MGMT 212 Exam 3

Chapter 8: Liabilities

1. What is a liability?
   A liability is a company's obligation to provide assets, services, or other forms of payment in the future due to past transactions or events.

2. Current vs. Long-term Liabilities

   • Current liabilities are obligations expected to be settled within one year or the operating cycle, whichever is longer. Examples include accounts payable, accrued expenses, and short-term notes payable.

   • Long-term liabilities are obligations not due within the next year, such as bonds payable and long-term leases.

3. Primary Types of Current Liabilities

   • Accounts Payable: Recorded when a company receives goods/services on credit.

   • Accrued Liabilities: Recorded for expenses incurred but not yet paid, like wages or utilities.

   • Short-term Notes Payable: Recorded for loans due within one year, along with interest accrued.

4. Recording Interest in the Period Incurred
   Interest is recorded as an expense in the period it is incurred to accurately reflect the cost of borrowing over time, aligning with the accrual accounting principle.

5. Computing Interest on a Loan

   • Formula:Interest=Principal×Rate×Time (in years)Interest=Principal×Rate×Time (in years) Example: For a $10,000 loan at 5% annual interest for 6 months, interest = $10,000 × 0.05 × 0.5 = $250.

6. Payroll Withholdings

   • Required by Law: Income tax, Social Security, Medicare.

   • Voluntary: Retirement contributions, health insurance premiums.

7. Employer Payroll Costs

   • Required by Law: Employer's share of Social Security and Medicare, unemployment taxes (FUTA/SUTA).

   • Voluntary: Employer matching retirement contributions, health benefits.

8. Accounting for Unearned Revenue
   When cash is received before services are performed:

   • Initial Entry: Debit Cash, Credit Unearned Revenue.

   • When Service is Performed: Debit Unearned Revenue, Credit Revenue.

9. Contingencies
   A contingency is a potential liability depending on a future event.

   • Probable and Estimable: Record a liability.

   • Reasonably Possible: Disclose in notes.

   • Remote: No action required.

10. Liquidity
    Liquidity measures a company’s ability to meet short-term obligations. Common measures include the current ratio and quick ratio.

Chapter 9: Capital Structure and Debt

1. Capital Structure and Leverage

   • Capital Structure: Mix of debt and equity used for financing.

   • Leverage: Use of debt to increase potential returns to shareholders.

2. Installment Notes

   • Interest expense decreases over time as the carrying value of the loan decreases.

   • Fixed payments consist of a decreasing interest portion and an increasing principal portion.

3. Leases

   • A lease is a contract granting the right to use an asset in exchange for payments.

   • Types: Operating Lease and Finance Lease.

4. Types of Bonds

   • Secured, Unsecured, Term, Serial, Callable, Convertible.

Appendix C: Time Value of Money

1. Interest

   • Simple Interest: Calculated on the principal only.

   • Compound Interest: Calculated on principal and previously earned interest.

2. Present Value
   The value today of a future cash flow, discounted at a specific rate.

3. Annuity
   A series of equal payments made at regular intervals.

4. Necessary Information for Future Value

   • Principal amount.

   • Interest rate.

   • Number of periods.

5. Time Value of Money Tables

   • Used to find present or future values based on specific interest rates and time periods.

Chapter 10: Business Organizations and Equity

1. Business Forms

   • Sole Proprietorship: Simple, full control, unlimited liability.

   • Partnership: Shared resources, potential disputes, unlimited liability.

   • Corporation: Limited liability, complex regulation.

   • LLC: Combines benefits of corporations and partnerships.

2. Stockholder Rights

   • Common: Voting rights, dividends, residual claims.

   • Preferred: Priority in dividends and liquidation, usually no voting rights.

3. Authorized, Issued, and Outstanding Shares

   • Authorized: Maximum shares a corporation can issue.

   • Issued: Shares sold to investors.

   • Outstanding: Issued shares still held by investors.

4. Par Value vs. Market Value

   • Par: Arbitrary amount stated in the corporate charter.

   • Market: Price at which shares trade.

5. Preferred Stock Features

   • Dividend preference.

   • Convertibility to common stock.

   • Callable by the company.

6. Dividend Process

   • Declaration Date: Dividend liability recorded.

   • Record Date: Determines eligible shareholders.

   • Payment Date: Dividend is paid.

7. Retained Earnings
   Cumulative net income less dividends distributed.

Chapter 11: Statement of Cash Flows

1. Cash Flow Categories

   • Operating: Day-to-day business activities.

   • Investing: Purchase/sale of long-term assets.

   • Financing: Borrowing/repaying debt, issuing stock.

2. Transaction Categorization
   Examples:

   • Operating: Cash from customers.

   • Investing: Purchase of equipment.

   • Financing: Issuing bonds.

3. Direct vs. Indirect Method

   • Direct: Lists actual cash flows.

   • Indirect: Adjusts net income for non-cash items.

Chapter 12: Financial Statement Analysis

1. Types of Comparisons

   • Intracompany, Intercompany, Industry Averages.

2. Horizontal vs. Vertical Analysis

   • Horizontal: Year-to-year changes in accounts.

   • Vertical: Account as a percentage of a base amount.

3. Financial Ratios

   • Examples: Current ratio, debt-to-equity ratio, return on equity.

   • Interpretation depends on context and trends.

4. Conservative vs. Aggressive Accounting

   • Conservative: Minimizes earnings and assets, maximizes liabilities.

   • Aggressive: Opposite approach to present higher earnings/assets.