FA2016Q4 Flashcards
1
Q
What are the three different business entities?
A
- Sole proprietorships
- Partnerships
- Corporations
2
Q
What are non-business entities?
A
Government entities
- Federal government and its agencies
- State and local governments and their agencies
Private organizations
- Hospitals, universities, cooperatives and philanthropic organizations/NGOs
Here you typically use fund accounting
3
Q
What is a liability?
A
A liability is an obligation of a business: for example when a company borrows money at a bank.
4
Q
What is a creditor?
A
Someone to whom a company or person has a debt. Also called a lender.
5
Q
What is an asset?
A
A future economic benefit; a valuable resource to the company that controls it. For example cash, buildings and equipment, inventory. It does not have to be tangible but could be intangible such as a patent right.
6
Q
What are the three areas of business activities?
A
- Financing: borrowing, sale of stock
- Operating activities: Sale of products/services + costs incurred to operate
- Investment: purchase and sale of assets
7
Q
Who are the users of accounting information?
A
- Internal users: The management
- External users:
- Stockholders and potential stockholders
- Bondholders, bankers and other creditors
- Government agencies
- Other: suppliers, trade associations, stockbrokers, financial analysts
8
Q
What is ratio analysis?
A
Looking at relationships among financial statement items
9
Q
What is horizontal analysis?
A
Looking at trends over time.
10
Q
What is vertical analysis?
A
Comparing financial statement items in a single period
11
Q
What is the accounting equation?
A
Assets = Liabilities + Owners’ equity (stockholder/shareholders equity)
12
Q
What is the balance sheet?
A
The balance sheet is the financial statement that summarizes the assets, liabilities and owners’ equity at a specific point in time. It is also called the statement of financial position (Balancen fra VØ)
13
Q
What is the income statement?
A
The income statement is a statement that summarizes revenues and expenses. It is also called the statement of income (Resultatopgørelsen fra VØ)
14
Q
What are dividends?
A
Distribution of net income of a business to its owners. They are NOT on the income statement.
15
Q
What is the statement of retained earnings?
A
The statement that summarizes income earned and dividends paid over the life of a business.
16
Q
What is the statement of cash flows?
A
The financial statement that summarizes a company’s cash receipts and cash payments during the period from operating, investing and financing activities (Pengestrømsopgørelsen I VØ)
17
Q
What is the cost principle?
A
The cost principle is such that assets are recorded at the cost to acquire them. It is also called the original cost/historical cost (later you can adjust to for example fair value).
18
Q
What is the principle of going concern?
A
The assumption that an entity is not in the process of liquidation and that It will continue indefinitely.
19
Q
What is the time period assumption?
A
The assumption that it is possible to prepare an income statement that accurately reflects net income or earnings for a specific time period.
20
Q
What is the monetary unit?
A
The monetary unit is the currency used, which is important in the sense that internationally trading entities profits are strongly affected by exchange rate changes.
21
Q
Who determines the rules for financial statements?
A
- SEC: Securities and exchange commission
- FASB: The Financial Accounting Standards Board
- AICPA: American Institute of Certified Public Accountants (the professional organization of CPA: Certified public accountants)
- PCAOB: Public company accounting oversight board
- IASB: The international accounting standards board
- GAAP: Generally accepted accounting principles
22
Q
What is auditing?
A
The process of examining the financial statements and the underlying records of a company to render an opinion as to whether the statements are fairly presented. Big corporations will have external auditors looking through/testing the procedures used.
23
Q
What is the concept of material errors?
A
After an auditor has looked through a financial report, the report should now only have material errors; material errors is errors that are so small that it would not change the users’ perception of the report (subjective definition but auditors will look at the percentage difference between their calculations of, for example, revenue or assets and the stated value. If the difference is small, it is typically accepted. In other words, a financial report is most likely, not completely, accurate).
24
Q
What are the main qualities of good financial reporting?
A
- Understandability
- Relevance
- Faithful representation
- Comparability and consistency
- Materiality (linked to relevance but deals with the size of an error in accounting information)
- Conservatism; using the least optimistic estate when two estimates of amounts are about equally like
25
**What is the operating cycle and how do you start it?**
Started when capital is invested in inventory.
26
**What is a current asset?**
An asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year.
27
**What are good examples of non-current assets?**
* _Investments;_ in land held for future office sites
* _Property, plants and equipment_
* _Intangible assets_ such as a franchise agreement
28
**What is a current liability?**
A current liability is an obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year.
29
**What is a long-term liability?**
Any obligation that will not be paid or otherwise satisfied within the next year of the operating cycle, whichever is longer, is classified as a long-term liability, or a long-term debt.
30
**What is working capital?**
Current assets minus current liabilities. The difference between current assets and liabilities at a point in time.
31
**How do you calculate the current ratio?**
Current assets divided by current liabilities. It shows you the relative liquidity. The ratio rule of thumbs is different from industry to industry both 2 is an often used ratio to analyze short-term financial health.
32
**What is a single-step income statement?**
An income statement in which all expenses are added together and subtracted from all revenues.
33
**What is a multiple-step income statement?**
An income statement that shows classifications of revenues and expenses as well as important subtotals.
34
**What are the most important questions to ask yourself when evaluating any financial statement ratio?**
* How does this year’s ratio differ from ratios of prior years?
* How does the ratio compare with industry norms?
35
**How do you make a simple ratio analysis?**
* Question: How liquid is the company? Or how profitable is the company?
* Find information on current assets + current liabilities or net income + net sales
* Calculate the ratio
* Compare with other ratios (prior years + competitors)
* Interpret the ratios
36
**What should be taken into account when deciding whether to lend a company money or not, or investing in a company or not? (not limited to these things)**
* Liquidity (current ratio)
* Income statement regarding profitability
* Cash flows in and out
* Outlook for the industry
* Outlook for the economy (inflation + growth rates)
* Interest rates for similar loans during the term of the loan
* Alternative uses of the bank’s money
37
**What is the difference between external and internal events?**
**External events;** An event involving interaction between the entity and its environment. For example paying wages to an employee or a sale to a customer.
**Internal events;** occurs entirely within the entity. It could be the use of a piece of equipment.
38
**What is a transaction?**
Any event (external or internal) that is recognized in a set of financial statements.
39
**What is a source document?**
A piece of paper that is used as evidence to record a transaction (invoices, cash register tapes, time cards – bilag på dansk)
40
**What is an account and why do we use it?**
A record used to accumulate amounts for each individual asset, liability, revenue, expense, and component of stockholders equity. Used to simplify the financial statements.
41
**What is a general ledger?**
Simply a book, a file, a hard drive, or another device containing all of the accounts.
42
**What does “debit” and “credit” refer to?**
It simply means the left side (debit) and right side (credit) of a T-account. Whether debiting increases or decreases an account depends on the account. Assets increased with debit, liabilities increased with credit.
