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127 Cards in this Set

  • Front
  • Back
The time value of money means that
money can be invested today to earn interest and grow to a larger dollar amount in the future
Time value of money concepts are useful in valuing
several assets and liabilities
The time value of money concept has nothing to do with _________ of those dollars; this concept concerns only ________ in the dollar amounts of money
the worth or buying power, the growth
________ is the amount paid or received in excess of the amount borrowed or lent
Interest
__________ includes interest not only on the initial investment but also on the accumulated interest in previous periods
Compound interest
Simple interest is computed by multiplying
an initial investment times both the applicable interest rate and the period of time for which the money is used
The effective rate is the rate at which
money will actually grow during a full year
Interest rates are typically stated as
annual rates
The __________ is the amount of money that a dollar will grow to at some point in the future
future value of a single amount
FV =
I (1 + i)^n where I is amount invested, i is interest rate, and n is number of compounding periods
FV = __ x FV factor
I
n is
number of compounding periods, not necessarily years
the present value of a single amount is
today’s equivalent to a particular amount in the future
the farther into the future a dollar is to be received, the less _____ it is now
valuable
FV = PV x ____
(1+i)^n
PV = FV/_____
(1 + i)^n
The calculation of FV requires the ________ of interest while the calculation of PV requires the ______ of interest
addition, removal
Accountants use ____ calculation much more frequently than ____
PV, FV
There are 4 variables in the process of adjusting a single cash flow amount for the time value of money: ________. If you know any ______, the other can be found
PV, FV, n, and i
three
Most monetary assets and monetary liabilities are valued at
the PV of future cash flows
Many assets and most liabilities are
monetary in nature
Monetary assets include _________, the amount of which is fixed or determinable
money and claims to money
Monetary liabilities are _________, the amounts of which are fixed or determinable
obligations to pay money
Financial instruments frequently involve
multiple receipts or payments of cash
If the same amount of cash is paid or received at the end of each period, the series of cash flows is referred to as
an annuity
An agreement that creates an annuity can produce either _______ or ______ (sometimes referred to as an annuity in advance)
an ordinary annuity, an annuity due
In an ordinary annuity, cash flows occur at the
end of each period
In an annuity due, cash flows occur at the
beginning of the period
In the future value of an ordinary annuity, the last cash payment will not
earn any interest
It’s possible to calculate the FV of the annuity by separately calculating the FV of each payment and adding these amounts together. However, this is only necessary when
the payments are different amounts
FVA stands for
FV of an ordinary annuity
In the future value of an annuity due, the last cash payment
will earn interest
FVAD stands for
FV of an annuity due
In the PVAD, ________ needs to be removed from the first cash payment
no interest
A _________ exists when the first cash flow occurs more than one period after the date the agreement begins
deferred annuity
Calculating PV of a deferred annuity can be a two-step process. Step one: _________. Step two: _________
calculate the PV of the annuity as of the beginning of the annuity period

discount the single amount calculated to its PV as of today (2 periods)
Alternative ways of calculating the PV of a deferred annuity are to calculate ___ and discount that amount three periods or to subtract the _______ from the ________ and use the difference
PVAD, two-period PV factor, five-period PVA factor
In PV problems involving annuities, there are 4 variables:
PVA or PVAD, the amount of each payment, the number of periods (n), and the interest rate (i)
When applying the expected cash flow approach to the calculation of present value, a company uses the
credit-adjusted risk-free rate of interest
Liabilities and owners' equity accounts represent
specific sources of a company's assets
Most liabilities obligate the debtor to _____ at specified times and result from _______
pay cash, legally enforceable agreements
Some liabilities are not ____ and may not be ____
contractual obligations, payable in cash
Liabilities involve the past, present, and future:
1. Probable future sacrifices of economic benefits
2. Arise from present obligations (to transfer goods or provide services) to other entities
3. Result from past transactions or events
Current liabilities are expected to require current assets and usually are ____
payable within one year
Classifying liabilities as either current or long term helps investors and creditors assess the _____ of a business's liabilities
relative risk
Liabilities should be recorded at their ____, but current liabilities ordinarily are reported at their ____
present values, maturity amounts
____ are obligations to suppliers of merchandise or of services purchased on open account
Accounts payable
In practice, there is little uniformity regarding precise captions used to describe current liabilities or in extent to which accounts are combined into ____
summary captions
Amounts reported on the face of the sheet seldom are sufficient to adequately describe current liabilities:
Additional descriptions are provided in disclosure notes
Buying merchandise on account in the ordinary course of business creates
accounts payable
Open account means that the only formal credit instrument is the
invoice
____ typically is noninterest-bearing and is reported at the face amount
Accounts payable
The key accounting considerations relating to accounts payable are determining their ____ and ensuring that they are ____ in the appropriate accounting period
existence, recorded
____ differ from accounts payable in that they are formally recognized by a written promissory note. Often these are of a somewhat longer term than open accounts and bear interest.
