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115 Cards in this Set
- Front
- Back
Depreciation Expense
Amortization Expense Loss on Impairment are found on what Finan doc? |
Income Statement
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Operating
Asset depreciation (indirect method) Financing Cash paid (received) to purchase (from sale of) long-term assets Cash paid to acquire another company Are found on what Financial doc? |
Statement of cash flows
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Long-term Assets
Property, Plant, & Equipment Accumulated Depreciation Intangible Assets are found on what financial doc? |
Balance sheet
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What exhibits these traits:
not held for resale to customers are used by a business to generate revenues |
Long Term operating assets
Including Property, plant, and equipment Intangible assets |
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Name some examples of PPE
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Tangible, long-lived assets
Acquired for use in business operations Land Buildings Machinery Equipment Furniture |
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Name three characteristics of Intangible Assets
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Long-lived assets
Used to facilitate the operation of a business Do not have physical substance Patents Trademarks Licenses Franchises Goodwill |
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What are the Long term Asset stages?
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Evaluate / Acquire / Estimate&Recognize / Monitor / Dispose
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What process is this?The process of evaluating a long-term project that may include purchasing property, plant, and equipment
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Capital Budgeting
Common capital budgeting models: Payback period Accounting rate of return Net present value |
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Define Payback Period
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The time it takes for a company to recover its original investment in cash
PP = Initial Invest / Annual Cashflow |
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How do you find Rate of Return?
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Annual Accting income / Initial Investment
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Define the cost of PP&E
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includes any costs necessary to bring the asset to the condition and location for its intended use
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How do you account for Subsequent expenditures after a PPE purchase?
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Normal repairs and maintenance are expensed in the current period
Expenditures which extend the useful life or increase the productive capacity are capitalized Asset book value is increased Annual depreciation is revised |
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Defin a Lease
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A lease is a contract whereby
one party (lessee) is granted the right to use property owned by another party (lessor) for a specified period of time for a specified cost |
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What are the differences between an operating lease and a capital lease?
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Operating lease - equivalent to a rental
Lease payments charged to expense Capital lease – equivalent to a purchase The asset acquired is recorded in property, plant and equipment The leased asset is depreciated over the lease period A lease liability is shown in the liability section of the balance sheet |
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What is this?
The acquisition price of the asset is equal to fair market value of noncash consideration plus any cash given |
Acquisition by Exchange
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How do you record an acquisition through donation?
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The asset is recorded at its fair market value at time it is received
Debit Land / Credit Gain - donated asset |
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How do you record an acquisition with a basket purchase?
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Fixed assets purchased for a lump sum need to be recorded separately
The total purchase price must be allocated among individual assets received in proportion to their appraised values |
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How do you recorn an acquistion of an entire company?
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All acquired assets are recorded on the books of the acquiring company at their fair values as of the acquisition date
The excess of the purchase price over the fair value of the identifiable assets represents goodwill |
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How do you record an acquisition through self construction?
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Self-constructed assets are recorded at cost, including all expenditures necessary to build the asset and make it ready for its intended use
Costs include: Materials and labor used directly in construction A reasonable share of general overhead If interest is included it is called capitalized interest Interest should be included equal to the amount that could have been saved if the money used on the construction had instead been used to repay loans |
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Define the characteristics of an intangible asset
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Long-term
Nonmonetary Generate revenues Grant a right to use of a product, process, name, image, customer list, or business practice Uncertainty about future benefits greater than that of tangible assets Specifically identifiable Except goodwill |
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Define a Patent
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An exclusive right to use, manufacture, process, or sell a product granted by the U.S. Patent Office. Patents have a legal life of 17 years, but their economic life may be shorter
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Define a Copywright
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The exclusive right of the creator or heirs to reproduce and/or sell an artistic or published work. Granted by the U.S. government for a period of 50 years after the death of the creator. Amortized over the shorter of its economic life or legal life.
