MGMT 200 FINAL EXAMS, STUDY GUIDE EXAM AND PRACTICE EXAMS (PURDUE UNIVERSITY), Exams of Nursing

Download MGMT 200 FINAL EXAMS, STUDY GUIDE EXAM AND PRACTICE EXAMS (PURDUE UNIVERSITY) and more Exams Nursing in PDF only on Docsity! MGMT 200 FINAL EXAMS, STUDY GUIDE EXAM AND PRACTICE EXAMS (PURDUE UNIVERSITY) WITH ACTUAL CORRECT QUESTIONS AND VERIFIED DETAILED RATIONALES ANSWERS LATEST 2024 (NEWEST) ALREADY GRADED A+ MGMT 200 FINAL EXAMS Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation? A. As a liability for $100,000 with disclosure of the range B. As a liability for $150,000 with disclosure of the range C. As a liability for $200,000 with disclosure of the range D. As a disclosure only. No liability is reported D. A contingent liability is not recorded if the likelihood of loss is only reasonably possible If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be A. Disclosed, but not reported as a liability B. Disclosed and reported as a liability C. Neither disclosed nor reported as a liability D. Reported as a liability, but not disclosed B. Footnote disclosure is required for material potential losses when the loss is at least reasonably possible: A. Only if the amount is known. B. Only if the amount is known or reasonably estimable. C. Unless the amount is not reasonably estimable. D. Even if the amount is not reasonably estimable. D. Ford estimates engine warranty expense in the year a car is sold. This best follows which of the following accounting principles? A. historical cost B. full disclosure C. consistency D. matching D. The balance in the Warranty Liability account is always equal to Warranty Expense A. True B. False B. The Warranty Liability account is increased by warranty expense, but it is also reduced over time by actual warranty expenditures Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year? A. $0 B. $16,000 C. $7,000 D. $9,000 B. 4,000 goals × 2% 80/goals cost to repair × $200/goal warranty expense $16,000 Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty liability at the end of the year? A. $0 B. $16,000 C. $7,000 D. $9,000 C. Warranty Liability Account C. $2,416.60 D. $1,000.60 A. $125,000 × 6% × 1/12 = $625.00 (interest expense) $2,416.60 ‐ $625.00 = $1,791.60 (payment) - (interest) = ( reduction in carrying value) Which of the following definitions describes a term bond? A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer. A. A callable bond allows the holder to repay the bonds before their scheduled maturity date at a specified call price. A. True B. False B. Holder --> borrower or the company The term used for bonds that are unsecured as to principal is A. series bonds B. debenture bonds C. indenture bonds. D.callable bonds. B. Convertible bonds allow the borrower to convert each bond into a specified number of shares of common stock A. True B. False B. borrower -- >bondholder or investor The advantages of obtaining long‐term funds by issuing bonds, rather than issuing additional common stock, include which of the following? A. Funds are obtained without surrendering ownership control. B. Interest expense is tax‐deductible. C. The company's default risk decreases. D. Funds are obtained without surrendering ownership control, as well as, interest expense is tax‐deductible. D. The rate quoted in the bond contract used to calculate the cash payments for interest is called the A. Effective rate B. Yield rate C. Market rate D. Stated rate D.(face, coupon or nominal rates) We can calculate the issue price of a bond as the face amount plus the total periodic interest payments A. True B. False B. Need to present value using the market interest rate A premium occurs when the issue price of a bond is above its face amount A. True B. False A. A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is: A. Equal to $500,000 B. More than $500,000 C. Less than $500,000 D. The answer cannot be determined from the information provided B. The price of a bond is equal to: A. The future value of the face amount only B. The present value of the interest only C. The present value of the face amount plus the present value of the stated interest payments D. The future value of the face amount plus the future value of the stated interest payments C. Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct? A. Both bonds will sell for the same amount B. Bond X will sell for more than Bond Y C. Bond Y will sell for more than Bond X D. Both bonds will sell at a premium B. Given the information below, which bond(s) will be issued at a discount? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate of Return 5% 7% 12% 10% Market Rate of Return 7% 8% 12% 9% A. Bond 1 B. Bond 2 C. Bond 4. D. Bonds 1 and 2 D. Which of the following is true for bonds issued at a discount? A. The stated interest rate is greater than the market interest rate B. The market interest rate is greater than the stated interest rate C. The stated interest rate and the market interest B. Sold for the $500,000 face amount plus $10,000 of accrued interest C. Sold at a discount because the stated interest rate was higher than the market rate D. Sold at a premium because the market interest rate was higher than the stated rate A. For the issuer of ten‐year bonds, the amount of amortization using the effective‐interest method would increase each year if the bonds were sold at a Discount/Premium a. Yes Yes b. No No c. Yes No d. No Yes A. An amortization schedule for a bond issued at a discount: A. Has a carrying value that decreases over time B. Is contained in the balance sheet C. Is a schedule that reflects the changes in bonds payable over its term to maturity D. Reflects interest expense decreasing over the term of the bond C. Bonds usually sell at a discount when A. investors are willing to invest in the bonds only at rates that are higher than the stated interest rate. B. investors are willing to invest in the bonds at rates that are lower than the stated interest rate. C. investors are willing to invest in the bonds at the stated interest rate. D. a capital gain is expected. A. X2 will issue callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity. What is the annual stated interest rate on the bonds? A. 3% B. 3.5%. C. 6% D. 7% D. $7,000/$100,000 = 7%. X2 Bond Issue Schedule Date Cash Interest Dec CV 1/1/2018 $104,212 12/2018 $7,000 $6,253 $747 103,465 2019 7,000 6,208 792 102,673 2020 7,000 6,160 840 101,833 2021 7,000 6,110 890 100,943 2022 7,000 6,057 943 100,000 X2 will issue callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity. What is the annual market interest rate on the bonds? A. 3% B. 3.5% C. 6% D. 7% C. $6,253/$104,212 = 6%. If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value, a gain will result. A. True B. False A. Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement A. True B. False B. Gains/losses on the early extinguishment of debt are reported as non‐operating items in the income statement When bonds are called for retirement, any excess of the bonds' call price over the bonds' carrying value is reported as a loss on the income statement. A. True B. False A. A gain or loss is recorded on bonds retired at maturity A. True B. False B.No gain or loss is recorded on bonds retired at maturity, as the carrying value at maturity is equal to the face amount of the bond When using vertical analysis, we express income statement accounts as a percentage of A. Net income B. Sales C. Total expenses D. Gross profit B. When using vertical analysis, we express balance sheet accounts as a percentage of A. Cash B. Total assets C. Total liabilities D. Total stockholders' equity B. Which of the following is an example of vertical analysis? A. Comparing gross profit across companies B. Comparing income statement items as a percentage of sales C. Comparing debt with industry averages D. Comparing the change in sales over time B. C. 50% D. 5 times B. $100,000/$500,000 = 20%. When a corporation is formed what document is filed with a state jurisdiction? a) Charter of organization b) Common stock registration form c) Articles of incorporation d) Articles of business organization C. The CEO of a company is elected by a vote of the shareholders. a. true b. false B. appointed by the board of directors Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company a. True b. False A All publicly held corporations are regulated by what government organization? a. The Financial Accounting Standards Board b. The Commission on Accounting Procedures c. The Accounting Principles Board d. The Securities and Exchange Commission D Advantages of the corporate form of business include which of the following? I. Double taxation II. Ability to raise capital III. Ability to transfer ownership IV. More paperwork V. Limited liability a. II b. II., III., V c. I., II., III d. II., IV., V B Which of the following is a reason that a corporation would prefer to issue stock instead of bonds? a. Dividend payments can be deducted for income tax purposes but interest payments cannot b. Expansion is accomplished without surrendering ownership control c. The risk of going bankrupt is less d. All of these C Contributed capital is the amount stockholders have invested in the company a. true b. false A (external funds) The par value of common stock represents the a. liquidation value of the stock b. book value of the stock c. amount received by the corporation when the stock was originally issued d. legal nominal value assigned to the stock D Authorized stock is the number of shares that have been sold to investors a. True b. False B Authorized stock is the total number of shares available to sell, stated in the company's articles of incorporation. Issued stock is the number of shares that have been sold to investors Par value is the legal capital per share of stock that's assigned when the corporation is first established a. True b. False A The number of shares outstanding is equal to the number of shares issued minus the number of shares repurchased. a. True b. False A Outstanding common stock refers to the total number of shares a. Issued b. Issued plus treasury stock c. Issued less treasury stock d. Authorized. C The par value of shares issued is normally recorded in the a. Additional Paid‐in Capital account b. Common Stock account c. Retained Earnings account d. Treasury Stock account B A company credits Additional Paid‐in Capital for the portion of the cash proceeds above par value received for the issuance of stock a. True b. False A Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to record the issuance will include a: a. Debit to Cash $1,500 b. Credit to Additional Paid‐In Capital $1,400 A transfer the loss from net income to investing activities Knomark Corporation reports net income of $450,000 that includes depreciation expense of $70,000. Also, cash of $50,000 was borrowed on a 5‐year note payable. Based on this data, total cash inflows from operating activities are A. $380,000 B. $470,000 C. $520,000 D. $570,000 C $450,000 + $70,000 = $520,000. (Cash is financing) Innovative Products reported net income of $205,000. Beginning and ending Inventory balances were $40,000 and $45,000, respectively. Accounts Payable balances at the beginning and end of the year were $35,000 and $33,000, respectively. Assuming that all relevant information has been presented, the company would report net operating cash flows of: A. $202,000 B. $198,000 C. $212,000 D. $205,000 B Net income $205,000 Subtract increase in Inventory (5,000) Subtract decrease in A/P (2,000) Cash flows from operating activities $198,000 (a) Decrease in accounts receivable (f) Gain on the sale of equipment (b) Issuance of common stock (g) Depreciation expense (c) Increase in interest receivable (h) Payment of dividends (d) Purchase of land (i) Increase in utilities payable (e) Decrease in accounts payable (j) Increase in inventory How many of these items would be added to net income to prepare the operating activities section of the statement of cash flows? A. 2 B. 4 C. 1 D. 3 D: a,g,i On a reconciliation of net income to cash from operations, depreciation is added back to net income since depreciation a) is a direct outflow of cash. b) reduces net income but does not involve an outflow of cash. c) reduces net income and involves an outflow of cash. d) is an outflow of cash to a fund established for the replacement of assets. B The long‐term assets section of the balance sheet is one place to look for investing activities A. True B. False A Cash