43
**How do you increase revenues and retained earnings?**
1. Retained Earnings is increased with a credit.
2. Revenue is an increase in Retained Earnings.
3. Revenue is increased with a credit.
4. Because revenue is increased with a credit, it is decreased with a debit.
44
**How do you increase expenses and retained earnings?**
1. Retained Earnings is decreased with a debit.
2. Expense is a decrease in Retained Earnings.
3. Expense is increased with a debit.
4. Because expense is increased with a debit, it is decreased with a credit.
45
**How do you increase dividends and retained earnings?**
1. Retained Earnings is decreased with a debit.
2. Dividends are a decrease in Retained Earnings.
3. Dividends are increased with a debit.
4. Because dividends are increased with a debit, they are decreased with a credit.
46
**What is the double-entry system?**
A system of accounting in which every transaction is recorded with equal debits and credits and the accounting equation is kept in balance.
47
**What is a journal?**
The book of original entry; A chronological record of all transactions. Any transaction first enters the journal and is then posted to the ledger accounts.
48
**What is a trial balance?**
A list of each account and its balance; used to prove equality of debits and credits (showing that the accounting equation has been adhered).
Even though debit and credit is equal, it does not mean that the trial balance is without errors; transactions can have been placed on the wrong accounts.
49
**What is recognition and why do we call financial numbers “representations”?**
The process of recording an item in the financial statements as an asset, a liability, revenue, an expense or the like.
Accountants make representations of the company’s assets. We don’t show the building but represent it by a dollar-value.
50
**What is the concept of accrual accounting?**
Revenues are recognized when earned and expenses are recognized when incurred – Incurred as in responsible/liable for paying, since the service/product has been delivered.
51
**What is the matching principle?**
Associated to cost. The association of revenue of a period with all of the costs necessary to generate that revenue (examples: commissions, inventory of the good sold).
52
**What is the definition of expenses by FASB?**
Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carryout out other activities.
53
**What is adjusting entries?**
Journal entries made at the end of a period by a company using the accrual basis of accounting (not needed if cash basis is used)
It is an adjustment of either an assets or a liability with a corresponding change in revenue or expenses
54
**What are the four types of adjusting entries?**
* Cash paid before expense is incurred – for example printer-paper in the office, supplies, insurance policy (Deferred expense)
* Cash received before revenue is earned – a gift card, subscriptions, (Deferred revenue)
* Expense incurred before cash is paid; wages payable, interest payable, taxes as examples (Accrued Liability)
* Revenue earned before cash is received; rent receivable for example (Accrued Asset)
55
**What is the straight-line method?**
The assignment of an equal amount of depreciation to each period.
56
**What does deferral mean?**
Cash has been paid or received but expense or revenue has not yet been recognized (deferred expense and deferred revenue).
57
**What does accrual mean?**
Cash has not yet been paid or received but expense has been incurred or revenue earned (Accrued Liabilities and Accrued Assets)
58
**What is the purpose of closing entries?**
* To return the balance of revenue, expense, and dividend accounts to zero to begin the next period; and
* To transfer the net income of the period to retained earnings
59
**What is the difference between real and nominal accounts?**
Real accounts are permanent and are not closed at the end of the period, whereas nominal accounts (revenue, expense and dividend accounts) are temporary and are closed at the end of the period (will return to 0).
60
**What are interim financial statements?**
Financial statements prepared monthly, quarterly, or at other intervals less than a year in duration.
61
**What are the steps in the accounting circle?**
62
**What is a non-current asset/non-current liability?**
An asset or a liability that you cannot turn into cash within 12 months.
63
**What is the balance sheet model and how do you increase assets?**
64
**What is the balance sheet model and how do you increase liabilities?**
65
**What is the balance sheet model and how do you increase capital?**
66
**What are the two types of inventory?**
* Finished inventory; Retailers and wholesalers (merchandise inventory)
* Unfinished inventory (raw materials); Manufacturers
67
**What are the three types of manufacturing costs?**
* Direct materials – raw materials
* Direct labor (production workers wage)
* Manufacturing overhead; all other costs related to manufacturing (depreciation of building and machines, salary to the supervisor etc.)
68
**What are the three forms of inventory?**
* Direct materials
* Work in process/progress
* Finished goods
69
**What is net sales? (calculation)**
Sales – Sales return and allowances – Sales discounts
70
**How do you calculate gross profit?**
Net sales – Cost of goods sold
71
**What is the “Sales Returns and Allowances” account for?**
Contra-revenues account used to record refunds to customers and reductions of their accounts.
72
**What is the “sales discounts” account for?**
A contra-revenue account used to record discounts given to customers for early payment of their accounts (think B2B paying within 10 days on a 30-day contract as example).
73
**How do you calculate cost of goods available for sale?**
Beginning inventory + cost of goods purchased
74
**How do you find the “cost of goods sold” for a given company?**
Cost of goods available for sale – Ending inventory
Where Cost of goods available = beginning inventory + purchases of inventory
75
**What are the two inventory systems and what is the difference?**
* Perpetual system: the inventory account is increased at the time of each purchase and decreased at the time of each sale
* Periodic system: the inventory account is updated only at the end of the period
76
**What is the “Purchases” account for, what should you remember and where will you see it?**
* Used in periodic inventory system to record acquisitions of merchandise
* Is NOT an asset account but
* Is included in the income statement as an integral part of the calculation of cost of goods sold and is therefore shown as an increase in expenses and thus a reduction in net income and stockholders’ equity in the accounting equation
77
**What does FOB mean and what is the difference between FOB destination point and FOB shipping point?**
* FOB: Free on board
* Destination point; seller pays for shipping costs
* Shipping point: buyer pays for the shipping costs
78
**How do you calculate the gross profit ratio and why is it important?**
Gross profit/net sales (overskudsgrad)
It shows the gross profit percentage of an increase in sales
79
**Why is it important to determine the real value of inventories?**
The value assigned to an asset such as inventory on the balance sheet determines the amount eventually recognized as an expense on the income statement.
80
**What are the four inventory costing methods?**
* **Specific identification method;** matching unit costs with the actual units sold
* **Weighted average cost method;** assigning the same unit cost to all units available for sale during the period.
* **FIFO: First-in, First-out method;** assigns the most recent costs to ending inventory
* **LIFO: Last-in, First-out;** assigns the most recent costs to cost of goods sold
81
**What is LIFO liquidation?**
The result of selling more units than are purchased during the period, which can have negative tax consequences if a company is using LIFO; You sell the “old” and cheap purchases so that your profits increase and tax bill increases.
82
**What is the LIFO conformity rule?**
The IRS-requirement (government) that when LIFO is used on a tax return, it must also be used in reporting income to stockholders. In other words, the same method has to be used throughout all financial statements.
83
**What happens when the ending inventory is overstated?**
Cost of goods sold is understated, gross profit and net income is overstated, taxes overstated and both assets + and retained earnings (balance sheet) will be overstated.