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Define a tradename
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A symbol or name that allows the holder to use it to identify or name a specific product or service. A legal registration system allows for an indefinite number of 20-year renewals
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What is this? An exclusive right to use a formula, design, technique, or territory.
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Franchise
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Define Goodwill
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The ability of a company to earn above-normal income. Recorded goodwill is the excess amount paid to acquire a company, over and above the fair market value of the company’s identifiable assets.
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A business combination occurs when one company buys all of the assets of the another...how do you account for the combination?
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The combination is accounted for using the purchase method (as if one company is buying the other)
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Describe the Purchase Method
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The identifiable assets and liabilities are recorded at their fair values
The excess of the purchase price over the fair value of the identifiable net assets is recorded as goodwill Goodwill represents the company’s reputation, superior business practices, and market position Goodwill is only recorded when it is purchased |
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Is this depreciation?
The systematic allocation of an asset’s cost to the periods of benefit |
Yes
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Is this Depreciation?Accumulation of a cash fund for asset replacement
A determination of an asset’s current value |
No
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Name two factors that cause depreciation
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Causes of depreciation:
Physical deterioration Due to use, passage of time, and exposure to the elements Obsolescence Outdated, outmoded, or inadequate |
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What is this?
An estimate of the asset’s worth at the time of its disposal |
Residual value (salvage value)
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What is this?
The original cost minus the residual value Estimated useful life A measure of the service potential in terms of years or units produced |
Depreciable Cost
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What are the three depreciation methods?
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Straight-line
Allocates an equal amount of asset cost per year Units-of-production Allocates cost based on the productive output of the asset Declining balance An accelerated method which allocates more cost to depreciation in the early years than the later years |
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What depreciation method is this:
An equal amount of depreciation expense is allocated to each period |
Straight-line method
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What depreciation method is this?
Annual depreciation is determined by applying a fixed percentage to the remaining book value at the beginning of each year |
Declining balance
1/life x rate = percentage rate |
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The straight line method is appropriate for what type of assets?
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assets whose benefits diminish on a fairly uniform basis
Most companies use the straight-line method due to its simplicity |
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The double-declining-balance method is appropriate for what type of assets?
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assets that give up a greater portion of their benefits in the early years
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What is this called?
Property is depreciated for half the taxable year in which it is placed in service, regardless of when use actually begins |
The Half Year Convention
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What happens to salvage value for tax purposes
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it's ignored
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Is Depreciation a source of cash?
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Depreciation is not a source of cash; it is a noncash expense
Depreciation indirectly affects cash flow depreciation reduces taxable income results in lower income taxes being paid |
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If later events require a change in economic life and residual value, what happens?
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A change in estimate is not an error correction
A change in estimate is reflected by spreading the remaining depreciable cost over the remaining useful life of the asset |
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With finite life intangible assets, name 3 characteristics
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Amortize over the economic useful life or legal life, whichever is shorter
Not to exceed 40 years Direct subtraction from the asset account |
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What is this called?Occurs when an event happens after the purchase of an asset that reduces its value
Recognized in the financial statements as a reduction in the value of the asset on the balance sheet and a loss on the income statement |
Impairment of an asset value
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What do you call the difference between the book value of the asset and the fair value
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Impairment
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When are gains in PPE recognized?
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Gains are recognized in income only when assets are sold
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When you compare US and International accounting standards, what is one of the key differences in accounting for PPE?
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Conservatism controls the US and gains are only recognized at sale. The IAS allows upward revaluation.
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Name 3 ways to dispose of long-term assets
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retirement, sale, or trade-in of operating assets
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What method of disposal is this?
Occurs when an operating asset is removed from service and is disposed of without the company receiving any proceeds An difference between the cost and balance in the accumulated depreciation account results in a loss on this activity |
Retirement
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Where are Gains/Losses reported on the Income Statement?
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In the "other" category
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What ratio is used to evaluate the appropriateness of the level of a company’s PP&E?
