Final Exam - Part 2 (CONCEPTUAL) Flashcards
21 Conceptual Problems
When an interest rate is called “Stated, Coupon, or Nomial,” what does this mean?
rate written in the terms of the bond indenture
When an interest rate is called “Effective, Yield, or Market,” what does this mean?
rate that provides an acceptable return commensurate with the issuer’s risk; rate of interest ACTUALLY earned by the bondholders
When are Bond Interest Payments usually made? And how are interest rates expressed?
payments made semi-annually
interest rates expressed as an ANNUAL rate
What is the valuation of:
Market rate = Stated rate
Par
What is the valuation of:
Market rate > Stated rate
Discount
What is the valuation of:
Market rate < Stated rate
Premium
If a bond is issued at DISCOUNT, what is amortization doing to interest expense, and how is this reported on the Balance Sheet?
amortization INCREASES interest expense
reported as “net reduction” of bond’s face amount
If a bond is issued at PREMIUM, what is amortization doing to interest expense, and how is this reported on the Balance Sheet?
amortization DECREASES interest expense
reported as “net increase” of bond’s face amount
What is the difference between the Straight-Line and Effective Interest methods for amortization?
Straight-Line:
Discount or Premium / # of periods
Effective Interest:
Amortization Amount = Bond Int. Exp - Bond Interest paid
If a bond is issued between interest dates, what does the BUYER OF THE BOND do?
pay the seller the INTEREST ACCRUED from the last interest payment date to the date of the issue
What are the 2 categories of Stockholders’ Equity?
- Contributed Capital: stock and additional paid-in-capital
- Earned Capital: retained earnings
TRUE/FALSE:
The maximum number of shares that can be issued (sold) to the public are known as AUTHORIZED.
True
Which of the Issued stocks are dividends paid on?
Outstanding common stock
Which of the Issued stocks are issued, sold, and reacquired by the company?
Treasury common stock
What does Treasury stock do to the SE of a company?
DECREASES SE
Stock that is referred to as “Unissued” is what?
never been sold
What is the Cost Method?
(when referring to the purchase of treasury stock)
Company purchases stock back at COST (not par value)
Which of the following requires a JE regarding dividends?
Date of Declaration
Date of Record
Date of Payment
Date of Declaration - JE
Date of Record - NO JE
Date of Payment - JE
What are the two types of dividends?
- Cash - reduced SE
- Stock - distributes no asset; reclassification of SE
What are the two main reasons for companies to issue convertible debt?
- to RAISE equity capital without giving up ownership control
- to OBTAIN debt financing at cheaper rates
What are Convertible Preferred Stock?
conversion of preferred stock into common stock
-requires par value of CS issued over the carrying amount of the preferred being converted REDUCED retained earnings
What are Convertible Stock Warrants?
long-term options to buy common stock at a FIXED PRICE
-allocated using FMV
What is the difference between the Proportional Method and the Incremental Method?
(regarding convertible stock warrants)
Proportional: FV of each class of security is known
Incremental: CANNOT determine FV of ALL classes of securities; know one FV, allocate remainder of purchase price to security whose FV is not known
What are Convertible Stock Options?
compensation expense based on FV on grant date
For Stock Compensation Plans, GAAP requires companies to recognize compensation expense using what method?
FMV
In general, a company recognizes compensation expense in what period?
Service Period
-periods in which its employees perform the service
What does “dilutive” refer to in EPS?
ability to influence the EPS in a DOWNWARD DIRECTION
In a Simple Capital Structure, are there any potentially dilutive securities?
No - it is just common stock
What is the formula for Basic EPS?
Net Income - Preferred Dividends / Weighted-Average Number of Shares O/S
Preferred Stock can either be Cumulative or Non-cumulative.
Which of these do you deduct the annual preferred dividend only if declared?
Non-cumulative = only if declared
Cumulative = always, whether declared or not
In Equity Securities, the valuation is FAIR VALUE when the holding is ____________.
<20% and no significant influence
-records only dividend income when investee declares a dividend
-AFS - adjust to FV at year-end
In Equity Securities, the valuation is EQUITY when the holding is _________________.
between 20-50% and significant influence exists
-records a % of investee’s income as an INCREASE to investment account
-records a % of dividend declared as a REDUCTION to investment account
In Equity Securities, the valuation is CONSOLIDATION when the holding is _________.
> 50%
With the new FASB/IASB Standard, what approach was adopted for Revenue Recognition?
asset-liability approach
What are the 5 Steps in the Revenue Recognition Process?
(HINT: “ISTAR”)
- IDENTIFY the contract with customers
- Identify the SEPARATE performance obligations in the contract
- Determine the TRANSACTION price
- ALLOCATE the transaction price to the separate performance obligations
- RECOGNIZE revenue when each performance obligation is satisfied
When does the Completed Contract method recognize revenue and gross profit?
ONLY when the contract is COMPLETED
When does the Percentage of Completion method recognize revenue and gross profit?
