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84 Cards in this Set
- Front
- Back
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What affect does the following transaction have on SE?
Issuance of $1 par value common stock at an amount greater than par value |
Increase
Common Stock Additional Paid-In Capital Total Common Shareholders Equity |
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What affect does the following transaction have on SE?
Donation of land by a governmental unit to a corporation |
Increase
Common Stock Additional Paid-In Capital Total Common Shareholders Equity |
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What affect does the following transaction have on SE?
Cash dividend declared
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Decrease
Retained Earnings Total Common Shareholders equity |
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What affect does the following transaction have on SE?
Previously declared cash dividend paid |
No effect on any financial accounts |
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What affect does the following transaction have on SE?
Property dividend declared and paid |
Decrease
Retained Earnings Total Common Shareholders equity |
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What affect does the following transaction have on SE?
Large stock dividend declared and issued |
Increase - Common Stock Decrease - Retained Earnings |
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What affect does the following transaction have on SE?
Small Stock dividend declared and issued |
Increase - Common Stock and APIC Decrease - Retained Earnings |
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What affect does the following transaction have on SE?
2-for-1 stock split announced and issued |
No effect on any financial accounts |
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What affect does the following transaction have on SE?
Stock options granted |
No effect on any financial accounts |
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What affect does the following transaction have on SE?
Recognition of compensation expense on stock options |
Increase - APIC Decrease - Retained Earnings (Also impacts Income Statement) |
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What affect does the following transaction have on SE?
Stock options exercised |
Increase - Common Stock, APIC, Total Common Shareholders equity |
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What affect does the following transaction have on SE?
Stock options expired |
APIC - Decrease, then Increase = Net no change |
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What affect does the following transaction have on SE?
Treasury Stock Acquired (company uses cost method) |
Increase - Treasury Stock at Cost Decrease - Total Common Shareholders Equity |
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What affect does the following transaction have on SE?
Treasury stock acquired (using cost method) reissued at an amount greater than the original acquisition price |
Increase - APIC, Total Common Shareholders Equity Decrease - Treasury Stock at Cost |
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What affect does the following transaction have on SE?
Treasury stock acquired (using cost method) reissued at an amount less than the original acquisition price |
Increase - Total Common Shareholders equity Decrease - APIC, Treasury stock at cost |
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What affect does the following transaction have on SE?
Restricted stock issued (grant date) |
Increase - Common Stock, APIC, Deferred Compensation |
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What affect does the following transaction have on SE?
Recognition of compensation expense related to restricted stock |
Decrease - Deferred compensation, Retained Earnings (also impacts Income Statement) |
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What affect does the following transaction have on SE?
Granting of stock appreciation rights to be settled with cash |
No effect on any financial accounts |
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What affect does the following transaction have on SE?
Recognition of compensation expense on stock appreciation rights |
Decrease - Retained Earnings (also impacts Income Statement), Total Common Shareholders equity |
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What affect does the following transaction have on SE?
Reacquisition and retirement of common stock at an amount greater than original issue price |
Decrease - Common Stock, APIC, Retained Earnings, Total Common Shareholders equity |
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What is the journal entry for:
Issue of 100,000 shares of $1 par value CS for $10 a share |
(Assets) Cash +1,000,000
(CC) Common Stock + 100,000 (CC) APIC + 900,000 |
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What is the journal entry for:
Receives land in exchange for 10,000 shares of $1 par CS when the CS is trading in the market at $15 a share. The land has no determinable market value |
(Assets) Land =150,000
(CC) Common Stock + 10,000 (CC) APIC + 140,000 |
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What is the journal entry for:
Receives subscriptions for the issue of 40,000 shares of $1 par value CS. The share issue price is $20, of which 30% is received as a downpayment. Subsequently, the remaining 70% is received. |
1st Journal Entry: (Assets) Cash + 240,000
(CC) Subscriptions Receivable - 560,000 (CC) Common Stock + 40,000 (CC) APIC + 760,000
2nd Journal Entry (When 70% received) (Assets) Cash + 560,000 (CC) Subscriptions Receivable + 560,000 |
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What is the journal entry for:
Cash dividend declaration (40,000 CS outstanding) and payment of $1 per share |
(RE) Retained Earnings - 40,000
(Assets) - 40,000 |
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What is the journal entry for:
Property dividend declaration and payment of shares representing a short-term investment with a fair value of $10,000 |
(RE) Retained Earnings - 10,000
(Assets) Investments - 10,000 |
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What is the journal entry for:
10% stock dividend (CS = $2 par value, 40,000 shares issued/outstanding, trading at $130 per share) |
(RE) Retained Earnings - 520,000
(CC) Common Stock + 8,000 (CC) APIC + 512,000
(Small dividend, issued at market value) |
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What is the journal entry for:
100% stock dividend (CS = $2 par value, 40,000 shares issued/outstanding, trading at $130 per share) |
(RE) Retained Earnings - 80,000
(CC) Common Stock + 80,000
(Large dividend recorded at Par Value) |
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What is the journal entry for:
3-for-1 stock split
(40,000 shares issued/outstanding, par value $2) |
Memorandum to note that # of shares triples to 120,000 and par value decreased to $0.667 per share |