Received From: Sale of land 100 Sale of common stock 600 Issuance of debt securities 2,000 Cash Paid For: Interest on debt $300 Debt principal reduction 1,500 Purchase of equipment 4,000 Dividends on common stock 200 The company would report net cash inflows (outflows) from investing activities in the amount of A. ($4,000) B. $100 C. ($3,900) D. ($1,900) C Sale of land $ 100 Purchase of equipment (4,000) Net cash outflows from investing activities ($3,900) The primary purpose of the statement of cash flows is to provide information A. about a company's cash receipts and cash payments during an accounting period. B. about a company's investing and financing activities during an accounting period. C. regarding a company's financial position at the end of an accounting period. D. cash availability at a point in time. A The income statement indicates a business's success or failure in earning an income from its operating activities, it also reflects the inflow and outflow of cash from operating activities A. true B. false B Cash flows statement The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations. A. true B. false A The most likely situation in which reported earnings are positive but operations are consuming rather than generating cash would be a A. company reporting large noncash expenses B. rapidly growing company C. company using very conservative accounting standards that lower earnings D. company paying large cash dividends to its shareholders B An decrease in accounts receivable represents a increase in cash. a) True b) False A An increase in supplies represents an increase in cash. a) True b) False B C. Investing activities section D. Financing activities section D If a company issues 1,000 shares of $1 par value common stock for $20 per share, which of the following accounts would be debited? a. Treasury Stock b. Cash c. Additional Paid‐in Capital d. Retained Earnings B Cash 20,000 Common Stock 1,000 Additional Paid‐in Capital 19,000 Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal entry to record the issuance? a. Credit Common Stock $300,000 b. Credit Cash $300,000 c. Debit Common Stock $15,000 d. Credit Additional Paid‐In Capital $285,000 D Cash 300,000 Common Stock 15,000 Additional Paid‐in Capital 285,000 When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include: a. A debit to Cash for $25,000 b. A debit to Additional Paid‐in Capital for $25,000 c. A credit to Common Stock for $25,000 d. A debit to Additional Paid‐in Capital for $225,000 C Cash 250,000 Common Stock 25,000 Additional Paid‐in Capital 225,000 Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to a. Dividends and voting rights b. Par value and dividends c. The preemptive right and voting rights d. Dividends and distribution of assets if the corporation is dissolved D Which of the following shareholder rights is most commonly enhanced in an issue of preferred stock? a. The right to vote for the board of directors b. The right to maintain one's proportional interest in the corporation c. The right to receive a full cash dividend before dividends are paid to other classes of stock d. The right to vote on major corporate issues C A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance? a. Debit Preferred Stock $5,000 b. Credit Cash $5,000 c. Credit Preferred Stock $5,000 d. Credit Additional Paid‐In Capital $4,000 D Cash 5,000 Preferred Stock 1,000 Additional Paid‐in Capital 4,000 Cumulative preferred stock means that dividends accumulate interest during the year. a. True b. False B Cumulative preferred stock means shares receive priority for future dividends, if dividends are not paid in a given year. Which of the following is the most likely to have voting rights? a. Common Stock b. Preferred Stock c. Bonds d. They all have similar voting rights A ATI Company has not declared or paid dividends on its cumulative preferred stock in the last three years. These dividends should be reported a. as a current liability. b. as a reduction in stockholders' equity. c. in a note to the financial statements. d. as a noncurrent liability. C cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2015, and December 31, 2014. The board of directors declared and paid a $10,000 dividend in 2014. In 2015, $48,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2015? a) $34,000 b) $24,000 c) $14,000 d) $12,000 C $ 2,000 * due from 2014 $12,000 * due in 2015 $14,000 total received in 2015 *6% x $50 par value = $3 dividend for each share $3 per share x 4,000 shares = $12,000 dividends per year The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $18,000 in 2018. Assuming the preferred stock is noncumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018? a. $6,000 to preferred stockholders and $12,000 to common stockholders. b. $18,000 to preferred stockholders and $0 to common stockholders. c. $12,000 to preferred stockholders and $6,000 to common stockholders d. $9,000 to preferred stockholders and $9,000 to common stockholders A $6 dividend/share x 1,000 shares = $6,000 B When treasury stock is resold at a gain, the difference between its cost and the cash received when resold: a. Increases net income b. Increases stockholders' equity c. Has no effect on net income or stockholders' equity d. Increases net income but decreases stockholders' equity B A company reissues 400 shares of its own common stock for $20 per share. The company had acquired these shares two months before for $15 per share. The reissuance of this stock would be recorded with a: a. Credit to Treasury Stock for $8,000 b. Debit to Additional Paid‐In Capital for $2,000 c. Debit to Common Stock for $8,000 d. Credit to Additional Paid‐In Capital for $2,000 D Cash (400 × $20) 8,000 Treasury Stock (400 × $15) 6,000 Additional Paid‐in Capital 2,000 On December 2, Coley Corp. acquired 1,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corp. reissued 400 shares for $15 each. Which of the following is correct regarding the journal entry for the reissued shares? a. Debit Cash $15,000 b. Credit Treasury Stock $10,800 c. Credit Additional Paid in Capital $5,200 d. Credit Treasury Stock $6,000 B Cash (400 × $15) 6,000 Additional Paid‐in Capital or R/E 4,800 Treasury Stock (400 × $27) 10,800 Which of the