Exam 3 Flashcards
1
Q
Identification, measurement, and communication of financial information about economic entities to interested parties
A
Financial accounting
2
Q
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions
A
Assets
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
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
5
Q
Residual interest in the assets of an entity that remains after deducting its liabilities
A
Shareholders’ equity or stockholders’ equity
6
Q
Stock repurchased by the issuer and intended for retirement or resale to be public
A
Treasury stock
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
8
Q
Decreases in equity of a particular enterprise resulting from transfers to owners
A
Distributions to owners
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
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
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
12
Q
An arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years
A
Pension
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
14
Q
No-par stock reasons for issuance: Avoids ____ and avoids confusion over ________
A
Contingent liability
Recording par value versus fair market value
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
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)
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
18
Q
Sale of treasury stock above cost and below cost both increase ____ and ____
A
Total assets and stockholders’ equity
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
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
21
Q
A company should not pay a dividend unless both the ___ and ____ financial position warrant the distribution
A
Present and future
22
Q
The SEC encourages companies to disclose their dividend policy in their annual report, especially those that ______ or ______
A
- Have earnings but fail to pay dividends
or
- Do not expect to pay dividends in the foreseeable future
23
Q
The SEC encourages companies that consistently pay dividends to indicate whether they ___________
A
Intend to continue this practice in the future
24
Q
Types of dividends (3):
A
- Cash dividends
- Property dividends (dividends in kind)
- Liquidating dividends
25
All dividends, except for stock dividends, ________ in the corporation
Reduce the total stockholders' equity
26
Board of directors vote on the declaration of ____
Cash dividends
27
A declared cash dividend is a ____
Liability
28
Companies do not ___ or ______ on treasury stock
Declare or pay cash dividends
29
Cash dividends three dates:
a. Date of declaration
b. Date of record
c. Date of payment
30
Property dividends are dividends payable in assets other than ___ and are to restate at ________, recognizing any gain or loss
Cash
Fair value the property it will distribute
31
Liquidating dividends:
Any dividend not based on ____ reduces ______.
The portion of these dividends in excess of _______ represents a return of part of the ______
Earnings
Corporate paid-in capital
Accumulated income
Stockholder's investment
32
Issuance by a company of its own stock to shareholders on a pro rata basis, without receiving any consideration
Stock dividends
33
Stock dividends are used when management wishes to "_____" part of _____
Capitalize
Earnings
34
If stock dividend is less than ____% of the common shares outstanding, company transfers ______ from _____
(small stock dividend)
20-25%
Fair market value
Retained earnings
(small stock dividend)
35
Stock splits are used to ______ of shares.
______ recorded for a stock split.
____ par value and ____ number of shares
Reduce the market value
No entry
Decrease
Increase
36
Large stock dividend is _____% of the number of shares previously outstanding
20-25%
37
Large stock dividend has same effect on market price as a _____. Par value is transferred from ______ to ______
Stock split
Retained earnings
Capital stock
38
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
Note
Retained Earnings balance
Working capital requirements
Borrowing
39
Analysts use stockholders' equity ratios to evaluate a company's ____ and _______
Three ratios:
Profitability
Long-term solvency
1. Rate of return on common stock equity
2. Payout ratio
3. Book value per share
40
Ratio shows how many dollars of net income the company earned for each dollar invested by the owners
Rate of Return
41
Rate of return formula:
[Net income - Preferred dividends]/Average common stockholders' equity
42
Payout ratio formula:
Cash dividends/[Net income - Preferred dividends]
43
Amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet
Book value per share
44
Book value per share formula:
Common stockholders' equity/Outstanding shares
45
The acquisition cost adjusted for the amortization of discount or premium, if appropriate
Amortized cost
46
Classify a debt security as held-to-maturity only if it has both 1. the _______, and 2. the ability to _______.
