Exam 3 Prep

Question 1

Fixed Asset

Answer 1

Property, Plant, & Equipment
Things a business owns to generate revenue

Question 2

Depreciation

Answer 2

A systematic and rational method of allocating the cost of an asset to the period in which it generates revenue

Question 3

Do you depreciate land?

Answer 3

No

Question 4

What are the three depreciation methods?

Answer 4

1) Straight-Line
2) Units of Proportion (activity-based)
3) Double-Declining Balance

Question 5

What are the two questions that determine if something is Repairs & Maintenance or a New Asset?

Answer 5

1) Did it extend the useful life of the asset?
2) Can I make more money than before?

If one of these is true, then it is a New Asset

Question 6

What is a current liability?

Answer 6

A debt that must be paid in the next 12 months (e.g. Accounts Payable, Taxes Payable, Sales Tax Payable)

Question 7

Which items are present on an employee’s paycheck?

Answer 7

Gross Pay
Social Security/Medicaid
Federal Withholding Tax
State Withholding Tax

Question 8

Which items do employers pay in addition to the employee’s items?

Answer 8

Social Security/Medicaid
Worker’s Compensation
Federal Unemployment Tax
State Unemployment Tax
Medical Insurance

Question 9

What is long-term debt?

Answer 9

Money you borrow for more than 1 year

Question 10

What are two ways that companies can borrow money?

Answer 10

1) Bank
2) Bonds

Question 11

How are decisions made in regard to the time value of money?

Answer 11

All decisions are made based on the present value (not future value)

Question 12

What is common stock? Pros and cons?

Answer 12

Basic ownership of a company (1 vote/share)

Pros:
You can vote for who sits on the board of directors (the committee that hires the CEO)

Cons:
No guarantee for dividends

Question 13

What is preferred stock? Pros and cons?

Answer 13

Preferred stockholders are “silent partners.”

Pros:
Right to receive dividends before the common stockholders
Right to receive assets before the common stockholders if the corporation liquidates

Cons:
No votes

Question 14

What is treasury stock? Pros and cons?

Answer 14

When a company buys back its own stock

Pros:
Artificially inflates value of stock (limited supply increases demand and price, which increases a company’s value)

Cons:
No dividends or votes for themselves

Question 15

What are the three organizational forms?

Answer 15

1) Sole Proprietorship
2) Corporation
3) Limited Liability Corporation

Question 16

What is a sole proprietorship? Pros and cons?

Answer 16

One person owns the business

Pros:
Taxed on personal income tax rates (less than corporate)
Owner gets all profits

Cons:
Owners assumes all liabilities and risk
Lawsuits are personal

Question 17

What is a corporation?

Answer 17

A business organized under state law that is a separate legal entity

Pros:
Corporate veil: stockholders are not personally responsible, but the stock can lose value
Selling of stock allows for immediate cash

Cons:
Corporate income taxes start at 22.5% (high), and there is “double taxation” because dividends are taxed
Not all profits go to the person who started the company

Question 18

What does the Sarbanes-Oxley Act (SOX) allow?

Answer 18

Allows the federal government to prosecute management of a company if the company misreports financial statements and defrauds the public

Question 19

What is a Limited Liability Corporation (LLC)?

Answer 19

A company in which each member is only liable for his own actions, made of multiple members

Most small businesses in the US are LLCs

Pros:
Members are not personally liable
LLC is not taxed; members pay tax on their share of earnings

Cons:
No income from stock market