84
**What happens when the ending inventory is understated?**
Cost of goods sold is overstated, net income is understated, taxes understated and both assets + and retained earnings (balance sheet) will be understated.
85
**What is the lower-of-cost-or-market rule? (LCM rule)**
A conservative inventory valuation approach that is an attempt to anticipate declines in the value of inventory before its actual sale; if you expect your inventory to be worth less on the market when selling, its value depreciates and you will have a lose on decline in value of inventory.
86
**What is the inventory turnover ratio and how is it calculated?**
A measure of the number of times inventory is sold during the period
Inventory turnover ratio: Cost of goods sold/Average inventory
Remember to compare with previous years + competitors ratios.
87
**When should you increase and decrease accounts in the cash flow statement when inventory increases/decreases and accounts payable increases/decreases? (indirect method)**
* Increase in inventory **\>** Deducted; the company is building up its stock of inventory and thus expending cahs
* Decrease in inventory **\>** added to net income
* Increase in accounts payable **\>** Added; the company increased the amount it owes suppliers
* Decrease in accounts payable **\>** Deducted; debt to suppliers is decreased
88
**Why is it important to distinguish between inventories costing methods for a perpetual and periodic system?**
The three inventory costing methods—FIFO, LIFO, and weighted average—may be used in combination with a perpetual inventory system.
* The inventory costing method is applied after each sale of merchandise to update
the Inventory account.
* The results from using LIFO differ depending on whether a periodic or perpetual
system is used. The same is true with weighted average, which is called moving average in a perpetual system.
89
**What is the classification of cash?**
An amount that is available to pay debts.
90
**What is cash equivalent?**
An investment that is readily convertible to a known amount of cash and has an original maturity to the investor of three months or less **\>\>\>** Readily means within 3 months.
91
**What does cash management mean?**
Managing the need to have enough cash on hand to ensure cash flow needs but not so much that excess funds earn little return and may be vulnerable to misappropriation.
92
**What is bank reconciliation?**
A form used by the accountant to reconcile or resolve any differences between the balances shown on the bank statement for a particular account with the balance shown in the accounting records.
93
**What is a petty cash fund?**
Money kept on hand for making minor disbursements in coin and currency rather than by writing checks.
94
**What is an internal control system for?**
Ensure the safeguarding of an entity’s assets, the reliability of its accounting records, and the accomplishment of overall company objectives.
95
**What is the Sarbanes-Oxley act?**
An act of congress in 2002 intended to bring reform to corporate accountability and stewardship in the wake of a number of major corporate scandals **\>\>\>** Increased requirements to documentations and internal control.
* Management must render an opinion on the efficiency of the company’s internal control system
* Auditors also must increase their documentation and understanding of the internal controls of their clients
96
**What is the internal control report?**
A report required by the Sarbanes-Oxley act to be included in a company’s annual report in which management assesses the effectiveness of the internal control structure.
97
**What are some of the most important internal control procedures?**
* Proper authorization; only certain personnel may authorize transactions
* Segregation of duties; physical custody of assets must not be combined with the ability to account for those assets
* Independent verification
* Safeguarding of assets and records; both must be adequately protected
* Independent review and appraisal (by internal audit staff)
* Design and use of business documents; source document control
No internal control system is bulletproof.
98
**What are cash discrepancies?**
When money “disappear” due to theft by dishonest employees and to human errors; giving the wrong amount of change to a customer.
99
**What is a purchase requisition form?**
A form a department uses to initiate a request to order merchandise
100
**What is a purchase order?**
A form sent by the purchasing department to the supplier
101
**What is a blind receiving report?**
A form used by the receiving department to account for the quantity and condition of merchandise received from a supplier
102
**What is an invoice approval form?**
A form the accounting department uses before making payment to document the accuracy of all information about a purchase.
103
**What are the 5 steps of the Financial Decision Model?**
1. Formulate the Question
2. Gather Information from the Financial Statements and Other Sources
3. Analyse the Information Gathered
4. Make the Decision
5. Monitor Your Decision
104
**What are the 5 steps of the Ratio Analysis Model?**
1. Formulate the Question
2. Gather the Information from the Financial Statements
3. Calculate the Ratio
4. Compare the Ratio with Other Ratios
5. Interpret the Ratios
**Visualize the debit and credit model; assets, liabilities, contributed capital, retained earnings; expenses, revenues**
105
**What is account receivable?**
A receivable arising from the sale of goods or services with a verbal promise to pay.
106
**What are the two methods of estimating bad debts (allowance method)?**
1. A percentage of net credit sales approach
2. A percentage of accounts receivable approach
107
**What is a subsidiary ledger and a control account?**
The detail for a number of individual items that collectively make up a single general ledger account.
The control account is the general ledger account that is supported by a subsidiary ledger.
108
**What is bad debt?**
Unpaid customer accounts that are uncollectible.
109
**What is the direct write-off method regarding bad debts and what are the two main issues?**
The recognition of bad debts expense at the point an account is written off as uncollectible **\>\>\>** bad debt expense is increased.
**Issues:**
* When not estimating the real value of the accounts receivable, you are overstating the value of the asset until you realize that it is uncollectible.
* You are violating the matching principle as you are overstating net income by ignoring bad debts as expense (by estimation) until the bad debt actually occur as you realize it is uncollectible.
110
What is the allowance method regarding bad debts?
A method of **_estimating_** bad debts on the basis of either the net credit sales of the period or the accounts receivable of the period **\>\>\>** Allowance account is reduced.
111
**What is the “allowances for doubtful accounts” for and when is it used?**
It’s a contra-asset account used to reduce accounts receivable to its net realizable value (estimate from the allowance method).
112
**What is an aging schedule?**
A form used to categorize the various individual accounts receivable according to the length of time each has been outstanding. The longer is as been outstanding, the less likely the account receivable is to be collected.
113
**What is the accounts receivable turnover ratio and how is it calculated?**
A measure of how well a company manages its receivables; the number of times accounts receivable is collected during a period.
Accounts receivable turnover ratio = Net credit sales / Average accounts receivable
This can be recalculated into days as well: Number of days in the period / Accounts receivable turnover ratio.
114
**What is a promissory note?**
A written promise to repay a definite sum of money on demand or at a fixed or determinable date in the future.
115
**What is a note receivable?**
An asset resulting from the acceptance of a promissory note from another company.
116
**What are common ways for companies to accelerate the inflow of cash from sales?**
* Letting customers use **credit cards**, lets merchants pass on the responsibility for collection of money to the credit card company.
* **Discounting notes receivable**; selling a check (as promissory note) to the bank, and receive cash before the note’s maturity date.