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What is the journal entry for:
1-for-2 reverse stock split
(40,000 shares issued/outstanding, par value $2) |
Memorandum to note that # of shares decreased to 20,000 and par value increased to $4 per share |
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The book value of common equity (Total Shareholders Equity) decreases only when |
Assets are dispersed |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Issuance of stock for cash |
Financing - Increase in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Issuance of stock for land |
No effect - shown in accompanying schedule of significant investing and financing activities |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Acquisition of treasury stock |
Financing - Decrease in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Reissuance of treasury stock |
Financing - Increase in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Declaration of a cash dividend |
No effect until the dividend is paid |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Payment of a cash dividend previously declared |
Financing - decrease in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Declaration and issuance of a large stock dividend |
No effect |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Declaration and issuance of a small stock dividend |
No effect |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Granting of stock options |
No effect |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Exercise of stock options |
Financing - Increase in CF from receipt of the exercise price |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Granting of RSUs |
No effect |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Issuance of LT notes payable |
Financing - Increase in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Issuance of convertible bonds |
Financing - Increase in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Conversion of convertible bonds to common stock |
No effect |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Payment of interest on bonds |
Operating - Decrease in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Retirement of bonds at book value |
Financing - Decrease in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Retirements of bonds at a gain |
Financing - Decrease in CF |
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Identify where the cash flow effect of the transaction is reported in the statement of cash flows: Operating, Investing or Financing. State direction of change as well.
Retirement of bonds at a loss |
Financing - Decrease in CF |
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From the perspective of the lessee, what line items are reported on the income statement for Operating leases? |
Rent Expense |
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From the perspective of the lessee, what line items are reported on the income statement for Capital Leases? |
1. Depreciation Expense on a leased asset 2. Interest Expense on a Leased Liability |
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From the perspective of the lessee, what line items are reported on the balance sheet for Operating Leases? |
Rent Payable or Cash |
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From the perspective of the lessee, what line items are reported on the balance sheet for Capital Leases? |
1. Leased Asset 2. Accumulated Depreciation on the Leased Asset 3. Capitalized Lease Obligation (short-term and long term) 4. Interest Payable on Leased Asset or cash |
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From the perspective of the lessee, what line items are reported on the Statement of Cash flows for Operations for Operating Leases? |
Increase or Decrease in Rent payable |
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From the perspective of the lessee, what line items are reported on the statement of cash flows for Operations for Capital Leases? |
Increase or decrease in interest payable on leased liability |
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From the perspective of the lessee, what line items are reported on the statement of cash flows used for financing activities for Operating Leases? |
Nothing |
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From the perspective of the lessee, what line items are reported on the statement of cash flows used for financing activities for Capital Leases? |
Payments on principal on capitalized lease obligation |
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What is a firm specific strategic factor that could help a firm sustain growth in sales volume the next year? |
A firm's competitive strategic advantages |
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What is a firm specific strategic factor that could help a firm sustain growth in prices the next year? |
A firm's competitive strategic advantages |
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What is a industry-specific factor that could help a firm sustain a growth in sales volume and prices the next year? |
The nature of competition in the firms industry and the position of the industry in its life cycle. Growth would be associated with more competitive and mature industries. |
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What is an economy wide factor that could help a firm sustain a growth in sales volume the next year? |
Demographic growth |
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What is an economy wide factor that could help a firm sustain growth in prices the next year? |
Inflation |
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During the introduction phase, what flexible account would a firm most likely use on the balance sheet? |
Equity. The firm needs capital but may be construed to issue debt, so it is more likely the firm will balance the balance sheet by issuing Equity.
As equity issues raise cash, startup firms commonly hold cash in liquid accounts until it is invested in growth-related assets |
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During the growth phase, what flexible account would a firm most likely use on the balance sheet? |
Debt or Equity Capital |
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During the mature and decline phases, what flexible account would a firm most likely use on the balance sheet? |
The firm's capital needs are more likely to be met with the firm's CFO and the firm should return capital to stakeholders. The firm will likely balance the balance sheet by paying dividends, buying back stock, or paying down debt. |
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Assume a software company promises to automatically deliver upgrades for 2 years when a customer purchases software for $100. How should the software company determine the amount of revenue to recognize at the date of sale and subsequent to the date of sale? |
Software prices each commodity in the bundle at fair value.