Trade notes payable
The most common way for a corporation to obtain temporary financing is to arrange a
short-term bank loan
____ are sometimes bank loans or short-term borrowings
Notes payable
Short-term funds usually offer ____ than long-term debt
lower interest rates
_____ allows a company to borrow cash without having to follow formal loan procedures and paperwork
A line of credit
____ is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. Banks sometimes require the company to maintain a compensating balance on deposit with the bank
A noncommitted line of credit
____ is a more formal agreement that usually requires the firm to pay a commitment fee to the bank and may also require a compensating balance
A committed line of credit
Interest on notes =
face amount x annual rate x time to maturity
Noninterest-bearing loans actually do bear interest, but the interest is
deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset
The ____ are reduced by the interest in a noninterest-bearing note
proceeds of the note
When interest is discounted from the face amount of a note, the ___ is higher than the stated discount rate
effective interest rate
Inventory or accounts receivable often are _____ for short-term loans
pledged as security
Large, highly rated firms sometimes sell ____ to borrow funds at a lower rate than through a bank loan
commercial paper
When accounts receivable serve as collateral, we refer to the arrangement as ___
pledging accounts receivable
Sometimes, the receivables are sold outright to a finance company as a means of short-term financing—this is called
factoring receivables
Commercial paper refers to unsecured notes sold in minimum denominations of ___ with maturities ranging from __ days (beyond 270 days the firm would be required to file a registration statement with the SEC)
$25,000, 30 to 270
Interest often is ____ at the issuance of the note
discounted
In a statement of cash flows, the cash a company receives from using short-term notes to borrow funds as well as the cash it uses to repay the notes are reported among cash flows from ____ activities. Most of the other liabilities, such as accounts payable, interest payable, and bonuses payable, are integrally related to a company's primary operations and thus are part of ___ activities
financing, operating
___ represent expenses already incurred but not yet paid (accrued expenses)
Accrued liabilities
Accrued liabilities are recorded by ___ at the end of the reporting period, prior to preparing financial statements
adjusting entries
Liabilities accrue for expenses that are ___
incurred but not yet paid
An employer should accrue an expense and the related liability for employees' compensation for future absences (such as vacation pay) if the obligation meets all of the four conditions
1. The obligation is attributable to employees’ services already performed
2. The paid absence can be taken in a later year—the benefit vests (will be compensated even if the employee is terminated) or the benefit can be accumulated over time
3. Payment is probable
4. The amount can be reasonably estimated
The liability for paid absences usually is accrued at the existing wage rate rather than at a rate estimated to be in effect when absences occur. So, if wage rates have risen, the difference between the accrual and the amount paid
increases compensation expense that year
____ should be considered when deciding whether an obligation exists
Customary practice
Accrual of ___ is not required, but may be appropriate in some circumstances
sick pay
A wide variety of bonus plans provide compensation tied to performance other than
stock prices
___ sometimes take the place of permanent annual raises and are compensation expense of the period in which they are earned
Bonuses
At times, businesses require ___ from customers that will be applied to the purchase price when goods are delivered or services provided
advance payments
These customer advances, also called unearned revenue or deferred revenue, represent liabilities until
the related product or service is provided
A customer advance produces an obligation that is satisfied when
the product or service is provided
Gift cards or gift certificates are particularly common forms of
advanced payments
When a company sells a gift card, it initially records the cash received as unearned revenue, and then recognizes revenue either when the gift card is redeemed or when
the probability of redemption is viewed as remote
____ collected from customers represent liabilities until remitted
Sales taxes
Amounts collected from employees in connection with payroll also represent ___ until remitted
liabilities
Most businesses would prefer to classify liabilities as ___ because they can report higher working capital and a higher current ratio
