Accounting Final Exam

Chapter 10, 11 and the Cash Flow Model

What is a Current Asset?

Assets in a company that are expected to be sold, used, converted to cash or consumed within one business year. These include cash/cash equivalents, accounts receivable, inventory, pre-paid expenses, and short-term investments.

What is a Current Liability?

Liabilities that require the use of current assets or the creation of new liabilities. Include accounts payable and notes payable.

What is the equation for calculating interest?

Principle x Interest Rate x Time (x/12)

Secured Bonds

Pledges specific property for security of the bond terms on the agreement.

Debenture Bonds

Bonds that have no specific property in place for security of the terms of the bond. They generally rely on things such as credit history. These are riskier for lenders so they may require a higher interest rate.

Serial Bonds

A bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. This allows for a consistent repayment financial record.

Sinking Fund Bonds

The borrowers assign a trustee to make payments towards the bond from a pool of funds in order to retire the bond at maturity.

Convertible bonds

Grant the bondholder the right to convert the bonds into the company’s common stock if the firm becomes profitable. This allows for a lower interest rate.

Callable Bonds

Allows the bond issuer to redeem the bond earlier than the maturity date

Face Value

The original value of the bond when it is issued.

Coupon Rate

A bond’s stated rate of interest

Effective interest rate

The interest rate used to price the bonds

What is the Current Ratio?

Current Assets / Current Liabilities

What is the Quick Ratio?

(Cash/Cash Equivalents + Short Term Investments + Accounts Receivable) / Current Liabilities

What is the Times Earned Interest Ratio?

Income before interest expense and taxes / interest expense

For payroll taxes, what are the responsibilities of the employee?

State income taxes, federal income taxes, social security, medicare, insurance, union dues, charity, etc.

For payroll taxes, what are the responsibilities of the employer?

Federal Unemployment tax, State Unemployment tax, Social Security and Medicare (they match what the employee pays)

What are contingent liabilities?

Potential Future Expenses that may arise due to mishaps (ex: lawsuits).

What are the three questions and actions for contingent liabilities?

1.) Is the chance very small/impossible? Report

2.) Is it possible? Leave in footnotes

3.) Is it probable? Can we reasonably estimate the expense? No: Discuss in footnotes. Yes: Record the loss.

If the Coupon Rate = Market Rate, what is the bond issues at?

Face Value

If the Coupon Rate > Market Rate, what is the bond issues at?

Premium

If the Coupon Rate < Market Rate, what is the bond issues at?

Discount

In terms of bonds, what will you always credit the account “bonds payable” for?

The Face Value of the issued bond.

What does par- value mean?

The face value of a bond or share, representing the amount paid to the bondholder at maturity. This is chosen and is a small number that is written into the charter. An estimate used for accounting purposes.

What are the rights of preferred stock?

Entitled to a dividend payout before capital stock is issued, asset distribution among company liquidation, may convert to common stock, may be repurchased by the corporation.

What are the rights of common stock?

Shareholders can vote on corporate matters, receive dividends after preferred stockholders, and claim assets during liquidation.

Authorized Shares

The total number of shares that can be issued which is written in the charter of a corporation.

Outstanding Shares

Shares that are in public hands. Does not include treasury stock.

Issued shares

All of the shares that have been sold

Treasury Stock

Shares that the company has issued and then bought back. Not included in outstand shares because they are not in the hands of the public.

What is the return on common equity formula?

Net income / average common shareholders' equity

When creating a journal entry for stock issuance, what is credited and debited?

You debit Cash for the selling price of the stock x the amount of shares sold. You credit common stock for the par- value x the amount of shares sold. You will the use the “Paid-in excess” account for the remaining needed to balance the equation.

For treasury stock- the cost method, what does in at cost, out at cost mean?

When you repurchase stocks at a said price, you will use this price for account resales of the stock, even if they resale for more or less. This price will go in the treasury stock section of the journal entry.

Treasury is a Contra-account, what account does it decrease?

Equity.

What account do Stock Dividends debit?

Retained Earnings

If an increase in stock dividend shares increases by <25%, what will you capitalize it at?

market value

If an increase in stock dividend shares increases by >25%, what will you capitalize it at?

par value

Total equity will NOT change with stock splits? If 10,000 shares @ 5$

par-value split 2-for-1, what would have to change in order for the equity balance to remain?

The total par value would change. 20,000 shares at $2.50.

1. In order of appearance, the 3 major activities found on the Statement of Cash Flows are:

a) operating, investing, and financing;

b) investing, recording, and financing;

c) investing, financing, and operating;

d) none of the above.

operating, investing, and financing activities.

2. In 2010, W Company issued Common Stock in the amount of $2,000,000. This transaction will be reflected in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Investing;

b) Operating;

c) Financing;

d) None of the above.

Financing

3. In 2010, X Company issued at par 9%, 10 year term bonds in the amount of $200,000,000. This transaction will be reflected in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Operating;

b) Investing;

c) Financing;

d) None of the above.

Financing

4. Refer to M/C Question #3 (In 2010, X Company issued at par 9%, 10 year term bonds in the amount of $200,000,000). In 2010, X Company incurred and paid Interest Expense in the amount of $18,000,000. This transaction will be reflected in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Operating;

b) Investing;

c) Financing;

d) None of the above.

Operating

5. In 2010, Y Company incurred Depreciation Expense in the amount of $3,800,000. Using the Direct Method, this transaction will be reflected in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Investing;

b) Operating;

c) Financing;

d) None of the above.

None of the above

6. In 2010, Y Company incurred Depreciation Expense in the amount of $3,800,000. Using the Indirect Method, a positive adjustment to Net Income will be made in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Operating;

b) Investing;

c) Financing;

d) None of the above.

Operating

7. In 2010, W Company earned Service Revenue on account in the amount of $62,000,000. This transaction will increase Cash Flows from _______________ Activities of the Statement of Cash Flows.

a) Investing;

b) Operating;

c) Financing;

d) None of the above.

None of the above

8. In 2010, W Company paid dividends on its Common Stock in the amount of $587,000. This transaction will be reflected in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Operating;

b) Investing;

c) Financing;

d) None of the above.

Financing

9. In 2010, X Company bought a piece of Equipment in the amount of $2,450,000. This transaction will be reflected in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Investing;

b) Operating;

c) Financing;

d) None of the above.

Investing

10. In 2010, X Company bought a 6-month CD as an investment. This transaction will be reflected in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Investing;

b) Operating;

c) Financing;

d) None of the above.

Investing

11. In 2010, Z Company repaid $1,000,000 of the principal owed on a $20,000,000 Note Payable. This transaction in the amount of $1,000,000 will be reflected in the Cash Flows from _______________ Activities section of the Statement of Cash Flows.

a) Investing;

b) Operating;

c) Financing;

d) None of the above.

Financing

12. With regard to the Statement of Cash Flows, the FASB prefers that companies use the _________ Method. Most companies use the __________ Method.

a) Direct/Direct;

b) Direct/Indirect;

c) Indirect/Direct;

d) Indirect/Indirect.

Direct/Indirect

13. In what chronological order are the financial statements prepared?

a) Statement of Cash Flows (SoCF), Balance Sheet (B/S), Income Statement (I/S), Statement of Changes in Stockholder’s Equity (SoCiSE),

b) B/S, I/S. SoCF, SoCiSE;

c) I/S, SoCiSE, B/S, SoCF;

d) None of the above.

I/S, SoCiSE, B/S, SoCF