At date of sale: The fair value of the software is reported as revenue. The fair value assigned to upgrades is reported as a liability (unearned or deferred revenues)
Subsequently: As upgrades are delivered over the period, liability is removed and revenue is recognized. |
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When would it be appropriate to recognize revenue before the product has been completed and delivered? |
When the production cycle for a product is extremely long. Example: long term contractors (ships/aircrafts) |
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What are the 4 circumstances where the Percentage-of-completion method could be used? |
1. The time required to build the product spans many accounting periods 2. A customer is identified and a contract price is agreed upon in advance 3. The total cost of the product can be estimated with reasonable certainty at the start of building the product 4. Customers make periodic payments of the contract price as the building progresses |
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Identify the effect (Increase/Decrease/NE) of the condition on the various financial statement elements.
A credit sale |
Increase - Assets, Shareholders Equity (through NI), Net Income |
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Identify the effect (Increase/Decrease/NE) of the condition on the various financial statement elements.
Collection of a portion of accounts receivable |
Increase - Assets Decrease - Assets |
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Identify the effect (Increase/Decrease/NE) of the condition on the various financial statement elements.
Estimate of bad debts |
Decrease - Assets, Shareholders Equity (through NI), Net Income |
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Identify the effect (Increase/Decrease/NE) of the condition on the various financial statement elements.
Write-off of a specific uncollectable account |
No effect on any |
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Rank COGS, Gross Profit, and ending inventory from highest to lowest under LIFO, FIFO or average costs when input prices are rising |
Inventory Costs and Gross Profits: FIFO, Average Costs, LIFO
COGS - LIFO, Average Costs, FIFO |
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How should differences between acquisition cost and the market value of inventory be reported on the balance sheet under IFRS and US GAAP |
When market value exceeds acquisition costs, the amount that exceeds the costs are not recognized.
If market value falls below acquisition cost, both system require inventory to be written down to market value with the loss reported in income of the period. |
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What is LIFO layer liquidation? |
If a firm sells more than it produces or purchases during a period, the revenue from the sales of the extra units are matched against an older and likely lower cost |
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How does a LIFO layer liquidation affect the prediction of future earnings? |
The profits recognized (and related tax expense) when current revenues are matched against older costs are inflated and not indicative of current profitability or sustainable future earnings. |
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Discuss when the type of business is likely to recognize revenues and expenses:
A bank lends money for home mortgages |
Revenue is recognized each period using the interest rate specified in the mortgage agreement and the unpaid balance of the loan at the beginning of the period.
Expenses are commonly recognized one of two ways: 1. Firms accelerate the recognition of revenue to offset high front-end expenses and avoid showing a loss in the loan's initial year. 2. Firms defer the initial costs and recognize them over the life of the loan |
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What type of cash flows are "free" and which are not? |
CF are free if they are unencumbered and available to be distributed to financial claims (debt, preferred and equity stakeholders)
CF are NOT free if it is necessary for the firm to use the cash to maintain working capital, invest in productive capacity, or make other strategic investments. |
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How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders |
Free CF available for debt and equity stakeholders include CF to satisfy all debt, preferred and common equity claims.
Free CF available to common equity shareholders only includes free cash that can be paid to common shareholders, after debt and preferred claims have been satisfied |
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Explain the theory behind the free cash flows valuation approach |
The theory is that these cash flows are ultimately distributable to common equity shareholders. |
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Why are free cash flows value-relevent to common equity shareholders when they are not cash flows to those shareholders, but rather cash flows into the firm? |
The CF will ultimately be paid to the investors through dividends and stock repurchases. Free CF valuation, like dividends valuation is a liquidation valuation concept. |
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If a firm borrows cash by issuing debt, how does that affect free cash flows for common equity shareholders in that period? |
It increases CF for that period. That period, the firm has more cash that it can use to pay out dividends or repurchase shares |
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If a firm uses cash to repay debt, how does that affect free cash flows for common equity shareholders in that period? |
The firm has to use cash to repay debt. It obviously reduces that amount of free cash flows for common equity shareholders that period. |
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When is it appropriate to use the required rate of return on equity capital as the appropriate discount rate instead of using WACC? |
When valuing the equity in a firm or a share of common stock |
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When is it appropriate to use the WACC as the appropriate discount rate instead of using the required rate of return on equity capital? |
When valuing the cash flows that will be distributable to debt, preferred, and equity claimants. |