Positive intent
Hold securities to maturity
47
Held-to-maturity is accounted for at ____ cost, not fair value
Amortized
48
Companies report available-for-sale securities at _____, with unrealized holding gains and losses reported as _______, a separate component of stockholder's equity, until realized
Fair value
Other comprehensive income
49
Any discount or premium on available-for-sale securities is ____
Amortized
50
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 ________
Debt investments
Amortized
Other
Income statement
51
Companies report trading securities at ____, with unrealized holding gains and losses reported as part of _____
Fair value
Net income
52
Net change in the fair value of a security from one period to another, exclusive of dividend or interest revenue recognized but not received
Holding gain or loss
53
Investments in equity securities cost includes price of the ____, plus _______ related to purchase
Security
Broker's commissions and fees
54
Investor has passive interest up to __% and investment is valued using _____
20%
Fair value method
55
Investor has significant influence between ___% and ___% and investment is valued using _____
20%-50%
Equity method
56
Investor has controlling interest between ___% and ___% and investment is valued on parent's books using cost method or equity method (investment eliminated in _____)
50%-100%
Consolidation
57
Holding of less than 20% without readily determinable fair value: value and report the investment using a _______
Practicability exception
58
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 _____
Cost adjusted
Received
Selling the securities
59
Holdings of less than 20%:
Upon acquisition, companies record equity securities at ____
Cost
60
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
Significant influence
61
In instances of "significant influence," the investor must account for the investment using the _____
Equity method
62
Comparison of Equity method to Fair value:
Record the investment at ____ and subsequently adjust the amount each period for the _______ and _______
- The investor's proportionate share of the earnings (or losses)
- Dividends received by the investor
63
If investor's share of investee's losses exceeds the _____ of the investment, the investor ordinarily should discontinue ______ and not recognize _____
Carrying amount
Applying the equity method
Additional losses
64
Investor corporation is referred to as the ____
Parent
65
Investee corporation is referred to as the ____
Subsidiary
66
Parent (investor) generally prepares _______
Consolidated financial statements
67
When one corporation acquires a voting interest of more than 50 percent in another corporation
Controlling interest
68
Companies that have debt securities that are classified as available-for-sale: If the fair value is ____ than amortized cost, no expected _____ is recognized
Greater
Credit loss
69
Three different types of derivatives:
- Financial forwards or financial futures
- Options
- Swaps
70
Recognize derivatives in the financial statements as _____
Assets and liabilities
71
Report derivatives at ____
Fair value
72
Recognize gains and losses resulting from speculation in derivatives _____ in _____
Immediately in income
73
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
Intrinsic value
74
Option Premium = _____ + _____
Intrinsic value + Time value
75
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.
Time value
76
The use of derivatives to offset the negative impacts of changes in interest rates or foreign currency exchange rates
Hedging
77
FASB allows special accounting for two types of hedges:
- Fair value
| - Cash flow hedges
78
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 ______.
Hybrid instrument
Host security
Embedded derivative
79
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 ____.
Host security
Derivatives
Bifurcation
80
Criteria that hedging transactions must meet before requiring the special accounting for hedges (3):
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
Five-step process for revenue recognition:
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
Recognize revenue in the ______ when the performance obligation is ____
Accounting period
Satisfied
83
Agreement between two or more parties that creates enforceable rights or obligations
Contract
84
Contracts can be ___, ___, or ______.
Written, oral, or implied from customary business practice
85
Company applies the revenue guidance to a contract according to the following criteria (5):
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
A product or service is distinct when a customer is able to (2):
-Benefit from a good or service on its own
or
-Together with other readily available resources
87
Variable consideration is based on (2):
- Price dependent on future events (Discounts, rebates, royalties, etc.)
- Companies estimate amount of revenue to recognize (expected value, most likely amount)
88
Probability-Weighted amount in a range of possible consideration amounts
Expected value
89
Expected value may be appropriate if a company has a ____ number of _____ with ______ and can be based on a _____ number of _________
Large
Contracts
Similar characteristics
Limited
Discrete outcomes and probabilities
90
The single most likely amount in a range of possible consideration outcomes
Most likely amount
91
Most likely amount may be appropriate if the contract has ______
Only two possible outcomes
92
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 ____
Experience with similar contracts
Cumulative amount of revenue
Reversal of revenue
Recognized
93
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 _____.
Relative fair values
Fair value
Standalone basis
94
Company satisfies its performance obligation when the customer obtains control of the good or service.