117
**What are equity securities?**
Securities issued by corporations as a form of ownership in the business **\>\>\>** stocks
118
**What are debt securities?**
Securities issued by corporations and governmental bodies as a form of borrowing **\>\>\>** bonds
119
**What is CDs?**
Certificate of deposits **\>\>\>** the most liquid form a company can invest their idle cash for a period of time while earning interest revenue.
120
**How do you calculate interest?**
Interest = Principal (starting value) x Interest rate x Time
Interest = 100.000 x 0.06 x 90/360 = 1,500.
121
**How does the ownership share of stocks in another corporation relate to accounting?**
Different accounting methods are used for:
* No significant influence (0-20 %) – our course is focused on this; fair value method
* Significant influence (20-50 %) - equity method
* Control (50-100 %) – consolidated financial statements
122
**How are brokerage fees, commissions etc. recorded?**
Simply added to the price of the stocks bought.
123
**How do you increase and decrease accounts and notes receivable on the cash-flow statement?**
124
**Visualize the debit and credit model; assets, liabilities, contributed capital, retained earnings; expenses, revenues**
125
**What are the two types of operating assets?**
* Property, plant and equipment (recorded at acquisition cost/historical/original cost)
* Intangible assets
126
**What are included in acquisition cost?**
The following but not limited to:
* Purchase price
* Taxes paid at time of purchase (sales tax etc.)
* Transportation charges
* Installation charges
127
**What is capitalization of interest?**
Interest on constructed assets is added to the asset account (the only situation where interest rate is included in the acquisition cost.
If a company constructs an asset over a period of time and borrows money to finance the construction, the interest incurred during the construction period is treated as part of the acquisition cost.
128
**What are land improvements?**
Costs that are related to land but that have a limited lifetime such as a new parking lot.
129
**What is the units-of-production method? (depreciation)**
When usefulness of an asset is directly related to the number of units it produces.
Depreciation per unit = (Acquisition cost – residual value) / (Total number of units in assets life)
Annual depreciation = depreciation per unit x units produced in current year
130
**What is the accelerated depreciation method?**
A higher amount of depreciation is recorded in the early years and a lower mount in the later years (for example for a car).
131
**What is the double-declining-balance method? (depreciation)**
Form of accelerated depreciation:
Depreciation is recorded at twice the straight-line rate, but the balance is reduced each period.
NO RESIDUAL VALUE IS DEDUCTED
132
**What are some ground rules for choice of depreciation method?**
133
**What is the difference between capital and revenue expenditure?**
* Capital: a cost that improves the asset and is added to the asset account (item treated as asset)
* Revenue: a cost that keeps an asset in its normal operating condition and is treated as an expense (item treated as an expense of the period)
134
**What is the general rule of thumb for judging between capital and revenue expenditures?**
* When expenditure _increases the life of an asset or its productivity_, it should be treated as a **capital expenditure** and added to the asset account.
* When expenditure _simply maintains an asset in its normal operating condition,_ however, it should be treated as an **expense**.
135
**What does disposal of an asset mean?**
When an asset is sold, traded or discarded.
136
**How do you calculate the gain/loss of the sale of an asset?**
A gain/loss is the amount of selling price over/under the asset’s book value.
137
**What are the most common intangible assets?**
138
**Can you treat R&D costs as assets?**
No. FASB has ruled that firms are not allowed to treat R&D costs as assets and all such expenses must be treated as expenses in the period incurred (income statement).
139
**What is amortization?**
Depreciation of intangible assets.
However some intangible assets have an indefinite life and amortization is not relevant. Goodwill is according to FASB rules now indefinite.
140
**How do you calculate the average life of property, plant and equipment?**
Property, plant and equipment / depreciation expense = Average life
141
**How do you calculate the average age of assets?**
Average age = Accumulated depreciation / Depreciation expense
142
**How do you calculate the asset turnover? (Measuring the assets’ productivity)**
Asset turnover = Net sales / Average total assets
143
**What are good examples of current liabilities?**
* Accounts payable
* Accrued compensation and related costs
* Accrued occupancy costs
* Accrued taxes
* Insurance reserves
* Other accrued liabilities
* Deferred revenue
144
**What is the primary difference between an account payable and a note payable?**
An account payable is not a formal contractual arrangement whereas a note payable is represented by a formal agreement or note signed by the parties to the transaction.
145
**What is discount on notes payable?**
A contra-liability account that represents interest deducted from a loan in advance.
Increases by debiting.
146
**What are current maturities of long-term debt?**
The portion of long-term liability that will be paid within one year.
147
**How would an accrued liability look like in a journal entry?**
148
**How is current liabilities related to the cash-flow statement and what are operating and financing activities?**
149
**What is a contingent liability/contingent loss?**
An existing condition for which the outcome is not known but depends on some future event.
Contingent liabilities are recorded only if they are probable and if the amount can be reasonably estimated. When not reported on the balance sheet, they are still disclosed in financial statement notes.
**OBS:** international accounting standards call items that must be recorded on the balance sheet for _provision_ and those who should not for _contingent liabilities_ giving us two different keywords.
Examples: product warranties and guarantees, premiums or coupons, legal claims against a firm
150
**What is an estimated liability?**
A contingent liability that is accrued and reflected on the balance sheet.
Examples: product warranties and guarantees.
151
**Do you report contingent assets and liabilities the same way?**
No.
Contingent assets are not reported in the financial statements.
Why? Accounting is a discipline based on a conservative set of principles and we do therefore not take potential future sales into account.
152
**What does time value of money refer to?**
An immediate amount should be preferred over an amount in the future **\>\>\>** this is why we have interest rates.
153
**What is the difference between simple interest and compound interest?**
* Simple interest is calculated on the principal only
* Compound interest is calculated on the principal PLUS previous amounts of interest.
154
**What is future value of a single amount and how is it calculated?**
Amount accumulated at a future time from a single payment or investment.
FV = *p*( 1 + *i* )n
Future value = principal x (1+ interest rate)^number of periods of compounding
155
**What is the present value of a single amount and how is it calculated?**
The amount at a present time that is equivalent to a payment or an investment at a future time.
*PV = Future Value x ( 1 + i ) -n*
Present value = Future value x (1 + interest rate)^minus number of periods of compounding
156
**What does annuity mean?**
A series of payments of equal amounts.
157
**What is the future value of an annuity and how is it calculated?**
The amount accumulated in the future when a series of payments is invested and accrues interest; the amount of an annuity.
We typically use a “table factor” to calculate (using the FV function in Excel).
158
**What is the present value of an annuity?**
The amount at a present time that is equivalent to a series of payments and interest in the future.
We typically use a “table factor” to calculate (using the PV function in Excel).
159
**What are the 3 forms of long-term liabilities?**
* Bonds or notes payable
* Leases
* Deferred income taxes
Remember the 12 month rule for classification.
160
**What does collateralized refer to?**
Bonds backed by specific assets in event of default.
161
**What does “face value” refer to?**
The principal amount of the bond as stated on the bond certificate.