noncurrent
____ is current assets minus current liabilities
Working capital
The currently maturing portion of the long-term debt must be reported as a
current liability
If debt is callable by the creditor in the upcoming year or the creditor can demand payment because of an existing violation, the debt should be classified as
current
Short-term obligations can be reported as noncurrent liabilities if the company
(a)intends to refinance on a long-term basis and (b) demonstrates the ability to do so by a refinancing agreement or by actual financing
The feature that distinguishes the loss contingencies is ___ even though the circumstance giving rise to the contingency has already occurred
uncertainty as to whether an obligation really exists
A loss contingency is accrued only if a loss is ___ and __
probable, the amount can reasonably be estimated
The amount of the potential loss is classified as either
known, reasonably estimable, or not reasonably estimable
Likelihood of a loss is either
probable, reasonably possible, or remote
Some loss contingencies do not involve __ (like uncollectable receivables)
liabilities
A loss contingency is disclosed in notes to the financial statements if there is
at least a reasonable possibility that the loss will occur
Most consumer products are accompanied by a
guarantee
The contingent liability for guarantees or product warranties almost always is
accrued
The costs of satisfying guarantees should be recorded as
expenses in the same accounting period the products are sold
Extended warranties are a separate sales transaction, and the revenue from such a sale is deferred and recognized on ___ (or a pattern proportional to the costs)
a straight-line basis
The estimated amount of the cash rebates or the cost of noncash premiums estimated to be given out represents both
an expense and an estimated liability in the reporting period the product is sold
The costs of promotional offers should be recorded as
expenses in the same accounting period the products are sold
Companies may accrue estimated lawyer fees and other legal costs, but usually do not record a loss until ___ or ___ for settlement are substantially completed
after the ultimate settlement has been reached, negotiations
When the cause of a loss contingency occurs before the year-end, ___ are issued to determine how the contingency is reported
clarifying event financial statements
If an event giving rise to a contingency occurs after the year-end, a liability
should not be accrued
Any event occurring after the fiscal year-end but before the financial statements are issued that has a material effect on the company's financial position
must be disclosed in a subsequent events disclosure note
It must be __ that an unasserted claim or assessment or an unfiled lawsuit will occur before considering whether and how to report the possible loss
probable
When a claim or assessment is unasserted as yet, a two-step process is involved in deciding how it should be reported:
1. Determine if the claim is probable
2. If it’s probable, what is the likelihood of the outcome and what (if any) is the estimated dollar amount?
Gain contingencies are
not accrued, but material ones are disclosed
The most common type of liability is:
One to be paid in cash and for which the amount and timing are known
T/F: estimated income taxes are a type of liability
True
The interest rate that is printed on the bond certificate is not
the effective rate
In each succeeding payment on an installment note, the amount of principal paid
increases
An annuity due can also be called
an annuity in advance
annuity payments must be
equal
Non-interest bearing notes payable are saleable and are sold at a
discount
Inventory or accounts receivable often are pledged as security for
short-term loans
A lawsuit arising from an incident in 2012 would ___ in the 2011 financial statements
NOT be accrued
The employer's payroll tax expense includes
the employer's matching amount of FICA taxes--voluntary deductions, such as union dues, are not an expense of the employer but are reported as a liability until remitted to the appropriate organization
Withheld taxes are a
liability, not an expense
The gain or loss on extinguishment is the difference between
the call price and the carrying value of the bonds
The interest expense for the year is ___ times the ___ of interest
the note payable less the discount, market rate
Interest is calculated on the __ debt balance at the effective rate
outstanding
using common stock (equity) to pay a current liability creates a __ liability
long-term
When using the straight-line method to amortize a discount/premium, interest expense
is a plug number