EACH PERIOD based upon the progress of the construction
What method do companies use in financial reporting (GAAP)?
full accrual method (“pretax financial income”)
What method do companies use in tax reporting?
modified cash basis (“taxable income”)
What is the difference between Temporary and Permanent timing differences?
Temporary = reverse themselves in subsequent accounting periods
Permanent = DO NOT reverse
What is a Deferred Tax Liability (DTL)?
Financial Income > Taxable Income
-Revenue is deferred for TAX PURPOSES, but not financial reporting purposes
-Expense is deferred for FINANCIAL REPORTING PURPOSES, but not tax purposes
What is Deferred Tax Asset (DTA)?
Financial Income < Taxable Income
-Revenue is deferred for FINANCIAL REPORTING PURPOSES, but not tax purposes
-Expense is deferred for TAX PURPOSES, but not financial reporting purposes
What must Pension Plans account for?
-Measuring the AMOUNT of pension obligation
-Disclosing the STATUS and EFFECTS of the plan in the financial statements
- Allocating the COST of the plan to the proper periods
TRUE/FALSE:
Pension expense may be equal to, greater than, or less than the amount funded
True
What are the components of Pension Expense?
Service Cost
+ Interest on PBO
- Return on Plan Assets
+ Amortization of Prior Service Costs
If PBO > FV of plan assets, the pension is ________.
Underfunded
If PBO < FV of plan assets, the pension is ________.
Overfunded
What is a lease?
contractual agreement between a lessor and a lessee that gives the LESSEE the RIGHT to use specific property owned by the lessor for a specified period of time
Are ALL long-term leases (>12 months) recorded on the balance sheet?
YES
What are the two classifications of leases?
- Finance (must meet at least 1 of the classification tests to be this)
- Operating
In which section would the CURRENT PORTION (<12 months) of disclosure for lease receivable/liability be found in the financial statement?
current receivable/liability section (lease and interest)
In which section would the REMAINDER of disclosure for lease receivable/liability be found in the financial statement?
long-term asset/liability section (>12 months, noncurrent)
PROBLEM III: (MATCHING): Changes in Principle
What are examples of changes in principles, and how are they reported?
-LIFO to FIFO
-Completed Contract Method to Percentage of Completion Method
RETROSPECTIVELY
-must adjust financial statements for each prior period presented
-adjusts beginning retained earnings balance
PROBLEM III: (MATCHING): Changes in Accounting Estimates
What are examples of changes in accounting estimates, and how are they reported?
- Uncollectible receivables
- Inventory obsolescence
- Useful life and salvage value of assets
- Periods benefited by deferred costs
- Liabilities for warranty costs and income taxes
- Recoverable mineral reserves
- Change in depreciation methods
PROSPECTIVELY
-changes in CURRENT year and future periods
PROBLEM III: (MATCHING): Changes in Accounting Errors
What are examples of changes in accounting errors, and how are they reported?
- Change from an accounting principle that is NOT generally accepted to an accounting policy that is acceptable (e.g., cash basis to accrual basis)
- Mathematical mistakes
- Changes in estimates that occur because a company did not prepare the estimates in good faith
- Failure to accrue or defer certain expenses ore revenues
- Misuse of facts
- incorrect classification of a cost as an expense instead of an asset (vice versa)
-reported as a PRIOR PERIOD ADJUSTMENT
-restate PRIOR YEAR (retrospective) by ADJUSTING beginning Retained Earnings balance
Broadly, what does the Operating section of the Statement of Cash Flows show a change in?
Current Assets and Current Liabilities
Broadly, what does the Investing section of the Statement of Cash Flows show a change in?
Long Term Assets
Broadly, what does the Financing section of the Statement of Cash Flows show a change in?
Long-Term Liabilities and Stockholders’ Equity
Per FASB, what are Cash Equivalents?
short-term, highly liquid investments that are:
-readily convertible to known amounts of cash
-so near their maturity that they present an insignificant risk of changes in interest rates (i.e. 3 months or less)
What does the Full Disclosure Principle call for in financial reporting?
financial reporting of ANY financial facts SIGNIFICANT enough to INFLUENCE the judgement of an informed reader
One of the Notes to Financial Statements is a “Summary of Significant Accounting Policies” (Footnote 1).
What are some examples that would be shown here?
-Allowance for Doubtful Accounts
-Inventory valuation
-PP&E
-Revenue Recognition
-Intangible Assets
What are the two types of Subsequent events?
TYPE 1: events that provide additional evidence about conditions that existed AT THE BALANCE SHEET DATE, which requires an adjustment to the financial statements if material
TYPE 2: events that provide additional evidence about conditions that existed SUBSEQUENT TO THE BALANCE SHEET DATE (i.e., following), which requires a disclosure if material
What are examples of Type 1 and Type 2 Subsequent Events?
Type 1: loss on a lawsuit after year-end that was uncertain at year-end; material loss on a year-end receivable due to customer bankruptcy
Type 2: loss of plant or inventories from a fire after year-end; merger with another company; issuance of a significant number of ordinary shares