The value that the firm must pay at the maturity date of the bond.
162
**What is collateral?**
The assets that back the bonds in case the issuer cannot make the interest and principal payments and must default on the loan (in regards to bonds).
163
**What are debenture bonds?**
Bonds that are not backed by specific collateral.
164
**What are serial bonds?**
Bonds that do not all have the same due date; a portion of the bonds comes due each time period, whereas TERM BONDS all come due the same date.
165
**What are callable bonds?**
Bonds that may be redeemed or retired before their specified due date.
166
**What affects the price of a bond?**
* The face rate of interest: the rate of interest on the bond certificate (nominal rate, contract rate, coupon rate, stated rate)
* The market rate of interest: the interest rate investor could obtain by investing in other bonds that are similar to the issuing firm’s bonds
167
**What is the bond issue price?**
The present value of the annuity of interest payments + the present value of the principal.
Interest receipts + Repayment of principal (face value)
168
**What is face rate of interest also called?**
* Nominal rate
* Contract rate
* Coupon rate
* Stated rate
The rate specified on the bond certificate.
169
**What is the market rate of interest?**
The rate that investors could obtain by investing in other bonds similar to the issuing firm’s bonds.
This is also called the effective rate.
170
**When is a bond on a premium price and when is it on a discount price?**
* Premium = Issue price – face value (Issue price is higher than face value)
* Discount = Face value – Issue price (Face value is higher than issue price)
171
**How would a journal entry look for a discounted bond? Face value is 10.000 and issue price is 9.366 (discounted 634)**
172
**How would a journal entry look for a premium bond? Face value is 10.000 and issue price is 10.693 (premium of 693)**
173
**How does a higher interest rate on a bond affect its price?**
There is an inverse relation between the interest rate and the price of a bond, so that a higher interest rate leads to a lower price.
174
**What is the effective interest method of amortization? (Interest method)**
The process of transferring a portion of the premium or discount to interest expense: this method results in a constant effective interest rate.
175
**What is the carrying value and how do you calculate it?**
The face value of a bond + the amount of unamortized premium or minus the amount of unamortized discount.
Carrying value = Face value + unamortized premium
Carrying value = Face value – unamortized discount
176
**How do you calculate the effective rate?**
Effective rate = Annual interest expense / Carrying value
177
**When does interest expense increase and decrease? For premium and discount bonds (not in exam)**
Amortization of a discount increases interest expense
Amortization of a premium decreases interest expense
178
**How do you record amortization of discount on a journal entry? (not in exam)**
179
**How do you record amortization of premium on a journal entry? (not in exam)**
180
**What are gain and losses on redemption and how is it calculated?**
The difference between the carrying value and the redemption price at the time bonds are redeemed.
Gain = Carrying value – redemption price (carrying value is highest)
Loss = Redemption price – carrying value (redemption price is highest)
181
**What are operating leases?**
A lease that is not recorded as an asset by the lessee.
In other words, the lease does not add to debt or impair the debt-to-equity ratio that investors usually calculate.
182
**What is a capital lease?**
A lease that is recorded as an asset by the lessee.
Capital lease when one or more of the following criteria are met:
* The lease transfers ownership of the property to the lessee at the end of the lease term.
* The lease contains a bargain-purchase option to purchase the asset at an amount lower than its fair market value.
* The lease term is 75% or more of the property’s economic life.
* The present value of the minimum lease payments is 90% or more of the fair market
value of the property at the inception of the lease.
183
**How should you record a capital lease of 15.972? (journal entry)**
Remember depreciation of the leased asset.
184
**What is the debt-to-equity ratio and how do you calculate it?**
The debt-to-equity ratio measures the proportion of a company’s debt to its equity.
Debt to equity ratio = Total liabilities / Total stockholder’s equity
185
**What is the times interest earned ratio and how do you calculate it?**
The times interest earned ratio measures a company’s ability to meet interest obligations as they come due.
Times interest earned ratio = Income before interest and tax / interest expense
186
**How does long-term liabilities affect the cash flow?**
A decrease in a long-term liability require payments and thus decrease cash.’
Increases in a long-term liability represent additional funding and therefore increases in cash.
One exception is the change in the deferred tax account, which is reported in the operating activities category.
187
**What is deferred tax?**
The account used to reconcile the difference between the amount recorded as income tax expense and the amount that is payable as income tax.
When you see “deferred tax” on the balance sheet, the amount in the account reflects ALL of the temporary differences between the accounting methods chosen for tax and book purposes.
188
**What does permanent difference refer to?**
A difference that affects the tax records but not the accounting records, or vice versa.
189
**What does temporary difference refer to?**
A difference that affects both book and tax records but not in the same time period (timing difference
Could be a difference caused by depreciation methods.
190
**What are good examples of accrued assets?**
* Interest receivable
* Rent receivable
Revenue earned before cash is received (Accrued Asset)
191
**What are good examples of accrued liabilities?**
* Income taxes payable
* Interest payable
* Salaries and wages payable
Expense incurred before cash is paid; (Accrued Liability)
192
**What are good examples of deferred revenue?**
* Unearned rental revenue
* Deferred subscription revenue
* Deferred gift card revenue
Cash received before revenue is earned.
193
**What are good examples of deferred expenses?**
* Prepaid rent
* Prepaid insurance
* Depreciation or amortization
Cash paid before expense is incurred (Deferred expense)
194
**What is an unexpired costs and where is it recorded?**
An asset, which is recorded on the balance sheet
195
**What is an expired cost and where is it recorded?**
An expense, which is recorded on the income statement
196
**What account is never affected by adjusting entries?**
Cash - because when you do your adjusting entries, it is only internal in the firm, and there is no out- or inflow of cash, so the cash account is never affected.
197
**What word is usually associated with a deferred expense?**
Prepaid - fx prepaid rent and prepaid insurance
198
**What word is usually associated with a deferred revenue?**
Unearned or collected in advance - fx unearned rental revenue, insurance collected in advance, subscriptions collected in advance, and gift certificates.
199
**What word is usually associated with an accrued asset?**
Receivable - fx rent receivable or interest receivable
200
**What word is usually associated with an accrued liability?**
Payable - fx income taxes payable, wages payable or interest payable
201
**How does the closing process work?**
1. Debit all revenue accounts in income summary in a single entry
2. Credit all expense accounts in income summary in a single entry
3. Credit balance in income summary is transferred to retained earnings
4. The dividends account is closed with an offsetting debit to retained earnings
202
**How should assets be listed in the financial statements?**
Ordered by liquidity; how readily they can be converted into cash.
203
**How should liabilities be listed in the financial statements?**
Ordered by liquidity; how readily they can be converted into cash.