following is the appropriate entry to record the declaration of cash dividends? a. Additional Paid‐in Capital - Debit; Dividends Payable - Credit b. Dividends- Debit; Dividends Payable - Credit c. Retained Earnings- Debit; Cash - Credit d. Dividends Payable - Debit; Cash - Credit B Retained Earnings represent a company's a. Net income less dividends since the company first began operations b. Undistributed net assets. c. Extra paid‐in capital d. Undistributed cash A Journal entries to record cash dividends are made on the: a. Declaration date, record date, and payment date b. Record date and payment date. c. Declaration date and payment date d. Declaration date and record date C The board of directors of Amalgamated Corporation declared a cash dividend on July 15, 2013, to be paid on August 15, 2013, to shareholders holding the stock on August 1, 2013. Given these facts, the date August 15, 2013, is referred to as the a. date of declaration b. date of payment c. ex‐dividend date d. date of record B The ending Retained Earnings balance of Lambert Inc. increased by $1.5 million from the beginning of the year. The company's net income earned during the year is $3.5 million. What is the amount of dividends Lambert Inc. declared and paid? a. $1.5 million b. $3.5 million c. $2.0 million d. $5.0 million C Net income ($3.5 million) minus dividends ($2.0 million) equals the change in retained earnings ($1.5 million). The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000 shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to shareholders of record on May 1, 2013. The effects of the entry to record the declaration of the dividend on April 14, 2013, are to a. decrease stockholders' equity and increase liabilities b. increase stockholders' equity and increase liabilities c. decrease stockholders' equity and decrease assets d. increase stockholders' equity and decrease assets A A feature common to both stock splits and stock dividends is a) a transfer to earned capital of a corporation b) that there is no effect on total stockholders' equity c) an increase in total liabilities of a corporation d) a reduction in the contributed capital of a corporation B same effect on a company's retained earnings and total stockholders' equity a) True b) False B large stock dividend reduces R/E by the par value of the stock When preparing a reconciliation of net income to cash from operations, an increase in the ending inventory over the beginning inventory will result in an adjustment to reported net income because A. cash is increased because inventory is a current asset B. inventory is an expense deducted in computing net earnings, but is not a use of cash C. the net increase in inventory is part of the difference between cost of goods sold and cash paid to suppliers We report interest paid on bonds or notes payable in operating activities rather than financing activities A. True B. False A The purchase of long‐term assets by issuing debt is recorded as both an investing activity and a financing activity A. True B. False B Purchase of long‐term assets by issuing debt is reported as a noncash activity either directly after the cash flow statement or in a separate note to the financial statements. Which of the following is a non‐cash transaction that should be disclosed in a schedule accompanying the statement of cash flows? A. Sale of an investment for cash B. Purchase of a machine for cash C. Issuance of common stock in exchange for land D. Declaration and payment of a cash dividend on common stock C Woodcrest, Inc. borrowed $50k from a local bank and signed a promissory note. What entry should they record? A. Debit Cash, 50k. Credit Notes Receivable, 50k B. Debit Notes Rec., 50k. Credit Cash, 50k C. Debit Cash, 50k. Credit Notes Pay 50k D. Debit Notes Pay, 50k, Credit Cash 50k C We record interest expense in the period in which we pay it, rather than in the period we incur it A. T B. F B. Interest expense is recorded in the period incurred, not in the period in which we pay it. On November 1, 2018, Knomark, Inc. signed a $100,000, 6%, six‐month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. Knomark should report interest payable at December 31, 2018, in the amount of A. 0 B. 1k C. 2k D. 3k B. [($100,000 × 6%) × 2/12] = $1,000 On November 1, 2018, Boiler Bakery signed a $200,000, 6%, six‐month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. Boiler Bakery records the appropriate adjusting entry for the note on December 31, 2018. What amount of cash will be needed to pay back the note payable plus any accrued interest on May 1, 2019? A. $200,000. B. $202,000 C. $204,000 D. $206,000 D. $200,000 + [$200,000 × 6% × 6/12] = $206,000 A contingency is best described as a(n) a. current liability. b. probable liability. c. potential liability. d. estimated liability. C If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be A. Disclosed, but not reported as a liability B. Disclosed and reported as a liability C. Neither disclosed nor reported as a liability D. Reported as a liability, but not disclosed A. must be probable Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation? A. As a liability for $100,000 with disclosure of the range B. As a liability for $150,000 with disclosure of the range C. As a liability for $200,000 with disclosure of the range D. As a disclosure only. No liability is reported A. When no amount within a range of potential losses appears more likely than others, the liability is recorded at the minimum amount in the range Financial accounting is useful to investors and creditors in making decisions. 2. helps to predict cash flows. 