Spring Test 2 Flashcards
How do you value stock?
Do not use Historical Cost Principle:
Use fair market value, accounting for unrealized gains and losses
What are the three types of debt securities?
Held to Maturity
Trading Securities
Available-for-Sale
How do you value Held to Maturity securities?
At cost (amortize), no unrealized G/L because you hold it the whole time
How do you value Trading securities?
At FV
How do you value Available-for-Sale securities?
At FV
Unrealized G/L for Trading securities go on which financial statement?
Comprehensive Income Statement
Unrealized G/L for Available-for-sale securities go on which financial statement?
Goes on Balance Sheet in Stockholder’s Equity as a negative number
What is a debt security?
Bonds
Loans with interest and repayment of capital (co. is receiving $)
What is an equity security?
Stocks
Derivatives
For equity securities, what do you do when there is:
<20% ownership?
20-50% ownership?
>50% ownership?
<20%: recorded at FV, dividend is revenue, G/L recorded for actual sales
20-50%: Equity method journal entries, dividends are returns on investments, G/L for actual sales
> 50% Equity method consolidation
Where are debt and equity securities recorded?
Investments section of Balance Sheet
What is a derivative?
Equity Security type:
A derivative is a type of financial contract that can be traded as an investment. Derivatives have no intrinsic value. Their worth comes entirely from the value of the underlying asset. Derivatives can be used to mitigate risk or to assume risk in the hope of achieving a reward.
Difference between held-to-maturity, trading, and available-for-sale debt securities?
Held-to-maturity: positive intent and ability to hold
Trading: sell soon
Available-for-sale: neither of the above (other)
What is a loss carryback?
Companies may carry NOL back 2 years and receive refunds for income taxes paid in those years (carryforward any remaining loss)
Taxes Payable go on which financial statement?
Balance Sheet (liability)
Tax Expense goes on which financial statement?
Income Statement (based on FASB income, not what is paid to the IRS)
What is the difference between taxes payable and tax expense called?
Deferred Tax Asset (Liability)
What are the three sets of books a company keeps?
Financial reporting (FASB)
IRS (federal)
OR Dept of Revenue (State)
Where examples of permanent differences?
Reported to FASB but not IRS:
1. Interest received on state and local obligations.
2. Expenses incurred in obtaining tax-exempt income (broker fees)
3. Proceeds from life insurance on key employees
4. Premiums paid for life insurance on key employees
5. Fines and expenses from violation of law
Reported to IRS but not FASB:
1. Depletion of natural resources in excess of their cost
2. Deduction for dividends received from US corporations
Easy ones:
Interest Income
What is Dr. Bernard’s golden rule?
Defer taxes as much as you can by deferring revenue and accelerating expenses
What are examples of temporary differences?
- Revenues or gains are taxable after they are recognized (A/R becomes cash, % of completion for construction on FS, but recog. all on tax return)
- Expenses or losses are deductible after recognized on FS (liabilities become future tax assets when liability is settled, product warranty liabilities, litigation accounts, direct write-off for tax purposes)
- Revenues or gains are taxable after they are recognized in financial income (subscriptions in advance, prepaids like rent)
- Expenses or losses are deductible before recognized on financial income (depreciation, prepaid expenses deducted on tax return in period paid)
Easy ones:
Prepaid Rent
Lawsuits
Depreciation
What is the difference between Permanent and Temporary Differences?
Permanent: non-taxable
Temporary: creates deferred tax assets/liabilities
- prepaid rent is a DTA (pay tax today but not later)
- depreciation is a DTL
DTA vs DTL
DTA: pay more tax today but not later due to increased income
DTL: pay less tax today but more later
