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132 Cards in this Set
- Front
- Back
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why is a dollar received today worth more than a dollar received tomorrow?
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because of the opportunity to invest today's dollar and receive interest on the investment
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according to FASB, what are the most useful fair value measures based on?
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prices in active markets; fair values for assets and liabilities
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valuing noncurrent receivables and payables that carry no stated interest rate or a lower than market interest rate
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notes
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valuing assets and obligations to be capitalized under long-term leases and measuring the amount of the lease payments and annual leasehold amortization
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leases
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measuring service cost components of employers' post-retirement benefits expenses and post-retirement benefits obligations
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pensions and other post-retirement benefits
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evaluating alternative long-term investments by discounting future cash flows. determining the value of assets acquired under deferred payment contracts. measuring impairments of assets
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long term assets
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determining the contributions necessary to accumulate a fund for debt retirements
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sinking fund
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determining the value of receivables, payables, liabilities, accruals, and commitments acquired or assumed in a purchase
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business combinations
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measuring the value of future cash flows from oil and gas reserves for disclosure in supplementary information
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disclosures
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measuring periodic payments on long-term purchase contracts
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installment contracts
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a percentage of the outstanding principal
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interest rate
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the amount borrowed or invested
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principal
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the number of years or fractional portion of a year that the principal is outstanding
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time
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what do business managers make investing and borrowing decisions based on?
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the basis of the rate of interest involved, rather than on the actual dollar amount of interest to be received or paid
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the larger the principal amount
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the larger the dollar amount of interest
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the higher the interest rate
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the larger the dollar amount of interest
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the longer the time period
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the larger the dollar amount of interest
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the return on the principal for one time period
= P x I x N |
simple interest
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the return on or growth of the principal for two or more time periods
on principal and on any interest earned that has not been paid or withdrawn |
compound interest
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contains the amounts to which 1 will accumulate if deposited now at a specified rate and left for a specified number of periods
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future value of 1 table
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contains the amounts that must be deposited now at a specified rate of interest to equal 1 at the end of a specified number of periods
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present value of 1 table
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contains the amounts to which periodic rents of 1 will accumulate if the payments (rents) are invested at the end of each period at a specified rate of interest for a specified number of periods
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future value of an ordinary annuity of 1 table
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contains the amounts that must be deposited now at a specified rate of interest to permit withdrawals of 1 at the end of regular periodic intervals for the specified number of periods
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present value of an ordinary annuity of 1 table
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contains the amounts that must be deposited now at a specified rate of interest to permit withdrawals of 1 at the beginning of regular periodic intervals for the specified number of periods
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present value of an annuity due of 1 table
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to convert the annual interest rate into the compounding period interest rate, a company...
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divides the annual rate bye the number of compounding periods per year
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this rate, unless otherwise stated, is an annual rate that must be adjusted to reflect the length of the compounding period if less than a year
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rate of interest
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the value at a future date of a given sum or sums invested assuming compound interest
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future value
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the value now (present time) of a future sum or sums discounted assuming compound interest
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present value
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accumulate all cash flows to a future point. in this instance, interest increases the amounts or values over time so that the future value exceeds the present value
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in solving for a future value
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discount all cash flows from the future to the present. discounting reduces the amounts or values, so that the present value is less than the future amount
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in solving for a present value
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the present value is always a _________ amount than the future value, due to ........
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smaller
due to earned and accumulated interest |
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requires the following:
1) periodic payments or receipts of the same amount 2) the same-length interval between such rents, 3) compounding of interest once each interval |
annuity
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END OF THE PERIOD
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ORDINARY ANNUITY
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BEGINNING OF THE PERIOD
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ANNUITY DUE
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future value factor of an ordinary annuity
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(1 + i )^ n - 1
_____________ i |
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interest amount =
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p x i x n
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amount of money that a dollar will grow to at some point in the future
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future value of a single amount
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future value equation:
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Present value ( 1 + i ) ^ n
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monetary assets and monetary liabilities are valued at
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the present value of future cash flows
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money and claims to receive money, the amount which is fixed or determinable
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monetary assets
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obligations to pay amounts of cash, the amount of which is fixed or determinable
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monetary liabilities
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notes that do not include a stated interest rate
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non-interest-bearing notes
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why is a non-interest bearing note necessary?