3. tells about economic resources, claims to resources, and changes in resources and claims. GAAP Generally Accepted Accounting Principles Relevance Confirmatory value Predictive Value Materiality Faithful Representation Completeness Neutrality Freedom of error Cost/Benefit constraint Financial accounting information is provided only when the benefits of doing so exceed the costs Economic Entity Assumption Identify all economic events with a particular economic entity Monetary Unit Assumption Need a unit or scale of measurement Periodicity Assumption Provide information of an enterprise at regular time periods Going Concern Detective controls -reconciliations -performance reviews -auditors Free cash flow operating cash flow investing cash flow bank reconciliation matching the balance of cash in the bank account with the balance of company's own record petty cash fund small amount of cash kept on hand to pay for minor purchases Balance per Bank ( reconciliation) Add Deposits Outstanding Subtract Checks Oustanding Balance per Company's Ledger (Books) (reconciliation) Subtract bank fees Subtract NSF checks Add interest on our accounts Add notes collected by the bank +/- our errors in recording Recording Credit Sales Accounts receivable D Service Revenue C Net Revenue total revenue- discounts-returns-allowances recording sales allowances sales allowances D accounts receivable C Sales Discount -reduction in the amount to be paid by credit customer if payment on account is made within a specified period of time - encourages prompt payments - contra account -recognized directly -ex : 2/10, n/30 Recording sales discount cash D sales discount D accounts receivable C Percentage-of-receivables method -Based on the percentage of receivables expected not to be collected -Also called the Balance Sheet method (because receivables are on the Balance Sheet!) -Balance sheet accounts are permanent -When we make the estimate, we include the existing balance of the uncollectable accounts when making the adjusting entry Percentage-of-credit-sales method Based on a percentage of net credit sales expected not to be collected Also called the Income Statement method (because sales are on the income statement!) Income statement accounts are temporary When we make the estimate, we do NOT include the existing balance of uncollectable accounts when making the adjusting entry estimating uncollectible accounts DEBIT Bad Debt Expense, take estimates directly to income statements CREDIT allowance for uncollectible, CONTRA ASSEST ACCOUNT, shows accounts receivable at net realizable value Writing off bad debt Entry is our best estimate of what we might not collect (we know there are bad debts, but we don't know which customers yet) Estimate Entry: Debit: Bad Debt Expense Credit: Allowance for Uncollectable Accounts Write-Off Entry: Debit: Allowance for Uncollectable Accounts Credit: Accounts Receivable Write Off Entry Write-off has no effect on total amounts reported Negative effects (reduction of Net Income) recorded with estimate Recording Notes payable Notes Receivable D Service revenue C interest calculation face value annual interest rate fraction of the year accrued interest We make the adjusting entry at the end of the year to recognize the revenue in the period it was earned Corrects our income statement and balance sheet inventory Includes items a company intends for sale to customers Also includes items that are not yet finished products *Reported as a current asset Cost of Goods Sold Cost of the inventory that is sold during the period (Expense on the Income Statement) Ending Inventory Everything we fully produced but did not sell by the end of the period (We still have it, it goes on our Balance Sheet as a Current Asset) Multiple Step Income Statement Multiple levels of Profit Specific Identification Method Each inventory item may have a different cost and is specifically tracked First-in, first-out (FIFO) CGS is made up from the FIRST items available, beginning inventory is the first products sold Cans of Chicken Noodle Soup at the grocery store Last-in, first-out (LIFO) CGS is made up from the LAST items available, the last items we made were the first products sold Six ton aluminum ingots Weighted-average cost Cost of goods available for sale / number of units available for sale Perpetual inventory system maintains a continual record of inventory purchased and sold *Inventory is adjusted with a journal entry every time we receive new items to sell or sell items! ex: Recording Sale of long term assets Cash D accumulated Depreciation D Equipment C Gain C Recording Retirement Accumulated Depreciation D Loss D Equipment C Profit Margin indicates the earnings per dollar of sales Net income / Net sales Asset turnover measures the sales per dollar of assets invested liability a present responsibility to sacrifice assets in future due to a transaction or other even from past Current Liabilities - we will have to fulfill that responsibility within 1 year or 1 operating cycle (usually 1 year) Long-Term Liabilities - will be payable MORE than one year or operating cycle in the future payroll liabilities Taxes & Benefits withheld from an employees' salaries and wages (what the employee pays) Taxes paid by the company (employer pays) Benefits paid by the company (employer pays) withheld from employee ( individual ) Federal Income Taxes State Income Taxes FICA (7.65%) Taxes Employee's share of benefits Health Insurance Retirement Contributions Taxes on Employer ( company ) ADDITIONAL FICA (7.65%) Half is withheld from the employees' earnings (7.65%) Half is taxed to the company (7.65%) Federal & State Unemployment Taxes FUTA & SUTA (percentages vary by company) Benefits paid by employer ( company ) Benefits paid by the Company on behalf of the employee Part or all of their health insurance Retirement match Other benefits (known as "fringe benefits") Notes Payable Note signed by a firm promising to repay the amount borrowed plus interest Accruing interest at the end of the year Just like with Notes Receivable, we need to accrue the amount that we owe at the end of the year so that our balance sheet and income statement have the appropriate amounts Interest expense D Interest payable C line of credit informal agreement Permits a company to borrow up to a prearranged limit No formal loan procedures and paperwork commercial paper Company borrows from another company rather than from a bank Sold with maturities normally ranging from 30 to 270 days Interest rate is usually lower than on a bank loan unearned revenue liability account used to record cash received in advance of the sale or service Current portion of long-term debt Debt that will be paid within the next year Provides information about a company's bankruptcy risk Separate out the current portion of long-term debt on the