204
**What are the cash inflows and outflows for financing activities?**
205
**What are the cash inflows and outflows for investing activities?**
206
**What are the cash inflows and outflows for operating activities?**
207
**What does stockholders’ equity consist of?**
* Contributed capital from stockholders
* Retained earnings from the current and prior periods of operation
208
**What are the primary advantages and disadvantages of financing with stock?**
209
**What does authorized shares refer to?**
The maximum number of shares a corporation may issue as indicated in the corporate charter.
210
**Is treasury stock included in number of shares issued and number of shares outstanding?**
Treasury stock is included in the number of shares issued. It is not part of the number of shares outstanding.
211
**What is treasury stock?**
Stock issued by the firm and then repurchased but not retired.
Treasury stock is accounted as a contra-equity account and is a reduction of stockholders’ equity.
1. It must be the corporation’s own stock
2. It must have been issued to the stockholders at some point
3. It must have been repurchased
4. It must not be retired, but must be held for some purpose. Treasury stock is not considered outstanding stock and does not have voting rights.
212
**What is a common stock?**
The most normal stock form. This is a bit more risky than preferred stock as common stockholders only have a claim to the residual interest in a company after ALL debtors’ and preferred stockholders claims are satisfied.
On the positive side, only common stockholders are allowed voting rights.
Common stock prices on the stock market tend to fluctuate more, thus there are higher risks and also better opportunities for earnings.
213
**What is par value?**
An arbitrary amount that represents the legal capital of the firm.
The par value is typically set very low, as there are legal difficulties if stock is sold at less than par value.
214
**What is additional paid-in capital?**
The amount received for the issuance of stock in excess of the par value of the stock.
Also called paid-in capital in excess of par.
215
**What are retained earnings and where do we see it in the financial statements?**
Net income that has been made by the corporation but not paid out as dividends.
216
**What is preferred stock and what are the 5 stated extra features that can be added to a preferred stock?**
A flexible stock type that is tailored to the company’s needs. Dividends must be distributed to preferred stockholder before common stockholders.
* Convertible feature: allows preferred stock to be exchanged for common stock
* Redeemable feature: allows stockholders to sell stock back to the company
* Callable feature: allows the firm to eliminate a class of stock by paying the stockholders a specified amount.
* Cumulative feature: the right to dividends in arrears before the current-year dividend is distributed
* Participating feature: allows preferred stockholders to share on a percentage basis in the distribution of an abnormally large dividend
Preferred by investors as risks are lower than for most common stocks.
217
**How could a stock issuing journal entry look? (cash)**
218
**How could a stock issuing journal entry look? (non-cash)**
219
**How would a journal entry look for a company purchasing shares of treasury stock?**
220
**What is the dividend payout ratio?**
Annual dividend amount / annual net income
New tech companies usually pay nothing whereas older heavy-industry companies pay 50-60 %.
221
**How do you record cash dividends on a journal entry?**
Remember that dividend is not an expense on the income statement.
It is a reduction of retained earnings.
In this case, where it is cash dividends, it also reduces the cash balance when paid.
222
**What are stock dividends?**
The issuance of additional stock to existing stockholders.
* Do not require the use of cash
* Reduces the market price of the stock
* Stock dividends do not represent taxable income to recipients and may be attractive to some wealthy investors.
223
**How would a journal entry look for a stock dividend?**
224
**When do we categorize a stock dividend as large and small and what are the differences in recording practices?**
Small (less than 20-25 %) and large is above 20-25 %.
Small: market value / fair value
Large: Par value
225
**What are stock splits?**
It is similar to a stock dividend.
The creation of additional shares of stock with a reduction of the par value of the stock.
Stock splits do not require an accounting transaction to be recorded, do reduce the par value of the stock but have no effect on retained earnings or additional paid-in capital.
226
**What is a statement of stockholders’ equity?**
A statement that reflects the differences between beginning and ending balance for all accounts in stockholders’ equity.
227
**What is comprehensive income?**
The total change in net assets from all sources except investments by or distributions to the owners.
228
**What is book value per share and how is it calculated when we only have common stock?**
Book value per share represents the rights of each share of stock to the net assets of the company (Net assets: total assets - total liabilities)
When only common stock is present:
Book value per share = Total stockholders’ equity / Numbers of shares of stock outstanding.
229
**What is market value per share?**
The selling price of the stock as indicated by the most recent transactions.
The current stock price.
230
**How do changes in stockholders’ equity affect the statement of cash flow?**
Transaction affecting the stockholders’ equity category of the balance sheet will appear in the financing activities on the cash flow statement.
Dividends are of course included when paid rather than when they are declared.
231
**What are the important differences between sole proprietorship and partnership forms of organization versus the corporate form?**
* Sole proprietorships are businesses that are not incorporated and are owned by one individual ⇒ The business entity and individual are not distinguished from one another for legal and tax purposes.
* Partnerships are owned by two or more individuals. The partners and their respective shares of the business are not distinguished from one another for legal purposes. The partnership itself is not taxed on earnings, but individual partners are taxed for their share.
* Corporations are generally taxable entities and have an unlimited life. The corporate form has been adopted by most larger businesses and is therefore emphasized in the book.
232
**What are cash equivalents and how are they used in regards of cash flow statements?**
Cash equivalents are assets readily convertible to a determinable amount of cash, with a maturity date of three months or less. They are combined with cash on a statement of cash flows.
233
**What are examples of activities in regards to cash flows for the areas of business; operating, investing and financing?**
* Operating: Everything that goes into net income (remember to subtract depreciations in the cash flow statement) + related to current assets and liabilities
* Investing: related to long-term assets on the balance sheet
* Financing: usually relate to either long-term liabilities or stockholders’ equity accounts
234
**What are the two ways of reporting cash flow from operating activities? (indirect is for the exam)**
* Direct method: cash receipts and cash payments are reported (you do not report revenue but instead the income actually received as cash or cash equivalents and so on)
* Indirect method: here net income is recorded to net cash flow from operations and we take accruals and deferrals into account (you take net income and start adding and deducting the real cash flows from the items of the income statement)
The net cash provided is the same with both methods.
235
**What are examples of things to add and deduct from net income using the indirect method for cash flow statement preparation? (operating activities)**
1. Add back noncash expenses (Depreciation, amortization)
2. +/- Changes in current asset + current liability accounts (prepayments, accounts receivable, inventory, and liabilities; accounts payable, accrued liabilities)
3. +/- Losses or gains (loss/gain on sale of equipment, land, bonds etc.)
236
**What are the rules for and what should be remembered regarding cash equivalents?**
* Readily convertible to a known amount of cash
* Maturity date of three months or less
* Less degree of risk in terms of price changes
* Combined with cash on a statement of cash flows
* Examples: commercial paper, money market funds, and Treasury bills
237
**What must a company using the indirect method for cash statement purposes report that companies using the direct method do not have to report?**
A separate disclosure of income taxes and interest paid.
238
**What is cash flow adequacy and how is it calculated?**
A measure intended to help show a company’s ability to meet its principal and interest obligations and is used by bankers and other creditors.