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because according to the SFAC #7 - you have to record everything at present value
approximate the fair value of that asset or liability |
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a series of equal periodic payments
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annuity
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annuity with payments at the end of the period
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ORDINARY ANNUITY
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interest amount =
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p x i x n
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amount of money that a dollar will grow to at some point in the future
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future value of a single amount
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future value equation:
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Present value ( 1 + i ) ^ n
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monetary assets and monetary liabilities are valued at
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the present value of future cash flows
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money and claims to receive money, the amount which is fixed or determinable
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monetary assets
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obligations to pay amounts of cash, the amount of which is fixed or determinable
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monetary liabilities
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notes that do not include a stated interest rate
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non-interest-bearing notes
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why is a non-interest bearing note necessary?
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because according to the SFAC #7 - you have to record everything at present value
approximate the fair value of that asset or liability |
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a series of equal periodic payments
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annuity
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annuity with payments at the end of the period
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ORDINARY ANNUITY
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annuity with payments at the beginning of the period is
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ANNUITY DUE
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to find the future value of an ORDINARY annuity,
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multiply the amount of the annuity by the future value of an ordinary annuity factor
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to find the future value of an annuity DUE
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multiply the amount of the annuity by the future value of an annuity due factor
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because financial instruments typically specify equal periodic payments, these applications quite often involve annuity situations: (4)
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long term bonds
long-term leases pension obligations notes payable/receivable |
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in a deferred annuity, the first cash flow is expected
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to occur more than one period after the date of the agreement
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a form of interest-bearing notes payable:
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bonds
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three advantages of bonds over common stock:
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1) stockholder control is not affected
2) tax savings result 3) earnings per share may be higher |
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a bond contract is known as
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a bond indenture
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a bond represents a promise to pay:
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1) sum of money at designated maturity date,
2) periodic interest at a contractual rate on the maturity amount |
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market value is a function of the three factors that determine present value:
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1) the dollar amounts to be received
2) the length of time until the amounts are received 3) the market rate of interest |
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the rate of interest investors demand for loaning funds to a corporation is the
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stated interest rate
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certain long-term leases require the recording of
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an asset and corresponding liability at the present value of future lease payments
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the most liquid of assets; the standard medium of exchange and the basis for measuring and accounting for all other items
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cash
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list some examples of cash
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coin; currency; available funds on deposit; money orders, certified checks; cashier's checks, personal checks and bank drafts
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are postdated checks CASH?
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no
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are CDs cash?
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no
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is a cash refund from IRS considered cash?
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no
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cash equivalents are short-term, highly liquid investments that are both
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a) readily convertible to cash
b) so near their maturity that they present insignificant risk of changes in interest rates |
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companies separate ________ cash from regular cash for reporting purchases
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restricted
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when a company writes a check for more than the amount in its cash account
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bank overdraft
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generally reported as a current liability
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bank overdraft
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short term loan from a broker company; used by corporations; when they need money quickly
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short term paper
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cash
Classification and Comment |
Cash
If unrestricted, identify and classify as current and noncurrent assets |
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petty cash and change funds
Classification and Comment |
Cash
Report as cash |
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Short term paper
Classification and Comment |
Investments with maturity of less than 3 months, often combined with cash
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short term paper
Classification and Comment |
Investments with maturity of 3 to 12 months
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Postdated checks and IOU's
Classification and Comment |
Receivables
Assumed to be collectible |
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Travel Advances
Classification and Comment |
Receivables
assumed to be collected from employees or deducted from their salaries |
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Postage on hand
Classification and Comment |
Prepaid expenses
may also be classified as office supplies inventory |
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bank overdrafts
Classification and Comment |
current liability
if right of offset exists, reduce cash |
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compensating balances
Classification and Comment |
cash separately classified as a deposit maintained as compensating balance.