balance sheet The remainder is reported as a Long-Term Liability (Chapter 9) contingency An existing uncertain situation that might result in a LOSS If the estimate of the loss is a range, record the low amount of the range and disclose the rest of the range in the notes to financial statement Gain contingencies Sometimes disclosed when the gain is certain Not recorded with a journal entry until received- disclosed in the notes to the financials Warranties -An example of a contingent liability -Helps a company increase sales - gives some assurance about the product -Warranty expense is recorded in the same accounting period as the sale -It should be probable and the amount can be reasonably estimated recording warranty warranty expense D warranty liability C Liquidity Analysis -Liquidity: refers to having sufficient cash or other current assets to pay currently maturing debts -Lack of liquidity can result in financial difficulties or even bankruptcy Three liquidity measures: -Working capital (Current Assets minus Current Liabilities) -Current ratio (Current Assets divided by Current Liabilities) -Acid-test ratio (Cash+Current Investments+Accounts Recivable divided by Current Liabilities) Time value of money Decrease in value of money due to passage of time $1 today is worth $1 $1 ten years from now will not have the buying power of $1 today Essential in solving many business decisions simple vs compound Simple interest: interest earned on the initial investment only Compound interest: interest earned on the initial investment and on previous interest Be able to calculate compound interest - you can use your calculator or a table (FV) annuity Cash payments of equal amounts over equal time intervals Used for a series of receipts and payments of cash EQUAL Payments or Receipts EQUAL Time Period Legal capital per share of stock that's assigned when the corporation is first established Creates a liability to the company if assets fall below the par level (The corporation is not up to par!) preferred stock Issued in addition to common stock to attract wider investment - par values are usually higher than common par values Preferred stockholders have: First rights to a specified amount of dividends Preference over common stockholders in the distribution of assets at the time of dissolution journal same as common preferred stock convertible shares of preferred can be exchanged for shares of common stock by the owner preferred stock Redeemable : shares can be returned by the shareholder to the corporation at a fixed price preferred stock Cumulative : preferred shares receive priority for dividends, if dividends are not paid in a given year Dividends in arrears - unpaid dividends retained earnings Account in Stockholders' Equity Section Earnings retained in the corporation and not paid out as dividends Equals all net income, less all dividends Has a normal credit balance dividends and dates Distributions of cash or stock by a corporation to its stockholders -Declaration date: date on which board of directors declare the cash dividend to be paid Legal obligation incurred -Record date: specific date on which the company will determine who will receive the dividend (registered owners of stock) Review of our records -Payment date: date of the actual cash distribution Cash is going out stock dividends additional shares of a company's own stock given to stockholders as dividends *stock split a large stock dividend that includes a reduction in the par or stated value per share stock dividends and split table you own 100 shares 10% stock dividend 10 additional shares 20% stock dividend 20 additional shares 100% stock dividend 100 additional shares ^ large stock dividend or 2 for 1 stock split **Return on Equity Net income / average stockholders equity= % measures the income earned for each dollar in stockholders equity **Earnings per share Net income- dividends on preferred stock / average shares of common stock outstanding **Price earnings ratio stock price / earnings per share growth stocks stocks whose future earnings investors expect to be higher Value stocks stocks that are priced low in relation to current earnings operating activities cash receipts and cash payments for transactions relating to revenue and expense activities Investing activities : cash transactions involving the purchase and sale of long-term assets and current investments Financing activities inflows and outflows of cash resulting from the external financing of a business Noncash activities: Significant investing and financing activities that do not affect cash Reported after the cash flow statement or in a note to the financial statements indirect method Begin with net income and then list adjustments to net income in order to arrive at operating cash flows Most popular method Easier and less costly direct method Adjust the items on the income statement to directly show the cash inflows and outflows from operations Conceptually better method More difficult and more costly Adjustments for Noncash Effects *Depreciation expense Gain or loss on sale of an asset These will be the only adjustments outside of CA & CL that you might have to make on the exam. Changes in Current Assets and Current Liabilities Current Assets: - Increase in a current asset + Decrease in a current asset Current Liabilities - do the opposite! + Increase in a current liability - Decrease in a current liability It might be easier to memorize these and just remember to do the opposite for Current Assets investing and financing Ask yourself Did I receive cash? (Add - it's an inflow of cash) Did I spend cash (Subtract - it's an outflow of cash) Hey! "Spend" & "Subtract" both start with S vertical analysis Express each item in a financial statement as a percentage of the same base amount Income statement items expressed as a percentage of sales Balance sheet items expressed as a percentage of total assets horizontal analysis Analyze trends in financial statement data for a single company over time current-prior / prior Can be year over year Can be one base year and show growth (decline) from the base year **Current ratio Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year? 4,000 goals × 2% cost to repair 800/goals X 200/goals = $16,000 Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty liability at the end of the year? $7,000 We record gain contingencies when the gain is probable and the amount is reasonably estimable False. We do not record gain contingencies until the gain is certain Which of the following is not a true statement? Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax‐deductible The mixture of debt and equity securities is generally the same for most companies. False. A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. True. Cash flow generally limits the amount of debt a business can finance. True. The entry to record a monthly payment on an installment note Increases expense, decreases liabilities, and decreases assets. In each succeeding payment on an installment note The amount that goes to decreasing the carrying value of the note increases. In each succeeding payment on an installment note The amount of interest expense decreases. A corporation obtains a $125,000, 6%, five‐year loan for equipment on January 1, 2018. If the monthly payment is $2,416.60, by how much will the carrying value decrease when the first payment is made on January 31, 2018 $1,791.60 Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance True. Which of the following definitions describes a term bond? Matures on a single date. A callable bond allows the holder to repay the bonds before their scheduled maturity date at a specified call price. False. borrower or company The term used for bonds that are unsecured as to principal is debenture bonds Convertible bonds allow the borrower to convert each bond into a specified number of shares of common stock False. Bond holder or investor We have an expert-written solution to this problem! The advantages of obtaining long‐term funds by issuing bonds, rather than issuing additional common stock, include which of the following? Funds are obtained without surrendering ownership control, as well as, interest expense is tax‐ deductible. The rate quoted in the bond contract used to calculate the cash payments for interest is called the Stated rate (face, coupon or nominal rates) We can calculate the issue price of a bond as the face amount plus the total periodic interest payments False. Need to present value using the market interest rate A premium occurs when the issue price of a bond is above its face amount True A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is: More than $500,000 The price of a bond is equal to: The present value of the face amount plus the present value of the stated interest payments Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct? Bond X will sell for more than Bond Y We have an expert-written solution to this problem! Which of the following is true for bonds issued at a discount? The market interest rate is greater than the stated interest rate Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi‐annually. The market rate for this type of bond is 8%. What is the issue price of the bond? $54,055 ($33,778 + $20,277) Samson Enterprises issued a ten‐year, $20 million bond with a 10% interest rate for $19,500,000. The entry to record the bond issuance would have what effect on the financial statements? Increase assets and liabilities Bonds payable should be reported as a long‐term liability in the balance sheet at: Carrying value The cash payment each period is calculated as the carrying value times the market rate False. The cash payment each period is calculated as the face value times the stated interest rate. Interest expense on bonds payable is calculated as the: Carrying value times the market interest rate When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time False. No. The company's 2018 gross profit ratio is: $190,000 ‐ $114,000)/$190,000 = 40.0% A company with a current ratio of 1.0 is considered more liquid than one with a current ratio of 2.0. False. The current ratio is (rounded to two decimal places): Current assets $505/ Current liabilities $320 = 1.58 The CEO of a company is elected by a vote of the shareholders. False. appointed by the board of directors Contributed capital is the amount stockholders have invested in the company True. External Funds Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company True. All publicly held corporations are regulated by what government organization? The Securities and Exchange Commission Advantages of the corporate form of business include which of the following? I. Double taxation II. Ability to raise capital III. Ability to transfer ownership IV. More paperwork V. Limited liability II., III., V We have an expert-written solution to this problem! Which of the following is a reason that a corporation would prefer to issue stock instead of bonds? The risk of going bankrupt is less Authorized stock is the number of shares that have been sold to investors False. Par value is the legal capital per share of stock that's assigned when the corporation is first established True. Outstanding common stock refers to the total number of shares Issued less treasury stock The par value of a share of common stock is normally equal to market value. False. The par value of shares issued is normally recorded in the Common Stock Account A company credits Additional Paid‐in Capital for the portion of the cash proceeds above par value received for the issuance of stock True. If a company issues 1,000 shares of $1 par value common stock for $20 per share, what would be the effect on the accounting equation? Increase assets and increase stockholders' equity If a company issues 1,000 shares of $1 par value common stock for $20 per share, which of the following accounts would be credited? Additional Paid‐in Capital When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include: A credit to Additional Paid‐in Capital for $225,000 Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal entry to record the issuance? Credit Common Stock $15,000 Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to Dividendsanddistributionofassetsifthe corporation is dissolved A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance? Credit Additional Paid‐In Capital $4,000 Cumulative preferred stock means that dividends accumulate interest during the