239
**How could you set up a cash flow worksheet instead of using T-accounts for the purpose of making a cash flow statement?**
Indirect method is used.
240
**Should you add or deduct a gain on sale of equipment in the indirect method (on the statement of cashflows)?**
Deduct
241
**Should you add or deduct a loss on early retirement of bonds in the indirect method (on the statement of cashflows)?**
Add
242
**What are things to be aware of and consider before concluding anything about a company’s financial statements?**
* Use of different depreciation methods
* Use of different methods for cost of goods sold (average, LIFO, FIFO, specific)
* Possible net sales growth due to inflation
243
**Why is a common-size comparative balance sheet useful and how does it look?**
We get to compare the size of each asset or liability to total assets and liabilities over time so that we can spot trends.
244
**How do you calculate working capital?**
The current level of capital available for investments.
Working capital = Current assets - Current liabilities
245
**What does the current ratio show?**
If we have enough current assets turning into cash to pay for the current liabilities that have to be paid. Depending on the industry, but as a rule of thumb, a ratio between 1.2 - 2.0 is sufficient, whereas anything above 2.0 indicates that the company does not invest their excess capital.
Current ratio = Current assets / Current liabilities
246
**What does the acid-test/quick ratio show?**
It is a stricter test of liquidity than the current ratio as it excludes inventory and prepayments from the numerator.
Acid-test or Quick ratio = Quick assets / Current liabilities
Quick assets = Cash + Marketable securities + current receivables
247
**What does the cash flow from operations to current liabilities ratio show?**
A measure of the ability to pay current debts from the operating cash flows.
Cash flow from operations to current liabilities ratio = Net cash provided by operating activities / Average current liabilities
248
**What does the accounts receivable ratio show?**
A measure of the number of times accounts receivable are collected in a period.
Accounts receivable turnover ratio = Net credit sales / Average accounts receivable
249
**What does the number of days’ sales in receivables show?**
The average age of accounts receivable.
Number of days’ sales in receivables = Number of days in the period (360) / Accounts receivable turnover
250
**What does the inventory turnover ratio show?**
The number of times inventory is sold during a period.
Inventory turnover ratio = Cost of goods sold / Average inventory
251
**What does the number of days’ sales in inventory show?**
How many days it takes to sell the inventory (sell the average inventory).
Number of days’ sales in inventory = Number of days in period (360) / Inventory turnover
252
**What does the cash-to-cash operating cycle show?**
The length of time from the purchase of inventory to the collection of any receivable from the sale.
Cash-to-cash operating cycle: Number of days’ sales in inventory + Number of days’ sales in receivables
253
**What are the primary ratios in liquidity analysis?**
Liquidity; the nearness to cash of the assets and liabilities
* Working capital
* Current ratio
* Acid-test/Quick ratio
* Cash flow from operations to current liabilities ratio
* Accounts receivable turnover analysis
* Number of days’ sales in receivables
* Inventory turnover ratio
* Number of days’ sales in inventory
* Cash-to-cash operating cycle
254
**What are the primary ratios in solvency analyses?**
The ability of a company to remain in business over the long term
255
**What are the primary ratios in profitability analyses?**
How well management is using company resources to earn a return on the funds invested.
256
**What does the debt-to-equity ratio show?**
How much debt the company has compared to its equity.
A low debt-to-equity ratio is not necessarily positive; it depends on whether the company profits from working with debt or not.
Debt to equity ratio = Total Liabilities / Total Stockholders equity
257
**What does the times interest earned ratio show?**
The ability of a company to meet its interest payments telling us something about the overall long-term financial health of the company.
Times interest earned ratio = (Net income + interest expense + income tax expense) / Interest expense
258
**What does the debt service coverage ratio show?**
A statement of cash flows measure of the ability of a company to meet its interest and principal payments (principal payment; loans maturing in the next period).
Debt service coverage ratio = Cash flow from operations before interest and tax payments / Interest and principal payments
259
What does the cash flow from operations to capital expenditures ratio show?
A company’s ability to finance long-term asset acquisition with cash from operations.
Cash flow from operations to capital expenditures ratio = (Cash flow from operations - total dividends paid) / Cash paid for acquisition
260
**What does the rate of return on assets ratio show?**
A measure of a company’s success in earning a return for all providers of capital (A percentage number)
Rate of return on assets ratio = (Net income + Interest expense on net of tax basis) / Average total assets
⇒ A Percentage number
261
**What does the return on sales ratio show?**
This is a variation of the profit margin ratio and shows the earnings before payments to any creditors (A percentage number)
Return on sales ratio = (Net income + interest expense on a net tax basis) / Net sales ⇒ Percentage number
262
**What does the asset turnover ratio show?**
The relationship between net sales and average total assets (Aktivernes omsætningshastighed)
Asset turnover ratio = Net sales / Average total assets
263
**What does the return on common stockholders’ equity ratio show?**
A measure of a company’s success in earning a return for the common stockholders.
Return on common stockholders’ equity ratio = (Net income - Preferred dividends) / Average common stockholders’ equity
264
**What does the earnings per share (EPS) show?**
Basically showing the company’s bottom line stated on a per-share basis.
Earnings per share = (Net income - preferred dividends) / Weighted average number of common shares outstanding
265
**What does the gross profit ratio show?**
Overskudsgrad; It shows the gross profit compared to the net sales.
Gross profit / Net sales
266
**What does the profit margin ratio show?**
Afkastningsgraden: It shows the net income compared to the net sales.
Net income / Net sales
267
**What does the price/earnings ratio show?**
This shows the relationship between a company’s performance according to the income statement and its performance in the stock market.
Price/Earnings ratio = Current market price / Earnings per share
Earnings per share = (Net income - preferred dividends) / Weighted average number of common shares outstanding
268
**What does the dividend payout ratio show?**
The percentage of earnings paid out as dividends.
Dividend payout ratio = Common dividends per share / Earnings per share
269
**What does the dividend yield ratio show?**
The relationship between dividends and the market price of a company’s stock.
Dividend Yield ratio = Common dividends per share / Market price per share
270
**What is discontinued operations?**
A line item on the income statement to reflect any gains or losses from the disposal of a segment of the business as well as any net income or loss from operating that segment.
271
**What is an extraordinary item?**
A line on the income statement to reflect any gains or losses that arise from an event that is both unusual in nature and infrequent in occurrence.
Fx. a natural catastrophe.
272
What is authorized, issued and outstanding shares?
* Authorized; maximum number of shares a corporation may issue
* Issued shares; the number issued
* Outstanding; the number issued less the number of shares held as treasury stock
273
What is a convertible bond?
A bond that can be converted into a certain number of shares.
274
How can stock be issued and what should be remembered?
For cash
* Par value reported in the stock account
* Amount in excess of par value is reported in the paid-in capital account
For non-cash
* Recorded at the fair market value of the stock or the asset received, whichever is most readily determined.
