Exam 3 Prep Flashcards
Fixed Asset
Property, Plant, & Equipment
Things a business owns to generate revenue
Depreciation
A systematic and rational method of allocating the cost of an asset to the period in which it generates revenue
Do you depreciate land?
No
What are the three depreciation methods?
1) Straight-Line
2) Units of Proportion (activity-based)
3) Double-Declining Balance
What are the two questions that determine if something is Repairs & Maintenance or a New Asset?
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
What is a current liability?
A debt that must be paid in the next 12 months (e.g. Accounts Payable, Taxes Payable, Sales Tax Payable)
Which items are present on an employee’s paycheck?
Gross Pay
Social Security/Medicaid
Federal Withholding Tax
State Withholding Tax
Which items do employers pay in addition to the employee’s items?
Social Security/Medicaid
Worker’s Compensation
Federal Unemployment Tax
State Unemployment Tax
Medical Insurance
What is long-term debt?
Money you borrow for more than 1 year
What are two ways that companies can borrow money?
1) Bank
2) Bonds
How are decisions made in regard to the time value of money?
All decisions are made based on the present value (not future value)
What is common stock? Pros and cons?
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
What is preferred stock? Pros and cons?
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
What is treasury stock? Pros and cons?
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
What are the three organizational forms?
1) Sole Proprietorship
2) Corporation
3) Limited Liability Corporation
What is a sole proprietorship? Pros and cons?
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
What is a corporation?
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
What does the Sarbanes-Oxley Act (SOX) allow?
Allows the federal government to prosecute management of a company if the company misreports financial statements and defrauds the public
What is a Limited Liability Corporation (LLC)?
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
