ACG 2021 Exam 3 More Detail

What are the characteristics of a liability?

Probable future sacrifices of economic benefits arising from present obligations resulting from past transactions

How are current liabilities distinguished from long-term liabilities?

Current liabilities are expected to be paid within one year or the operating cycle while long-term liabilities are due beyond that period

What is the benefit to a company of recording a long-term liability rather than a current one?

It improves short-term liquidity ratios and makes the company appear less risky in the near term

Define liquidity

The ability of a company to pay its short-term obligations using its short-term assets

Calculate the current ratio

Current Assets divided by Current Liabilities

Record notes payable

Debit Cash or another asset and Credit Notes Payable

Calculate interest payable for an end-of-period adjusting entry

Principal multiplied by the Interest Rate multiplied by the fraction of the year

Distinguish between employee costs and employer costs

Employee costs are withheld from the employee's pay like income tax while employer costs are paid out of pocket by the company like matching FICA

Define and record deferred revenue

Cash received in advance of providing goods or services recorded as a debit to Cash and a credit to Deferred Revenue

Understand when to record warranty expense

Recorded in the same period as the revenue from the sale of the product to satisfy the matching principle

Understand when and how to report contingent liabilities

Reported on the balance sheet if the loss is probable and reasonably estimable but disclosed in notes if only reasonably possible

Identify the primary sources of corporate debt financing

Notes payable and leases and bonds

What is capital structure?

The specific mixture of debt and equity a company uses to finance its operations

What are the advantages of issuing bonds?

Interest expense is tax-deductible and stockholders retain control and it can increase return on equity

Why would a company lease an asset instead of purchase one?

It requires lower upfront cash and provides protection against asset obsolescence and offers potential tax advantages

Know the elements that make up the price of a bond

The present value of the face amount plus the present value of the periodic interest payments

How is the cash interest payment calculated each period?

Face Value multiplied by the Stated Interest Rate adjusted for the length of the period

Understand the relationship between stated rate and market rate and whether bonds sell at a discount or premium

Bonds sell at a premium if stated rate is greater than market rate and at a discount if stated rate is less than market rate

Interpret information in a bond amortization table

The carrying value moves toward the face value over time while interest expense is calculated as carrying value times the market rate

Calculate gain or loss when bonds are retired before maturity

The difference between the cash paid to retire the bonds and their carrying value at the time of retirement

Calculate ROA and debt-to-equity ratio

Return on Assets is Net Income divided by Average Total Assets while Debt-to-Equity is Total Liabilities divided by Total Stockholders Equity

Name advantages and disadvantages of the corporate form of business

Advantages include limited liability and easy transfer of ownership while disadvantages include double taxation and more government regulation

Describe the rights of common stockholders

The right to vote and the right to receive declared dividends and the right to share in asset distribution upon liquidation

What are authorized shares and what are outstanding shares?

Authorized shares are the maximum number a corporation can issue while outstanding shares are those currently held by investors

Record the issuance of common stock

Debit Cash and Credit Common Stock for the par value and Credit Additional Paid-in Capital for any amount received above par

Why is preferred stock preferred?

It has preference over common stock when receiving dividends and during the distribution of assets in liquidation

What is treasury stock and what effect does it have on total equity?

It is a corporation's own stock that has been reacquired and acts as a contra-equity account that decreases total stockholders equity

Define and calculate the balance of retained earnings

Accumulated net income minus dividends paid calculated as Beginning Retained Earnings plus Net Income minus Dividends

Know the normal balance of retained earnings and its effect on stockholders equity

The normal balance is a credit which increases stockholders equity while a debit balance decreases it

What is the primary motivation behind stock splits?

To lower the market price of the company stock to make it more affordable and attractive to investors

What is the difference between the equity section on the balance sheet and the statement of stockholders equity?

The balance sheet shows ending equity balances at a specific point in time while the statement shows changes in those balances over a period

Prepare the statement of stockholders equity

List beginning balances then add net income and stock issuances then subtract dividends and treasury stock to find ending balances

Calculate return on equity (ROE)

Net Income divided by Average Stockholders Equity

Calculate earnings per share (EPS)

Net Income minus Preferred Dividends divided by Average Common Shares Outstanding

State the purpose of the statement of cash flows

To provide detailed information about a company cash receipts and cash payments during a specific accounting period

Classify transactions as operating or investing or financing activities

Operating involves day-to-day business activities while investing involves buying or selling long-term assets while financing involves borrowing or issuing stock or paying dividends

Differentiate between cash transactions and noncash transactions

Cash transactions involve actual inflows and outflows of cash while noncash transactions do not directly affect the cash balance

Know what constitutes a significant noncash investing and financing activity

Major transactions like acquiring equipment by issuing a long-term note which are reported in a separate schedule

Understand how to create each section of the cash flow statement and where to find the needed information

Operating uses the Income Statement and Current Assets and Liabilities while Investing uses Long-Term Assets and Financing uses Long-Term Liabilities and Equity

Prepare the operating activities section using the indirect method

Start with Net Income then add back non-cash expenses like depreciation and adjust for gains or losses and changes in current assets and liabilities