275
What is the difference between making stock splits and stock dividends?
Stock dividends:
* Do not affect the par value per share
* Recorded
Stock splits
* Reduce the par value per share
* Not recorded (note is disclosed though)
276
**What are the activities of each of the 3 business areas?**
277
**What is the difference between direct and indirect matching regarding costs?**
* Direct matching: associate revenue of a period with the associated costs.
* Indirect matching: associate costs with a particular period ⇒ Depreciation, utilities expense
278
**Which accounts are nominal accounts and should you credit or debit each account to return the account to zero? (closing process)**
Nominal accounts = Temporary account = The accounts that are closed.
* Revenue = Debit to return to 0
* Expense = Credit to return to 0
* Net Income = Either debit (if a surplus) or credit (if a deficit) to return to 0
* Dividend = Debit to return to 0
Doing so we end up with a new retained earnings account for the end of the period.
279
**What are examples of current assets:**
* Cash
* Marketable securities: financial instruments that are very liquid and can be quickly converted into cash at a reasonable price.
* Accounts receivable
* Merchandise inventory
* Prepaid insurance
* Store supplies
280
**What are the common long-term / noncurrent asset-categories?**
* Investments
* Property, Plant, and equipment
* Intangibles (trademarks, copyrights, patents, goodwill, franchise rights).
281
**What are examples of current liabilities:**
* Accounts payable
* Salaries and wages payable
* Interest payable
* Bank loan payable
* Deferred revenue
282
**What are examples of long-term liabilities?**
* Notes payable
* Bonds payable
283
**What is the order of accounts when setting up a trial balance?**
* Assets = Debit (Remember to put the most liquid first)
* Liabilities = Credit (Remember to put the one that has to be paid next first)
* Stockholders equity = credit
* Revenue = credit
* Expenses = debit
* Dividend = debit
284
**How would a journal entry look for return and allowances on a purchase?**
285
**How would a journal entry look for a discount on a purchase?**
286
**What are the steps of preparing a bank reconciliation?**
Steps used in preparing a bank reconciliation:
1. Prepare a list of the deposits in transit and add them to the bank balance
2. Prepare a list of the outstanding checks ⇒ any checks recorded on the books but not yet listed on the bank statement are outstanding and should be subtracted from the bank balance
3. Prepare a list of credit memoranda ⇒ things that has increased the bank balance during the period - this could be interest earned or accounts receivable from customers (here adjusting journal entries should be made)
4. Prepare a list of debit memoranda ⇒ things that has decreased the bank balance - this could be bank service charges, NSF checks, or overvaluation of the bank balance according to the book due to human errors (here adjusting journal entries should be made)
5. Identify any errors
287
**WHAT IS IMPORTANT TO REMEMBER REGARDING THE DOUBLE-DECLINING DEPRECIATION METHOD?**
NO RESIDUAL VALUE IS DEDUCTED.
288
**What is a capital lease?**
A lease that is recorded as an asset by the lessee.
Capital lease when one or more of the following criteria are met:
* The lease transfers ownership of the property to the lessee at the end of the lease term.
* The lease contains a bargain-purchase option to purchase the asset at an amount lower than its fair market value.
* The lease term is 75% or more of the property’s economic life.
* The present value of the minimum lease payments is 90% or more of the fair market
value of the property at the inception of the lease.
289
**How do you calculate book value per share when having both common and preferred stock?**
Book value per share when preferred stock is present = (Total stockholders’ equity - the redemption/liquidation value of preferred stock) / number of common stock shares
290
What are 3 good steps for handling sales of assets?
1) Figure out what the book value is
2) Determine if we have a gain or loss
3) Remember both to write-off the asset itself + accumulated depreciation in your journal entry.
291
What should be included in the purchase price?
All costs that are normal and necessary to acquire the asset and to prepare it for its intended use.
Do include:
* Purchase price,
* Taxes paid,
* Transportation charges
* Installation costs.
Do not include:
* Unexpected repairing costs.
292
How should you record the values of an asset, if the estimated value of the asset differ from the amount paid?
You should add proportional values to the assets acquired.
Fx: We buy warehouse and land at 500,000 but a professional has estimated the value of the land to be 200,000 and the land to be 100,000. We should now add up these estimated values to fit the actual purchase price.
293
What is a good way to figure out if you have made a +/- mistake in your cash flow statement?
In case you only have 1 mistake and it is a +/- mistake, you will easily find it, if you divide the difference from your cash flow and the actual cash flow on the balance sheet with 2 as it will make it easy to see which number you have failed with.
294
Why might companies want to buy treasury stock?
* Make shares available for employee share purchase
* To prevent buy-outs by stockholder groups
* (To boost earnings per share (EPS)) - wouldn't happen
* (Plan to buy low and sell high) - wouldn't happen
295
Why is stock dividend sometimes preferred to cash dividends?
* Stock dividend does not require the use of cash.
* A stock dividend result in more stock outstanding and may decrease the market price of the shares, making the shares more liquid.
* Taxes (there might be very wealthy stock owners who can gain from paying lower taxes when having stocks instead of cash as dividend.
296
How does a journal entry for a NSF check look?
297
When is a lease considered a capital lease?
When any of the conditions below are met:
* Transfer of ownership at the end of the lease agreement
* Bargain purchase option at less than fair market value
* Lease term is 75 % or more of the assets useful lifetime
* The present value of the lease payments is 90 % or more of the assets fair value in the beginning of the lease agreement.
298
What is the equation for allowance for doubtful accounts?
Beginning balance
Less: Receivable write-off
Add: Bad debt expense (what we have to find)
= Ending balance
299
If bad debt is over-estimated, then…
First year’s expenses ares overestimated, and the next year’s expenses will be under-estimated.
300
Why do we work with estimations of bad debts? (Allowance for doubtful accounts)
To live up to the matching principle.
The bad debt expense associated with the revenue we have generated in the current year should be booked. To do so we have to estimate bad debts as we don't know already if the accounts receivable will be collected or not.
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What are the primary differences between US GAPP and IFRS?
Understanding of the differences between US GAPP and IFRS
* US GAPP: Rule-based. IFRS: Principle-based
* IFRS requires companies to present classified balance sheets (current vs. long term) - US GAPP does not. Therefore, some US companies list their assets and liabilities after the size, alphabetic order or in some other order than classified in current+long-term and after liquidity as in IFRS.
* IFRS is more flexible when it comes to defining capital and operating leases whereas US GAPP is strictly following the criteria set up.
* LIFO not allowed in IFRS but is allowed in US GAPP
* Write-downs of inventory ⇒ IFRS - write-down can be reversed in later years. US GAPP; reversals are prohibited.
* R&D /Development costs can be considered assets under IFRS if certain criteria are met. In US GAPP always expenses.
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What are the primary differences between US GAPP and IFRS?
