Mixture Flashcards
What are the two classifications of liabilities?
Liabilities are classified as current or long-term.
What are current liabilities?
Obligations the company expects to liquidate through the use of current assets or the creation of other current liabilities.
Give examples of payables from acquisition of goods and services.
Accounts payable, wages payable, and taxes payable.
What are collections received in advance of delivery of goods or services?
Unearned rent revenue and unearned subscriptions revenue.
What are other liabilities that will be liquidated during the reporting cycle?
The portion of long-term bonds to be paid in the current period and short-term obligations arising from the purchase of equipment.
What happens if a company intends to refinance debt?
Liabilities payable within a year are not included in current liabilities if the company intends to refinance the debt through another long-term issue or to retire it out of noncurrent assets.
Is there a prescribed order for current liabilities?
No prescribed order for current liabilities, but common to see notes payable, accounts payable, or short-term debt as the first item.
What is working capital?
Excess of total current assets over total current liabilities.
What are long-term (noncurrent) liabilities?
Obligations a company does not reasonably expect to liquidate within the normal operating cycle.
Give examples of long-term liabilities.
Bonds payable, notes payable, deferred income tax amounts, lease obligations, and pension obligations.
What are the three types of long-term liabilities?
- Obligations from specific financing situations. 2. Obligations arising from the ordinary operations of the company. 3. Obligations that depend on future events.
What type of disclosures do long-term liabilities require?
Long-term liabilities require the most disclosure, including supplementary disclosures related to covenants and restrictions for the protection of lenders.
What are the components of the owner’s equity section of the balance sheet?
Generally 6 sections: Capital Stock, Additional Paid-In Capital, Retained Earnings, Accumulated Other Comprehensive Income, Treasury Stock, Noncontrolling Interest.
What is included in Capital Stock?
Preferred stock, common stock, and paid-in capital.
The par or stated value of the shares issued, along with authorized, issued, and outstanding share amounts are also disclosed.
What is Additional Paid-In Capital?
The excess of amounts paid in over the par or stated value. Subtotals are informative if additional sources of capital are varied and material.
What are Retained Earnings?
The corporation’s undistributed earnings, divided into unappropriated (available for dividend distribution) and restricted (bond indentures or other loan agreements).
What does Accumulated Other Comprehensive Income represent?
The aggregate amount of other comprehensive income items, including unrealized gains or losses on available-for-sale investments and certain derivative transactions.
What is Treasury Stock?
The amount of ordinary shares repurchased, shown as a reduction of stockholders’ equity. It is a contra-equity account.
What is Noncontrolling Interest?
A portion of the equity of subsidiaries not wholly owned by the reporting company.
What is the classification of Investment in a Preferred Stock?
Current asset or Long Term Asset/Investment.
What is the classification of Treasury Stock?
Contra-Equity Account - Stockholders’ Equity.
What is the classification of Common Stock?
Stockholders’ Equity.
What is the classification of Cash Dividends Payable?
Current Liability.
What is the classification of Accumulated Depreciation?
Contra Asset Account to PP&E.
What is the classification of Interest Payable?
Current Liability.
What is the classification of Deficit?
Contra Account in Retained Earnings/Equity.
What is the classification of Trading Securities?
Current Asset.
What is the classification of Unearned Revenue?
Current Liability.
How should an asset be valued upon purchase?
An asset should be valued at the fair value of what was received, whichever is more clearly evident.
What is the accounting treatment for cash discounts on asset purchases?
If companies take the discount, they reduce the value of the asset.
What is a deferred payment contract?
It involves buying an asset and paying for it at a future time, discounting the payment amount back to present value.
How is the asset’s value determined in a deferred payment contract?
The asset’s value is the present value of the future payment.
What is recorded as a discount on notes payable?
The difference between the present value of the asset and the full amount of notes payable.
What is a lump-sum purchase?
Making one payment for many assets, such as buying a restaurant that includes land, building, and equipment.
How do you allocate the cost in a lump-sum purchase?
Use the relative fair value to allocate the cost among the assets.
What is the basis for accounting for exchange transactions?
Assets are ordinarily accounted for based on the value of what is given up or received, whichever is more evident.
What is ‘boot’ in an exchange transaction?
Cash received in an exchange is referred to as ‘boot’.
What defines commercial substance in an exchange?
If future cash flows change as a result of the transaction, it has commercial substance.
How should a company record a new asset if the exchange has commercial substance?
Record the new asset at the fair value of what you gave up.
What should companies do if an exchange has commercial substance?
Recognize gains and losses immediately.
What is the accounting treatment for exchanges with no commercial substance and no cash received?
Defer gains by lowering the cost of the new asset by the gain amount, or use book value plus cash paid to value. Recognize losses immediately.
What is the accounting treatment for exchanges with no commercial substance but cash received?
Recognize partial gain and recognize losses immediately. If cash is more than 25% of the exchange, recognize the entire gain.
What is the formula for recognizing gain when cash is received in an exchange?
Formula: (Cash received)/(Cash received + Fair Value of other Assets Received) x Total Gain = Recognized Gain.
What is the principle of conservatism in accounting?
Deferring gain reduces the cost of an asset, while deferring loss increases the cost of an asset.
How do you determine if there is a gain or loss?
If FV > BV, recognize a gain. If FV < BV, recognize a loss.
How is a gain or loss recorded?
Gain is recorded as a credit, loss is recorded as a debit.