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FAT - Fixed Asset Turnover = Sales / Average PPE
Can be interpreted as the number of dollars in sales generated by each dollar of fixed assets |
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Chapter 12 review slide - over
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Long-term assets provide the infrastructure for production and distribution
Capital budgeting models include the payback period, accounting rate of return, and net present value analysis Patents, franchises, licenses, and goodwill are intangible assets. Straight-line and declining balance are common depreciation methods Recognizing impairment for PPE is a two-step process Gain (loss) on asset disposal occurs if proceeds received are greater (less) than the asset’s book value at date of sale |
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What are the steps in the life cycle of a security issue?
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Determine / purchase / classify / earn / monitor / sell
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Name the 5 reasons that companies invest in other companies
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Safety cushion
Cyclical cash needs A return on investment Influence Control Safety cushion Investments are sometimes made to give a company a ready source of funds as a margin of safety Cyclical cash needs Some companies have a seasonal business cycle requiring large amounts of cash for inventory buildup followed by increased sales and cash collections A return on investment Companies invest simply to earn a rate of return Influence Companies can invest to Ensure a supply of raw materials Influence a board of directors Diversify their product offerings Control An investment resulting in over 50% ownership of a company’s shares of stock produces a controlling interest The investing company can control the other company’s operating, investing, and financing decisions |
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What involves a promise of interest payments and repayment of the principal amount of the debt?
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Debt Securities - Debt security investors have priority over equity investors in terms of interest payments and principal in the event of a corporate liquidation
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What represents an actual ownership interest in a corporation
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Equity Securities Equity investors have the right to vote in corporate matters such as election of directors
Equity investors may receive a rate of return from dividends and appreciation of stock price |
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What are those debt and equity securities purchased with the intent to take advantage of short-term price changes
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Trading Securities
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What are those debt and equity securities purchased for safety, to hold temporarily excess cash, or to earn a normal long-run return
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Available-for-sale securities
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What are are debt securities purchased with the intent of holding the securities until they mature
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Held to Maturity Securities
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What are equity securities purchased in order to exercise ownership influence (at least 20% of the shares) over another company
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Equity method securities
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At what price are investment securities recorded?
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Cost
Cost includes The market price Any additional expenditures required in making the purchase E.g., stockbroker’s fee |
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Where are Realized gains and losses from the sale of securities are included?
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Income Statement
A gain or loss is realized when it is confirmed and verified through the actual sale of the security |
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Where are Changes in the market value (unrealized gains and losses) are recognized?
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income statement
The market value is reported on the balance sheet as an asset |
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How are available for sale securities recorded on the balance sheet?
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The market value is reported on the balance sheet as an asset
The accumulated unrealized gain/loss is treated as a stockholders’ equity adjustment |
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How do you compute the overall rate of return?
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Portfolio return / portfolio beginning balance
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How are unrealized gain/losses measured?
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Measured from beginning of year to end of year
Asset adjusted to end-of-year market value Gain (Loss) reported Trading portfolio: on income statement Available-for-Sale portfolio: on Balance Sheet (Equity Section) in Accumulated Other Comprehensive Income |
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How are realized gains/losses measured?
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Measured as the difference between historical cost and the sale proceeds
Gain (Loss) reported Trading portfolio: on income statement Available-for-Sale portfolio: on income statement |
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What type of Securites have these traits:
Debt securities Intent to hold until maturity date Cash inflows While owned, interest At maturity date, maturity value Reported at amortized cost Unrealized gains and losses are not measured or recognized |
Held to Maturity Securities
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If the purchase price of a bond is LESS than the face value, what is it?
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Discount, because the market's interest rate is HIGHER than the bond's
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If the purchase price of a bond is Equal to the face, what is it?
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Par
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If the purchase price of a bond is GREATER than the face value, what is it?
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Premium
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What is the equity method when discussion securities?