Change in control indicators (5):
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
Companies recognize revenue over a period of time if one of the following criteria are met (3):
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
Recognizes revenues and gross profits each period based upon the progress of the construction
Percentage-of-Completion Method
97
Percentage-of-completion method: buyer and seller have ____
Enforceable rights
98
Percent complete formula =
Costs incurred to date/Most recent estimate of total costs
99
Percentage-of-completion method:
Revenue (or gross profit) to be recognized to date =
Percent complete x Estimated total revenue
100
Percentage-of-completion method:
Current-period revenue =
Revenue to be recognized to date - Revenue recognized in prior periods
101
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
Temporary difference
102
Represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year
Deferred Tax Liability
103
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
Deferred Tax Assets
104
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
Valuation allowance
Not realize
105
Formula to compute income tax expense:
Income taxes payable or refundable +/- change in deferred income taxes = income tax expense or benefit
106
Deferred tax liability
Taxable temporary differences
107
Deferred tax asset
Deductible temporary differences
108
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
Taxable amounts in future years
109
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
Deductible amounts in future years
110
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
Deductible amounts in future years
111
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
Taxable amounts in future years
112
Initial difference between the book basis and the tax basis of an asset or liability
Originating temporary difference
113
Occurs when eliminating a temporary difference that originated in prior periods and then removing the related tax effect from the deferred tax account
Reversing difference
114
Permanent diferences result from items that (2):
1. Enter into pretax financial income but never into taxable income
or
2. Enter into taxable income but never into pretax financial income
115
Permanent differences affect only the period in which _____. They do not give rise to future ____ or ____ amounts. There are no _________ to be recognized
They occur
Taxable or deductible
Deferred tax consequences
116
Specific differences:
The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes.
Future taxable amount = Deferred tax liability
117
Specific differences:
| A landlord collects some rents in advance. Rents received are taxable in the period when they are received
Future deductible amount = Deferred tax asset
118
Specific differences:
| Expenses are incurred in obtaining tax-exempt income
Permanent difference
119
Specific differences:
| Costs of guarantee and warranties are estimated and accrued for financial reporting purposes
Future deductible amount = Deferred tax asset
120
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
Future taxable amount = Deferred tax liability
121
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)
Permanent Difference
122
Tax-deductible expenses exceed taxable revenues
Net operating loss (NOL)
123
Loss carryback is back __ years and forward __ years. Losses must be applied to _____ first.
2 years
20 years
Earliest year first
124
Loss carryforward may elect to _______ and carryforward losses __ years
Forgo loss carryback
20
125
Pension plans can be (3):
- Contributory
- Noncontributory
- Qualified pension plans
126
Employees voluntarily make payments to increase their benefits
Contributory
127
Employer bears the entire cost
Noncontributory
128
Offer tax benefits (pension plan)
Qualified pension plans
129
The two most common types of pension plans are ___ and ___
Defined contribution plans and defined benefit plans
130
- Employer contribution determined by plan (fixed)
- Risk borne by employees
- Benefits based on plan value
Defined-Contribution plan
131
- Benefit determined by plan
- Employer contribution varies (determined by actuaries)
- Risk borne by employer
Defined-Benefit plan
132
Companies must recognize on their balance sheet the full ____ or ____ status of their ____ pension plan
Overfunded or underfunded
Defined benefit
133
Components of Pension Expense (5):
- 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
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
Lessee
Lessor
135
Largest group of leased equipment involves (4):
- Information technology equipment
- Transportation (trucks, aircraft, rail)
- Construction
- Agriculture
136
Advantages of leasing for Lessees (4):
- 100% financing at fixed rates
- Protection against obsolescence
- Flexibility
- Less costly financing
137
Lessor market share and company examples:
Banks:
Independents
Captive Leasing Companies
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
Advantages of leasing for Lessors (4):
- 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
Companies classify lease arrangements as either ___ or ___. In either case, companies _____ all leased assets and liabilities*
*=
Finance or operating
Capitalize
*Longer than one year
140
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 ______
Interest expense
On a straight-line basis
141
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 _________
Interest expense
Same from period to period
142
Operating lease:
Only a _____ (comprised of interest on the liability and amortization of the right-of-use asset) is recognized on the income statement
Single lease expense
143
If the lease transfers control (or ownership) of the underlying asset to a lessee, then the lease is classified as a(n) ______
Finance lease
144
In a finance lease, the lessee takes ____ or consumes the _____ of the underlying asset over the ____
Ownership
Substantial portion
Lease term
145
Five tests to determine if its a finance lease:
- Transfer of ownership test
- Purchase option test
- Lease term test
- Present value test
- Alternative use test
146
To be a finance lease, the lease must be ____ and meet at least one of the five tests
Non-cancelable
147
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
75%
Lease term test
148
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 _____
Commencement of the lease
Same amount
Each period
The lease term
149
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 ______
Each period
Double-declining balance
150
Statement of retained earnings includes ____ and ____
Dividends and net income or net loss
151
Balance sheet includes _____ which is made up of ___ and ____
Stockholders' Equity
Common stock and Retained Earnings
152
Elements of the income statement (4):
- Revenues
- Expenses
- Gains
- Losses
