AC EXAM

Preferred Stock

Provides priority in dividends and liquidation, but usually no voting rights.

Amortized Intangibles

Intangible assets with finite lives such as patents and copyrights.

Face Value of a Bond

The amount repaid at maturity.

Immediate Expenditure

An expenditure that is expensed immediately if it's routine maintenance or a small repair.

Legal Protection for Creative Works

Copyright.

Dividend Dates

Declaration, Record, and Payment.

Biggest Disadvantage of a Corporation

Double taxation.

Treasury Stock

The company's own stock that has been repurchased.

Goodwill

Excess paid over fair value during acquisition; it has an indefinite life and is not amortized.

Debt-to-Equity Ratio

Measures financial leverage.

EPS (Earnings Per Share)

Measures earnings attributable to each common share.

Journal Entry for Issuing Bonds at Face

Dr Cash; Cr Bonds Payable.

Trademarks Amortization

Trademarks are not amortized if they have an indefinite life.

EPS Formula

(Net Income – Preferred Dividends) ÷ Weighted Average Common Shares.

Goodwill Amortization

Goodwill is not amortized but is tested for impairment.

Internally Developed Intangibles

Generally not capitalized; they are expensed.

Current Ratio

Measures short-term liquidity.

Statement of Stockholders’ Equity

Shows changes in equity accounts over the period.

One-time Items

Nonrecurring items such as lawsuit gains or natural disasters.

Persistent Earnings

Ongoing, repeatable income from core operations.

Stockholders’ Equity Section

Includes common stock, preferred stock, APIC, retained earnings, and treasury stock.

Journal Entry for Bond Interest Payment

Dr Interest Expense; Cr Cash.

Horizontal Analysis

Shows dollar and percentage change from one period to the next.

Journal Entry for Dividends Declaration Date

Dr Retained Earnings; Cr Dividends Payable.

Amortization Expense Formula

(Cost – Residual Value) ÷ Useful Life.

Key Feature of a Liability

A present obligation from a past event to be settled in the future.

Equity Financing

Raising money by issuing stock.

Common Stock Rights

Provides ownership, voting rights, and residual claim on assets.

Biggest Advantage of a Corporation

Limited liability.

Vertical Analysis

Each line as a percentage of a base: sales (I/S) or assets (B/S).

Asset Sold for More than Book Value

A gain is recorded.

Capitalized Cost of Land

Includes purchase price, legal fees, title transfer, clearing, and grading.

Land Improvements Depreciation

Yes, land improvements are depreciated.

Examples of Land Improvements

Fencing, parking lots, and lighting.

Cost of a Building

Includes purchase price, legal fees, and renovation costs.

Equipment Capitalization Costs

Includes purchase price, shipping, installation, testing, and insurance in transit.

Natural Resources Depreciation/Depletion

Natural resources are depleted.

Legal Life of a Patent

20 years.

Patents Amortization

Yes, patents are amortized.

Duration of a Copyright

Life of creator + 70 years.

Trademarks Renewal

Trademarks can be renewed indefinitely, every 10 years.

Expenditure Capitalization

An expenditure should be capitalized if it extends useful life or increases capacity.

Oil Change Accounting

An oil change is expensed.

Building Renovation Accounting

A building renovation is capitalized.

Straight-Line Depreciation Formula

(Cost – Residual Value) ÷ Useful Life.

Double Declining Balance Concept

Accelerated depreciation: 2 × straight-line rate × book value.

Activity-Based Depreciation Use

Used when asset use varies from year to year.

Depreciation Per Unit Formula

(Cost – Residual Value) ÷ Estimated Units.

Calculate Depreciation Expense Using Activity Method

Depreciation per unit × Units used in the year.

Steps to Record Asset Disposal

1. Record depreciation. 2. Remove asset and accumulated depreciation. 3. Record cash received. 4. Record gain or loss.

Journal Entry for Loss on Disposal

Dr A/D, Dr Cash, Dr Loss; Cr Asset.

Debt Financing Definition

Borrowing money to be repaid with interest.

Interest Payments Tax Deductible

Yes, interest payments on debt are tax deductible.

Unearned Revenue Definition

Cash received before providing goods/services; a liability.

Journal Entry for Earning Unearned Revenue

Dr Unearned Revenue; Cr Revenue.

Coupon Rate on a Bond

The stated interest rate used to calculate interest payments.

Journal Entry for Retiring Bonds at Maturity

Dr Bonds Payable; Cr Cash.

Treasury Stock as an Asset

No, treasury stock is a contra equity account.

Journal Entry for Repurchasing Stock

Dr Treasury Stock; Cr Cash.

Journal Entry for Dividend Payment

Dr Dividends Payable; Cr Cash.

Retained Earnings Formula

Beginning RE + Net Income – Dividends.

Return on Assets (ROA) Measure

Efficiency in using assets to generate net income.

Net Profit Margin Measure

Net income as a percentage of sales.

Times Interest Earned Ratio

(Net Income + Interest + Taxes) ÷ Interest Expense.

High Debt-to-Equity Ratio Implication

The company is more leveraged and potentially riskier.

Market Value Ratios Purpose

Used to assess investor expectations and market valuation.

Price-to-Earnings (P/E) Ratio Indicator

Indicates growth expectations; a higher P/E may mean more optimism.

Adjusting Net Income for One-time Items

To better assess the company’s core, repeatable earnings.

Importance of EPS to Investors

Measures profitability per share of common stock.

Increase EPS Artificially

Repurchase shares to reduce the denominator.