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The equity method is used when an investor company has significant influence over an investee company
Significant influence is presumed if a company owns between 20% and 50% of the company |
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Describe the accounting for equity method securities
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The investment asset is originally recorded at its acquisition cost
Account for activity using the accrual method: Record revenue as earned, not paid Accrual method prevents manipulation of income by investor entity. |
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How does the investor account for the investee's reported net income?
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Reported as revenue and increases the carrying value of the Investment account on the balance sheet
Cash dividends received are recorded as an increase to Cash and a decrease to the Investment account (return of investment) |
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What needs to be done with the books when an investor owns a controlling interest (over 50% ownership of the voting stock of the investee)
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The investor/parent is able to determine both the financial and operating policies of investee/subsidiary
Consolidated financial statements are required |
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What do you call the interest of other shareholders for subsidiaries that are not 100% owned by the parent
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Minority Interest
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Ch 13 summary
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Companies make investments in securities for a variety of reasons
Equity investments are classified as trading, available-for-sale, or equity-method; debt security investments are classified as trading, available-for-sale, or held-to-maturity Trading and available-for-sale securities are carried at market value; held-to-maturity bond investments are carried at amortized cost; equity-method investments are carried at adjusted-cost Consolidated financial statements are prepared if the parent owns more than 50% of a subsidiary; minority interest reports the equity of other investors in subsidiaries that are not wholly-owned |
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What is a liability?
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Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
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There are two types of liabilities, what are they?
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Monetary liabilities are obligations payable in a fixed sum of money
Examples: accounts payable, accruals Nonmonetary liabilities are obligations to provide fixed amounts of goods and services Example: revenues received in advance of providing a service |
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There are two types of liabilities, what are they?
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Current liabilities are obligations expected to be satisfied within one year of the balance sheet date
Examples: accounts payable, accrued liabilities, current maturity of mortgage Long-term liabilities are obligations expected to be satisfied after one year from the balance sheet date Examples: bonds payable, remainder of mortgage |
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What is the Current ratio?
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Measures the ability to repay debt in the short run
Current ratio = current assets / current liabilities |
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What current ratio is considered indicative of liquidity concerns? Historically and now?
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Historically, less than 2:1 indicative of liquidity concerns
Now, due to advances in technology, frequently less than 1:1 |
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When are contingent liabilities recognized?/
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Contingent liabilities are recognized if
Probable and Can be reasonably estimated |
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Current liabilities are shown at face value, how are long-term liabilities shown?
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Present day value. (what it would cost to completely pay off the obligation today
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There are 5 common types of short term operating liabilities, what are they?
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Accts Payable, Accrued liabilities, short term debt, promissary notes (commercial paper), line of credit
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What do you call A loan backed by an asset whose title is pledged to the lender
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Mortgage A mortgage is payable in equal installments (an annuity)
Each payment is comprised of interest and principal Interest is charged on the declining principal balance |
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What do you call a loan backed by certain assets as collateral?
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secured loan
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What is a written agreement between a borrower and a lender in which the borrower agrees to
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Bond - Repay a stated sum on a future date
Make periodic interest payments at specified dates After issuance, bonds may be publicly traded on a bond exchange |
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There are four names for the denomination of a bond - what are they?
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The denomination is also called the
Principal Face value Maturity value Par value |
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What do you call the date on which a bond matures?
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Maturity Date
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What are two other names for the bond's stated interest rates
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Face Rate or Coupon rate
Is specified on the bond at issuance Is set as close as possible to the market rate established by the money market depends on the prevailing interest rates and perceived risk of the company Remains constant over the life of the bond Is applied to the face of the bond to calculate interest payments to bondholders Most bonds pay interest semiannually Stated interest rate is always an annual amount |
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What type of bonds don't pay interest periodically?
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zero coupon bonds -
Are issued at a deep discount The discount represents interest to be earned over the life of the bond Are a popular form of issue with governmental units |
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What type of bonds have all principle due on a single date?
