Exam 3 Study Guide

Question 1

(7) Be able to determine the total cost of a fixed asset. Know which expenditures are included in the purchase price.

Answer 1

• purchase cost
• any costs incurred to bring the asset to the location and condition needed for it to operate in the manner intended by management

Question 2

(7) Be able to calculate depletion expense.

Answer 2

asset’s initial cost
asset’s expected useful life
asset’s estimated residual value
- total cost less salvage value and divide it by the total number of estimated units

Question 3

(7) Be able to calculate gains/losses from the sale of a fixed asset.

Answer 3

• find accumulated depreciation
• subtract from equipment cost
• calculate gain or loss from that number^

Question 4

(7) Be able to calculate straight line deprecation.

Answer 4

(1) Cost of the asset: $100,000.
(2) Cost of the asset – Estimated salvage value: $100,000 – $20,000 = $80,000 total depreciable cost.
(3) Useful life of the asset: 5 years.
(4) Divide step (2) by step (3): $80,000 / 5 years = $16,000 annual depreciation amount.

Question 5

(7) Be able to calculate double declining depreciation.

Answer 5

(1) Divide “100%” by the number of years in the asset’s useful life, this is your straight-line depreciation rate.
(2) Multiply that number by 2 and that is your Double-Declining Depreciation Rate.

Depreciation continues until the asset value declines to its salvage value.

Question 6

(7) What are leases?

Answer 6

contract for the use of an asset for a period of time
LESSOR => owns the asset
LESSEE => has rights to use the asset

Question 7

(7) Be able to calculate amortization for a patent? Who is it recorded?

Answer 7

• amortization recorded using straight-line method

- recorded as operating expenses

Question 8

(7) What is the depreciable cost of a fixed asset?

Answer 8

amount of an asset’s cost that is allocated over its useful life as depreciation expense

Question 9

(7) What are land improvements? Be able to identify examples.

Answer 9

• improvements increase output and increase the fixed asset amount
• paved parking areas, driveways, fences, outdoor lighting, and so on
• land improvements have a limited life and are depreciated

Question 10

(7) What is the book value of an asset?

Answer 10

• does not agree with the asset’s market value
• value of fixed assets after deducting the accumulated depreciation and accumulated impairment expenses from the original cost of fixed assets

Question 11

(7) What values must you know in order to calculate depreciation?

Answer 11

• cost of asset
• salvage (residual) value of asset
• depreciation rate
• lifetime

Question 12

(7) What is depletion expense?

Answer 12

“account is created for a portion of the cost of the resource removed”

depletion rate = cost of resource / est. total units of resource

depletion expense = depletion rate * quantity removed

Question 13

(7) What are the characteristics of a fixed asset?

Answer 13

• tangible assets
• owned/used by company in normal operations
• not offered for sale as part of normal operations

Question 14

(8) Understand what accounts are affected and by how much when stock is issued (Cash, Common Stock, and Paid-In Capital)

Answer 14

CASH => shares * @ value sold
COMMON STOCK => shares * par
PAID-IN CAPITAL => cash - common stick

Question 15

(8) Be able to calculate gross pay for an employee.

Answer 15

• total earnings for the payroll period

Question 16

(8) Be able to calculate net pay for an employee.

Answer 16

• obtained from subtracting deduction(s) from gross pay

Question 17

(8) What are contingent liabilities?

Answer 17

potential liabilities that may arise from past transactions if certain events occur in the future

Question 18

(8) When are they are recorded as a liability or in the notes?

Answer 18

if they are probable and estimable

Question 19

(8) What are current liabilities?

Answer 19

liabilities due within 12 months

Question 20

(8) What are long-term liabilities?

Answer 20

liabilities due beyond 12 months

Question 21

(8) Understand what it means to issue bonds at par, at a premium, or at a discount. Understand the circumstances of each type of issuance. (Market rate in comparison to the coupon/stated rate.)

Answer 21

PAR => market rate = contract rate; selling price = face amount of bonds
PREMIUM => market rate < contract rate; selling price > face amount of bonds; premium = selling price - face
DISCOUNT => market rate of interest > contract rate; selling price < face amount of bonds; discount = face - selling price

Question 22

(8) Be able to calculate the maturity value of a note-payable.

Answer 22

Maturity value = Principal x (1+ Rate x Time)

Question 23

(8) Be able to calculate the price and number of shares after a stock split.

Answer 23

• par of each share of common stock will be original par divided by amount of split

Question 24

(8) What are FICA taxes?

Answer 24

Federal Insurance Contribution Act

• social security
• Medicare

Question 25

(8) What is the par value of a stock?

Answer 25

monetary value stated on stock certificate

Question 26

(8) Why do companies issue a stock split?

Answer 26

to reduce a stock’s market price per share in order to attract more investors

Question 27

(8) What is treasury stock? Where is it on the balance sheet?

Answer 27

• stock that a corporation has issued and then reacquired

- reported as reduction of stockholders’ equity

Question 28

(9) What is a vertical analysis? Be able to identify an example.

Answer 28

“percentage analysis of the relationship of each component in a financial statement to a total within the statement”

EX. goes up and down, expressed as percentages; has 100% = A = L + E

Question 29

(9) What is profitability?

Answer 29

“ability of a company to generate net income related to its invested assets”

Question 30

(9) Sarbanes-Oxley now requires the management of the company to report on what topics in the annual report?

Answer 30

• management’s responsibility for establishing and maintaining internal control
• management’s assessment of the effectiveness of internal controls over financial reporting

Question 31

(9) What does the auditor’s report represent? What does it say? What is it proving?

Answer 31

• an unbiased opinion of fairness of statements
• conducted by a CPA firm
• the report of independent registered public accounting firm => opinion rendered by the firm on the fairness of statements
• any report other than an unqualified opinion is alarming for investors and requires further investigation

Question 32

(9) What is a horizontal analysis? Be able to identify an example.

Answer 32

“percentage analysis of increases and decreases in related items in comparative financial statements”

EX. you compare a company’s sales in 2014 to its sales in 2015

Question 33

(9) Be able to calculate quick assets if given multiple accounts.

Answer 33

normally include cash, temporary assets, accounts receivable

Question 34

(9) Be able to calculate working capital. (The equation is provided.)

Answer 34

WC = current assets - current liabilities

Question 35

(9) Be able to calculate the quick ratio. (The equation is provided.)

Answer 35

quick assets / current liabilities

Question 36

(9) What is liquidity?

Answer 36

a way of describing how well you can cover your current liabilities using your current assets

Question 37

(9) What is current position analysis?

Answer 37

uses measures to assess a company’s ability to pay its current liabilities

Question 38

(9) What are current assets?

Answer 38

items such as cash, accounts receivable, and inventory