

133
Q

Components of Pension Expense (5):

A
  • Interest on liability
  • Service cost for the year
  • Amortization of prior service cost
  • Actual return on plan assets (Generally decreases expense)
  • Gain or loss
134
Q

A lease is a contractual agreement between a lessor and a lessee that gives the ___ the right to use specific property, owned by the ___, for a specified period of time

A

Lessee

Lessor

135
Q

Largest group of leased equipment involves (4):

A
  • Information technology equipment
  • Transportation (trucks, aircraft, rail)
  • Construction
  • Agriculture
136
Q

Advantages of leasing for Lessees (4):

A
  • 100% financing at fixed rates
  • Protection against obsolescence
  • Flexibility
  • Less costly financing
137
Q

Lessor market share and company examples:

Banks:
Independents
Captive Leasing Companies

A

Banks (55%) - Wells Fargo, Chase, Citigroup, PNC

Independents (14%) - International Lease Finance Corp.

Captive Leasing Companies (31%) - Caterpillar Financial Services Corp., Ford Motor Credit, IBM Global Financing

138
Q

Advantages of leasing for Lessors (4):

A
  • Often provides profitable interest margins
  • It can stimulate sales of a lessor’s product
  • It often provides tax benefits to various parties in the lease
  • It can provide a high residual value to the lessor
139
Q

Companies classify lease arrangements as either ___ or ___. In either case, companies _____ all leased assets and liabilities*

*=

A

Finance or operating

Capitalize

*Longer than one year

140
Q

For a finance lease, the lessee recognizes ______ on the lease liability over the life of the lease using the effective-interest method and records amortization expense on the right-of-use asset generally ______

A

Interest expense

On a straight-line basis

141
Q

For an operating lease, the lessee measures ______ using the effective-interest method. However, the lessee amortizes the right-of-use asset such that the total lease expense is the _________

A

Interest expense

Same from period to period

142
Q

Operating lease:

Only a _____ (comprised of interest on the liability and amortization of the right-of-use asset) is recognized on the income statement

A

Single lease expense

143
Q

If the lease transfers control (or ownership) of the underlying asset to a lessee, then the lease is classified as a(n) ______

A

Finance lease

144
Q

In a finance lease, the lessee takes ____ or consumes the _____ of the underlying asset over the ____

A

Ownership

Substantial portion

Lease term

145
Q

Five tests to determine if its a finance lease:

A
  • Transfer of ownership test
  • Purchase option test
  • Lease term test
  • Present value test
  • Alternative use test
146
Q

To be a finance lease, the lease must be ____ and meet at least one of the five tests

A

Non-cancelable

147
Q

If the lease term is __% or greater of the economic life of the leased asset, the lease meets the ____ and finance lease treatment is appropriate

A

75%

Lease term test

148
Q

For leases classified as operating, the lessee records a right-of-use asset and lease liability at _____, similar to the finance lease approach. However, unlike a finance lease, the lessee records the ____ for lease expense ____ over _____

A

Commencement of the lease

Same amount

Each period

The lease term

149
Q

Under the operating method, the lessor continues to recognize the asset on its balance sheet and recognizes lease revenue (generally on a straight-line basis) in _____. It depreciates the leased asset using ______

A

Each period

Double-declining balance

150
Q

Statement of retained earnings includes ____ and ____

A

Dividends and net income or net loss

151
Q

Balance sheet includes _____ which is made up of ___ and ____

A

Stockholders’ Equity

Common stock and Retained Earnings

152
Q

Elements of the income statement (4):

A
  • Revenues
  • Expenses
  • Gains
  • Losses

ACC 305 (3 decks)

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