Final Exam Flashcards
Which type of lease does a lessor not record interest revenue?
Operating lease
Capitalized amount for a Finance/Sales type lease =
Annual payments x PV Annuity Due
Gross Profit =
Sales Price - COGS
Direct Financing Lease
when lessor relinquishes control of asset to lessee, but a third party is involved in the residual value guarantee.
Sale Leaseback
Company sells an asset to another entity, and then leases that asset from the new owner.
In a Sales-Type lease, the gross profit will be the same whether __________.
the residual value is guaranteed or ungauranteed
If Expected RV > Guaranteed RV ;
Lessee should NOT include guaranteed RV in the lease liability computation
If Expected RV < Guaranteed RV :
the difference should be included in the lease liability computation
In a Sales-Type lease, initial direct costs are ________.
expensed in the year of incurrence
In an Operating lease, initial direct costs are ________.
amortized as expenses over life of the lease term
What is the short-term lease exception?
If under 12 months, the LESSEE lease payments may be expensed as incurred.
The new standard for lease accounting will affect a company’s _______.
profitability and solvency
Both Operating and Financing leases use ______ assets.
right-of-use
A lease executory cost example would be ______.
property taxes, property insurance
What is the Cumulative Effect?
Difference in PY’s net income OR retained earnings between the new accounting method and prior method.
What is Depreciation Charge?
Book Value / Remaining Service Life
What is a change in accounting principle?
from one GAAP to another GAAP (avg cost to FIFO)
Accounting errors are treated as ______.
prior period adjustments
Does a change in depreciation method have a cumulative effect?
No; because it is prospective not retrospective.
How to retrospectively report cumulative effect change in accounting principle:
On Retained Earnings Statement as adjustment to beginning balance of earliest year presented.
What makes the retrospective approach impractical?
- Cannot determine effects of retrospective application
- Requires assumptions on management’s intent in prior period
- Requires significant estimates that cannot be objectively verified
When the retrospective approach is impractical, what approach should be used instead?
Prospective approach
A change in accounting estimate is accounted for in what periods?
Current and future
If it is impossible to determine if a change is a change in principle or estimate, consider the change a ________.
Estimate; as prospective approach is more conservative
Why do companies prefer certain accounting methods?
Bonus payments, political costs, smooth earnings, capital structure
Inventory errors are ______ errors.
counterbalancing
On the Statement of Cash Flows, after all reconciling items, each line for a BS account should ______.
foot across
Bad debt expense is a ______ charge.
non-cash
On the statement of Cash Flows, items should be reported _____, not netted against each other.
gross
Statement of Cash Flows has two sections:
Balance sheet effects and cash effects
Nonconvertible debenture bonds usually have ____ interest rates than convertible debenture bonds.
higher
_________ should be classified as equity because the issuer has no obligation to pay divs or repurchase stock.
Nonredeemable common shares
Convertible bonds are classified as _______, and convertible preferred stock is classified as _______.
liabilities, equity
if the exercise price of the option/warrant is ______ than the market price, dilution occurs.
lower
Basic EPS =
(Net Income - Preferred Dividends) / Weighted Avg Common Shares Outstanding
Diluted EPS =
Basic EPS - Impact of convertibles - impact of options, warrants, and other dilutive securities
Projected Benefit Obligation
PV of vested AND nonvested benefits accrued to date, based on employees’ future salary levels.
Settlement Rate
Interest rate -> interest expense accrues each year on the projected benefit obligation.
Which would be least likely to change stockholders’ equity; Sale of Treasury Stock above cost, expiration of stock rights, or sale of common stock below par.
Expiration of stock rights
Treasury stock is a _________ account.
contra-equity
The difference between the Projected Benefit Obligation and the FV of Plan Assets is the _________.
pension asset / liability
Bargain Purchase Option
Lesse to purchase leased property for price substantially lower than expected future fair value.
When are leases capitalized by the Lessor?
When the penalty for nonperformance is substantial, and its unlikely to avoid severe penalty for failure.
The implicit interest rate is used to calculate the ___________ to determine if lease is Finance or Operating.
PV of lease payments
Executory Cost vs Initial Direct Costs
Executory costs are normal expenses associated owning asset (taxes, insurance), while initial direct costs are exclusive to the acquisition of the lease (fees, commissions).
What is a Captive Leasing company and what are their advantages?
Ford, Boeing, etc; product knowledge, lease flexibility, POS
Lessee - advantages of leasing
Fixed rate financing, protection against obsolescence, less costly, flexibility
Lessor - advantages of leasing
Profitable interest margins, stimulate sales, tax benefits
What leases are exempt from Capitalization?
Leases with term of 12 months or less
Lease liability or Capitalized Amount formula
PV of lease payments less PV of guaranteed residual value
Direct Effect of a change in accounting principle
retrospectively applied, inventory adjustment from different method, asset impairment
_____ effects do not change prior period amounts.
Indirect
Principal-agent relationship uses gross or net revenue recognition?
net
