BUS 251 Final Exam Review

BUS 251 Final Exam Review Notes

Long-Term Assets / PP&E (Chapter 8)

• Definition of PP&E:

  • Provides long-term benefits to a company.
  • Not easily convertible into cash.
  • Examples include buildings, land, and machinery.

• Capitalize vs. Expense:

  • Capitalized: Cost becomes an asset on the Balance Sheet (B/S) and depreciated over time.
  • Expensed: Cost is recorded as an expense on the Income Statement (I/S).

• When to Capitalize Costs:

  1. Capitalize all costs necessary to prepare an asset for use.
  2. Only capitalize costs that improve or extend the useful life of an asset after it is in use.
  3. Routine maintenance costs should be expensed.

• Key Terms:

  • Net Book Value: Purchase Price – Accumulated Depreciation (Accum Dep’n).
  • Useful Life: Expected duration an asset will provide benefits.
  • Salvage/Residual Value: Expected recovery amount at the end of the asset’s life.

• Depreciation: Allocation of the cost of an asset over its useful life.

  • Important Notes:
  • Not synonymous with fair market value.
  • Land does not depreciate.
  • Depreciation Expense on Statements:
  • Income Statement: Reports depreciation expense for the current year.
  • Balance Sheet: Accumulated depreciation shows total depreciation to date.

• Calculating Depreciation: Requires:

  1. Initial cost of the asset.
  2. Estimated useful life.
  3. Estimated salvage value.

• Methods of Depreciation:

  1. Straight-Line:
  • Allocates equal depreciation each year.
  • [ ext{Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} ]
  1. Units of Production:
  • Based on actual usage or production.
  • [ ext{Depreciation Expense} = \left(\frac{\text{Cost} - \text{Residual Value}}{\text{Estimated Total Production}}\right) \times \text{Actual Production for Year} ]
  1. Diminishing Balance:
  • Higher depreciation in earlier years.
  • [ ext{Depreciation Expense} = \text{Net Book Value} \times \left(\frac{2}{\text{Estimated Useful Life}}\right) ]
  • Note: Salvage value is only accounted for in the last year.

• Disposal of Assets:

  • Record depreciation up to the disposal date.
  • Journal entries required for cash, accumulated depreciation, and gain/loss on disposal.

Intangible Assets (Chapter 8)

• Internally Developed vs. Purchased Intangibles:

  • Purchased Intangibles (e.g., Patents, Copyrights): Rights to use or sell products.
  • Goodwill: Premium paid over net identifiable assets during acquisition; appears on B/S as an indefinite life asset and subject to impairment testing.

• Goodwill Calculation Example:

  • If Pita Pan acquires Hindenburger with assets totaling $100,000 and liabilities totaling $90,000 for $110,000:
    [ \text{Goodwill} = \text{Price Paid} - (\text{Assets} - \text{Liabilities}) = 110,000 - 100,000 = 10,000 ]

Current Liabilities (Chapter 9)

• Definition: Obligations expected to be settled within one year (e.g., A/P, Accrued Liabilities, Unearned Revenue).
• Notes Payable Journal Entries:
  • When issued:
  • DR. Cash
  • CR. Notes Payable
  • When interest payable:
  • DR. Interest Expense
  • CR. Interest Payable
  • Upon repayment:
  • DR. Interest Expense
  • DR. Notes Payable
  • CR. Cash

Contingencies and Commitments (Chapter 10)

• Contingent Liabilities: Potential liabilities from past transactions (e.g., lawsuits, warranties).
  • Recording guidelines depending on probability and estimability:
  • Likely (70%): Record a journal entry.
  • Probable (>50%): Disclose in notes.
  • Possible/Remote: No action unless aggregate total is reasonable;
  • Example: If potential lawsuit is estimated at $1,000,000, record that amount as a liability if probable.

Long-Term Liabilities and Bonds (Chapter 10)

• Key Terms:

  • Face Value: Amount owed at maturity.
  • Market/Effective Interest Rate: Current market rate.
  • Coupon Rate: Rate paid to bondholders;
  • Discount/Premium: Determined by comparing coupon rate to effective rate.

• Issuing Bonds Example:

  • If a $100,000 bond is issued at 87:
  • DR. Cash @ (100,000 \times 87\ ext{%} = 87,000)
  • CR. Bonds Payable

Shareholders' Equity (Chapter 11)

• Common Shares: Offer voting rights; recorded on issuance as:

  • DR. Cash
  • CR. Common Shares

• Preferred Shares: Rights to dividends prior to common shareholders; similarly recorded.

• Dividends:

  • Declaration journal entry:
  • DR. Dividends Declared
  • CR. Dividends Payable
  • Payment journal entry:
  • DR. Dividends Payable
  • CR. Cash

Cash Flow Statements (Chapter 5)

• Steps to Prepare:
  1. Start with net income.
  2. Add back non-cash expenses (e.g., depreciation).
  3. Adjust cash flows from operating, investing, and financing activities.
  4. Summarize to find cash increase/decrease.

Analyzing Financial Statements (Chapter 12)

• Profitability Metrics:

  • Gross Margin: Measures sales efficiency.
  • Return on Equity: Indicates how well equity is being used.

• Liquidity Metrics:

  • Current Ratio: Ability to meet short-term obligations.

• Solvency Metrics:

  • Debt to Equity Ratio: Indicates long-term financial health.

General Advice

• Practice thoroughly; focus on understanding concepts rather than memorization.
• Utilize in-class problems and textbook questions for review.