Classify as current or noncurrent in the balance sheet. Disclose separately in notes details of the arrangement |
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that the bank requires in case relationship of default on a loan
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compensated balances
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oral promises of the purchaser to pay for goods and services sold
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accounts receivable
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written promises to ay a sum of money on a specified future date
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notes receivable
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reductions form the list price;
not recognized in the accounting records customers are billed net of discounts |
trade discounts
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inducements for prompt payments
gross method vs net method |
cash discounts
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a company should measure receivables in terms of their present value
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nonrecognition of interest element
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classification and valuation
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Reporting receivables
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sales on account raise the possibility of accounts not being collected
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uncollectible accounts receivables
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a uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts;
a decrease in the asset accounts receivable a related decrease in income and stockholders' equity |
uncollectible accounts receivable
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name the two methods of accounting for uncollectible accounts
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direct write off
allowance method |
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theoretically undesirable:
- no matching - receivable not stated at net realizable value - not GAAP |
direct write off
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Losses are estimated:
- percentage-of-sales - percentage- of -receivables - GAAP |
Allowance Method
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Percentage of Sales
Matching Sales <--> bad debt expense |
income statement approach
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percentage of Receivables
net realizable value accounts receivable <--> allowance for doubtful accounts |
balance sheet approach
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matches cost with revenues because it relates the charge to the period in which a company records the sale
appropriate if there is a fairly stable relationship between the previous year's credit sales and bad debts |
percentage of sales approach
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not matching
reports receivables at net realizable value |
Percentage of Receivables
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companies may apply this method using
- one composite rate - an aging schedule of accounts receivable |
Percentage of Receivables Approach
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bad debt expense estimate is related to a nominal account (sales), any balance in the allowance account is ignored;
achieves a proper matching of cost and revenues |
percentage of sales approach
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results in a more accurate valuation of receivables on the balance sheet
- method may also be applied using an aging schedule |
percentage of receivables approach
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supported by a formal promissory note:
- a negotiable instrument - maker signs in favor of a payee - interest bearing - zero-interest bearing |
notes receivable
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record at FACE VALUE
less allowance |
Short Term notes receivable
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Record at Present Value of cash expected to be collected
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Long term notes receivable
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stated rate = market rate
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Face Value
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Stated Rate > Market Rate
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Premium
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Stated Rate < Market Rate
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Discount
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in a bargained transaction entered into at arm's length, the stated interest rate is presumed to be fair unless:
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1) no interest rate is stated
2) stated interest rate is unreasonable 3) face amount of the note is materially different from the current cash sales price |
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reported at net realizable value
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short term notes receivable
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FASB requires companies disclose not only their cost but also their fair value in the notes to the financial statements
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long term notes receivable
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owner may transfer accounts or notes receivables to another company for cash because (3 reasons)
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- competition
- sell receivables because money is tight - billing/collection are time-consuming and costly |
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transfer accomplished by:
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- secured borrowing
- sale of receivables |
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Sales of Receivables:
finance companies or banks that buy receivables form businesses for a fee |
factors
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what three conditions must be met for FASB to conclude that a sale has occurred?
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1) transferred assets isolated from transferor
2) transferee has right to pledge or sell assets 3) transferor does not maintain control through repurchase agreement |
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The accounting and reporting related to cash is essentially the same under both iGAAP and US GAAP
TRUE OR FALSE |
TRUE
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what are the two problems management faces in accounting for cash transactions:
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1) establish proper controls to prevent any unauthorized transactions by officers or employees,
2) provide information necessary to properly manage cash on hand and cash transactions |
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to obtain desired control objectives, a company can vary the number and location of banks and the types of accounts including:
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- general checking account
- collection float - lockbox accounts - imprest bank accounts |
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name for reconciling items:
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1) deposits in transit
2) outstanding checks 3) bank charges and credits 4) bank or depositor errors |
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the reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is
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bank service charges
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the allowance method is appropriate when: (2)
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1) probable that an asset has been impaired
2) amount of the loss can be reasonably estimated |
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impairment loss is calculated as the difference between (2)
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1) the investment in the loan
2) the expected future cash flows discounted at the loan's historical effective interest rate |
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end of month deposits of cash recorded on the depositor's books in one month are received and recorded by the bank in the following month
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deposits in transit
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checks written by the depositor are recorded when written but may not be recorded by the bank until the next month
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outstanding checks
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charges recorded by the bank against the depositor's balance for such items as bank services, printing checks, not sufficient funds checks and safe-deposit box rentals. the depositor may not be aware of these charges until the receipt of the bank statement
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bank charges
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collections or deposits by the bank for the benefit of the depositor that may be unknown to the depositor and interest earned on interest-bearing checking accounts
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bank credits
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errors on either the part of the bank or the part of the depositor cause the bank balance to disagree with the depositor's book balance
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bank or depositor error
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a schedule explaining any differences between the bank's and the company's records of cash
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bank reconciliation
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companies prepare adjusting journal entires for all the addition and deduction items appearing in the
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"Balance per depositor's books" Section
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