ACCT 327 Exam 2 (Cline)

Current assets

Items that can or will be converted into cash within one year
- cash
- cash equivalents
- ST investments
- receivables
- inventory
- prepaid expenses

liquid, 3

Cash equivalents are highly _________ investments with a maturity of ____ months or less

Noncurrent assets

long-term investments, PPE, intangible assets, other (LT prepaids, noncurrent receivables, deferred income tax, etc.)

Current liabilities

Obligations expected to liquidate through use of current assets or creation of other current liabilities, including:
- payables, UE revenue, current maturities of long term debt/bonds

Long term liabilities

Obligations not due to be paid within one year or the operating cycle, whichever is longer
- bonds payable, notes payable, some deferred taxes, lease obligations, pension obligations, warranties and contingencies
- generally require lots of disclosures in the notes

Equity

Capital stock, APIC, RE, AOCI, treasury stock

notes, disclosures

The balance sheet is a valuable overview of the financial position of the company, but it is an incomplete picture. This picture is completed by the _________ and _________

Contingencies

Important events with an uncertain outcome (ex: taxes, litigation)
- a common disclosure

Accounting policies

Valuation methods used, assumptions made in assigning value to inventory, depreciation, investments in subsidiaries, and risks/uncertainties related to industry
- a common disclosure

Contractual obligations

Especially as related to liabilities (pensions, leases, stock options)
- a common disclosure

Fair values of assets and liabilities

Particularly financial instruments (cash, investments, receivables, payables, etc.)
- valued with a score from 1-3 (remember from exam 1)
- a common disclosure

More, risks

______ disclosure is generally better, but also comes with greater _________; the more info you put out, the more likely you are to have something wrong in your audit

stated, market

The __________ rate is used for finding the payment
The __________ rate is used for finding PV of the cash flows

Annuity

A stream of equal payments
- ordinary and due

Ordinary annuity

Stream of equal payments occur at the end of the period (end mode)

Annuity due

Stream of equal payments occur at the beginning of the period (begin mode)

Sales discounts

Incentives offered by sellers to induce prompt payment
- written as %disct/if paid in n days, n/or full amount due in x days (ex: 2/10, n/30)

Gross method

Most common way to record sales discounts; records the receivable at the full amount of the sale

Net method

Way to record sales discounts; more correct than the gross method, but less common because it is more work; records the receivable at the net amount
- assumes that if you're willing to accept the discounted price, it must be worth that discounted price; the amount left to the full amount is considered a "late fee"

NRV

A/R is valued at _________, or the amount of outstanding receivables the company actually expects to receive
- companies must estimate uncollectible accounts and subtract from the receivables balance
- equal to AR-ADA

internal, delinquent

A/R aging schedules serve as an important __________ control to identify ____________ accounts

pledging, sales

Methods of generating cash from receivables (2)

Pledging/assigning

Method of generating cash from receivables; also known as secured borrowing
- "desperate grab for money"

Pledging

A company uses its AR as collateral for a loan (NP) and continue to collect receivables as usual; each accounting period, the collections are used to pay off the principle of the note & interest incurred
- receivables remain on the seller's books
- must be disclosed in the financial statements

Factoring

Finance companies buy receivables from companies for a fee and then collect from the companies directly

- sale of receivables

Securitization

Groups of assets, such as credit card receivables, mortgage receivables, and car loans, are placed into a pool; shares of ownership in these pools are sold to investors, entitling them to a portion of the interest and principal payments

- sale of receivables

absorbs losses, assume responsibility

When receivables are purchased without recourse, the party buying the receivable assumes the risk of uncollectibility and ________ ______ associated with uncollectibles; receivables purchased with recourse require the seller of the receivables to ________ ___________ for any losses

Liability

An overdraft on a bank account is considered a ____________ UNLESS there is another account at the same bank with a positive balance to offset the overdraft

Cash

Currency (paper money/ coins), deposits in banks, money orders, checks, bank drafts
- does NOT include postdated checks, IOUs, NSF checks (considered receivables)

Postdated check

a check with a future date on it
- not cash; considered a receivable

Cash equivalents

Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes
- treasury bills, commercial paper, money market funds
- maturity of 3 months or less

Restricted cash

Cash set aside for certain uses; ex:
- lender requirements for min cash balances
- amounts set aside for PPE expansion
- Amounts set aside to retire bonds

Bank reconciliations

Compares the cash balance according to the books and reconciles discrepancies
- an internal control

- Lending transactions (notes for cash)
- Extend payment period of outstanding AR
- Companies require from high-risk customers
- Sale of PPE/big ticket items

Notes are given in the following situations (4)

amortized

The discount/premium must be ___________ over the life of the note using the effective interest method

Zero interest bearing notes

A note receivable that includes interest as part of the face amount

CV new = CV old + Interest revenue - Cash rec'd during period

"Shortcut" formula for finding CV

Debt securities

Securities that involve a creditor relationship between 2 entities; ex:
- US gov securities, munis, corporate bonds, convertible debt, commercial paper
- can be classified as HTM, available for sale, trading

HTM

Securities for which a company has the positive ability and intent to hold it to maturity
- presented at CV (amortized cost) on the BS

AFS

Securities that are not classified as HTM or trading securities

Trading

Securities purchased with the intent of selling in the near term (generally within 3 months) to generate income based on changes in market prices

Amortized cost (CV)

The investment account for all debt securities are recorded at ___________ _______

Trading, AFS, mark to market, SFVA

___________ and ___________ securities are reported on the BS at fair value; the process by which this happens is called _________ ____ _________; most companies utilize an __________ account to accomplish fair value presentation

Security Fair Value Adjustment (SFVA)

Account used to bring trading and available for sale securities to fair value presentation on the BS
- permanent account

Equity securities

Securities that represent ownership in a corporation, as well as rights to acquire or dispose of ownership in an entity (ex: CS, PS, options)

- this does not include debt securities that are convertible into equity securities

Cost, ownership

All equity securities are recorded at _________ (purchase price) and are classified based on the extent of _____________ obtained by purchasing the company's stock

are not

Debt securities that are convertible to equity securities (are/are not) considered equity

20, return on capital, fair value

At _____% ownership or less, it is unlikely that the investing company could really control the investee, and the two are not heavily intertwined. It is likely that this investment is primarily an investment to obtain a __________ ____ _________. Thus, _________ ________ information is relevant to investors (because the securities are intended for sale).

20, 50, significant influence, equity method

At ______-_______% ownership, the investor can probably exert ____________ ___________ over the investee, meaning that the investor can significantly control operating and financial policies of an investee company through board representation. As a result, the results of the investee's operations may have bearing on the results of the investor. For this, we use the ____________ ___________

50, consolidated financial statements

At _______% ownership or more, the investor has a controlling influence over the investee so the two companies should be reported as one economic entity (i.e. _____________ __________ ____________)

Equity method

1. record investment at cost

2. increase the investment account balance when the investee reports NI; decrease with net loss

3. decrease the investment account when the investee pays a dividend

- method for 20-50% ownership

- dividends are not considered revenue under this method

Gains trading

Selling "winning" AFS securities and holding on to the losers so that losses are in OCI and gains are in income
- issue related to security valuation

NI, OCI

G/L on trading securities go to ________, GL for AFS securities go to ____________