Accounting Review: Chapters 8, 9, and 10

Comprehensive practice questions covering stockholder equity, long-term and current liabilities, and the financial statement closing process based on the Chapter 8, 9, and 10 lecture notes.

What is the definition of Paid-in Capital?

The amount stockholders have invested in the company.

How is Retained Earnings defined?

The amount of earnings the company has kept or retained, which are earnings not distributed in dividends to stockholders over the life of the company.

What is Treasury stock?

A company's own issued stock that it has repurchased.

What three items are typically included in the Articles of incorporation?

a) the nature of the company's business activities, b) the shares of stock to be issued, and c) the initial board of directors.

What are the three primary Stockholders' rights mentioned?

The right to vote, the right to receive dividends, and the right to share in the distribution of Assets.

What is Authorized stock?

The total number of shares available to sell, as stated in the company's articles of incorporation.

What is the difference between Issued Stock and Outstanding Stock?

Issued Stock is the number of shares sold to investors, while Outstanding Stock is the number of issued shares actually held by investors (only outstanding shares receive dividends).

Define Convertible preferred stock.

Stockholders can exchange shares of preferred stock for common stock at a specified conversion ratio.

What does Cumulative mean in the context of preferred stock?

Dividends not declared in a given year accumulate until the company does declare dividends.

What is the formula for Retained earnings?

$$\text{All net income since the company began} - ext{All dividends since company began}$$

What is Debt financing versus Equity financing?

Debt financing refers to borrowing money from creditors (liabilities), while Equity financing refers to obtaining investment from stockholders (equity).

Why might a company prefer debt over equity regarding taxes?

Interest expense incurred when borrowing money is tax-deductible, whereas dividends paid to stockholders are not tax-deductible.

What is an Amortization Schedule?

A table detailing the note's initial value, payments made at the end of each month, interest expense, and the decrease in carrying value.

How is Interest Expense calculated for an installment note?

$$\text{Prior month's carrying value} \times \text{interest rate}$$

What is the definition of a Bond?

A formal debt instrument that promises to pay both a principal amount at the maturity date and periodic interest payments.

What is the difference between a Term Bond and a Serial bond?

A Term Bond matures on a single date, whereas Serial bonds mature in installments.

How is Interest calculated for short-term obligations?

$$\text{Face Value} \times \text{Annual Interest Rate} \times \text{Fraction of the year}$$

What is a Line of credit?

A prearranged agreement between a company and a financial institution that allows the company to borrow as needed up to a certain amount.

What employee costs are associated with FICA?

Social security and Medicare.

Which payroll taxes are specifically listed as Employer costs?

Matching Employee FICA, FUTA (Federal Unemployment Tax Act), and SUTA (State Unemployment Tax Act).

What type of account is Deferred Revenues?

A LIABILITY ACCOUNT, not a revenue account.

Under what two conditions is a Contingent Liability recorded?

Only if a loss is probable AND the amount is reasonably estimable.

If Dell has sales of $1.5 million and expects future warranty costs of 3%, what is the recorded Warranty Expense?

$$1,500,000 \times 0.03 = \$45,000$$

When are Contingent Gains recorded?

Companies do not record them until the gain is certain.

What is the formula for Working Capital?

$$\text{Current Assets} - \text{Current Liabilities}$$

What is the formula for the Current Ratio?

$$\frac{\text{Current Assets}}{\text{Current Liabilities}}$$

What is a Classified balance sheet?

A statement that groups a company's asset and liability accounts based on the timing of activity.

What accounts are included in a Post-Closing Trial balance?

ONLY Permanent accounts and their balances.

What is the purpose of Closing entries?

To transfer the balances of temporary accounts (revenues, expenses, dividends) to retained earnings.

According to the Revenue Recognition Principle, when should revenue be recorded?

In the period in which the company provides the good or service to customers.