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Term Bonds
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What type of bonds have bonds payable at specific intervals
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serial bonds
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Also called debentures, these are issued without any security to back them
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Unsecured Bonds
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Also called mortgage bonds, these are secured by the borrower’s collateral or specified assets
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Secured Bonds
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What type of bonds may at some future, specified date be exchanged for, or converted into, the company’s common stock
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Convertible Bonds
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What types of bonds allow the borrower, or issuer, to call or redeem the bonds prior to their maturity
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Callable Bonds
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What are the 4 factors that influence bond prices?
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Stated interest rates, Prevailing market rates, length of time to maturity, perceived risk of investment
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How are Bonds recorded and recognized in the financial statements?
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at the present value of future cash flows
Interest annuity (face × stated rate × time) Maturity value |
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Depending on the relationship between the stated interest rate and the yield rate, how are bonds valued?
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par value
par value minus a discount par value plus a premium |
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When bonds are repaid at maturity, Bonds Payable is decreased and Cash is decreased
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Cash -10000 bond pay -100000
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What is collection of cash and short-term securities that is set aside for repayment of the principal of the bonds
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A bond sinking fund is an asset reported in the investment section of the balance sheet
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What occurs when a firm’s long-term debt is retired before maturity
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Early extinguishment of debt.
A gain or loss occurs when there is a difference between the reacquisition price and the carrying value of the debt The gain or loss is reported as a component of income from continuing operations on the income statement |
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What are the economic advantages of leasing for the LESEE
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No (or low) down payment
Avoid risks associated with ownership Technological obsolescence Physical deterioration Changing economic conditions Flexibility |
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What are the economic advantages for the lessor
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Increased sales
Ongoing business relationship with the lessee Residual value retained |
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What type of lease is accounted for as if the lease agreement transfers ownership of the asset to the lessee
The lease is equivalent to a financed purchase An asset and liability must be recorded on lessee’s books |
Capital Lease
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What type of lease is accounted for as rental agreements, with no transfer of effective ownership associated with the lease
Lease payments are recorded as rent expense by the lessee and rent revenue to the lessor |
Operating Lease
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If any one of the following criteria are met, then the lease is classified as a capital lease
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The lease transfers ownership of the property to the lessee by the end of the lease term
The lease contains a bargain purchase option The lease term is equal to 75% or more of the estimated economic life of the leased property The present value of the minimum lease payments equals or exceeds 90% of the fair market value of the property |
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What do you call Obligations of a company that are not disclosed on the financial statements
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Off-balance sheet financing
Three common types of off-balance sheet financing are Operating leases Unconsolidated subsidiaries Joint ventures |
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What is a subsidiary that is accounted for using the equity method
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Unconsolidated subsidiary Companies that purchase less than 50% of an investee do not have to prepare consolidated financial statements
The investee’s debt is kept off the balance sheet |
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What occurs occur when companies join forces to share the costs, risks, and benefits associated with specifically defined projects
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Joint Venture A joint venture is carefully structured to ensure that the liabilities of the venture are not disclosed in the balance sheets of the companies
They are often just a special type of unconsolidated subsidiary |
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What do you call Using debt to finance asset purchases
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leverage
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What is debt ratio equation?
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debt ratio = total liabilities / total assets
Rule of thumb: Most large U.S. companies borrow about half the funds they use to purchase assets |
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What is the debt to Equity ratio?
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DEQ = total liabilities / total equity
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ch 14 summary
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Liabilities are existing obligations for future economic sacrifice
Accounts payable and other short-term operating accruals are generally non-interest-bearing Long-term liabilities are reported at the present value of future cash flows Bonds are issued to borrow funds from multiple sources. Bonds can be issued at par, at a discount, or at a premium. Leases are either rental in nature (operating) or in essence, purchases (capital). Four specific criteria exist for capital leases Off-balance-sheet financing arises with operating leases, unconsolidated subsidiaries, and joint ventures Debt-related financial ratios indicate the degree of leverage and the extent of a company to make period interest payments. |