year. False. The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $18,000 in 2018. Assuming the preferred stock is noncumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018? $6,000 to preferred stockholders and $12,000 to common stockholders. $6 dividend/share x 1,000 shares = $6,000 We have an expert-written solution to this problem! Treasury Stock: Decreases stockholders' equity When treasury stock is resold at a price above cost: Additional Paid‐in Capital is increased Which of the following is the appropriate entry to record the declaration of cash dividends? Dividends- Debit; Dividends Payable - Credit Retained Earnings represent a company's Netincomelessdividendssincethecompany first began operations Journal entries to record cash dividends are made on the: Declaration date and payment date A feature common to both stock splits and stock dividends is that there is no effect on total stockholders' equity Stock splits and large stock dividends have the same effect on a company's retained earnings and total stockholders' equity False. When treasury stock is acquired, what is the effect on total stockholders' equity? Decrease When treasury stock is resold at a gain, the difference between its cost and the cash received when resold: II. Increase in Supplies III. Increase in Accounts Payable IV. Increase in Accounts Receivable I and III Knomark Corporation reports net income of $450,000 that includes depreciation expense of $70,000. Also, cash of $50,000 was borrowed on a 5‐year note payable. Based on this data, total cash inflows from operating activities are $450,000 + $70,000 = $520,000 Innovative Products reported net income of $205,000. Beginning and ending Inventory balances were $40,000 and $45,000, respectively. Accounts Payable balances at the beginning and end of the year were $35,000 and $33,000, respectively. Assuming that all relevant information has been presented, the company would report net operating cash flows of: $198,000 (a) Decrease in accounts receivable* (b) Issuance of common stock (c) Increase in interest receivable (d) Purchase of land (e) Decrease in accounts payable (f) Gain on the sale of equipment (g) Depreciation expense* (h) Payment of dividends (i) Decrease in utilities payable (j) Increase in inventory How many of these items would be added to net income to prepare the operating activities section of the statement of cash flows? 2 The long‐term assets section of the balance sheet is the place to look for investing activities True. Woodcrest Mfg. Co. sold land costing $10,000 for $12,000. Shively would report: Investing cash inflows of $12,000 Which of the following is an example of a cash inflow from a financing activity? Issuance of bonds How is the retirement of long‐term debt reported on the statement of cash flows. What is the effect on cash flows? Financing activities & decrease in cash The purchase of treasury stock is classified in the statement of cash flows as a(n): Financing activity We report interest paid on bonds or notes payable with operating activities rather than financing activities True. The purchase of long‐term assets by issuing debt is recorded as both an investing activity and a financing activity False. How is a purchase of land and buildings with a bank mortgage reported on the statement of cash flows. What is the effect on cash flows? Noncash transaction & no effect on cash Which of the following is a non‐cash transaction that should be disclosed in a schedule accompanying the statement of cash flows? Issuanceofcommonstockinexchangefor land Which of the following is reported as a noncash investing and financing transaction on the statement of cash flows? Conversion of long‐term liability to common stock One can obtain a clear picture of a company's liquidity by referring to its A. Balance Sheet. B. Income Statement A. Balance Sheet (liquidity refers to assets / cash, while income statement only deals with revenues, expenses, and profits) The advantages of obtaining funds by issuing debt, rather than issuing additional common stock, include which of the following? A. Funds are obtained without surrendering ownership control. B. Funds are obtained without surrendering ownership control, as well as, interest expense is tax‐deductible. C. The company's default risk decreases. D. Interest expense is tax‐deductible. B. Funds are obtained without surrendering ownership control, as well as, interest expense is tax- deductible. (but mostly the fact that it is done without surrendering ownership of the company) Banks will charge a very profitable company a higher interest rate as compared to a company with minimal income since the high‐income business will be better able to pay the extra interest cost. A. True B. False B. Absorutery not Banks do the opposite; they charge lower interest rates to profitable companies to attract their business because there is less risk involved with profitable companies. The lower the debt to equity ratio, the greater the financial risk the company is taking. A. True B. False B. Nuh uh This makes sense because a LOWER debt to equity ratio means (debt/equity) is small which means debt is small compared to equity, so therefore a LOWER debt to equity ratio would imply the opposite; the company would be more financially stable. Cash flow generally limits the amount of debt a business can finance. A. True B. False A. True Borrowing levels can INCREASE with stable and predictive cash flows Think about credit score; the better credit score (more stable and predictive your credit is) then the higher loans you can take out. A debt to equity ratio of approximately .34 means that one‐fourth of the company's assets are financed by creditors. A. True B. False A. Thomas the tank engine says tru tru then you will take the present value of a series of payments AND then the present value of the maturity value (or in this case the face value). On January 1, 2018, San Bruno, Inc. issued twenty‐year bonds payable with a face value of $50,000,000 and a face interest rate of 5 percent. The bonds were issued with a market interest rate of 6 percent. Interest is payable semi‐annually on January 1 and July 1. In calculating the present value of the bond issue on January 1, 2018, A. the 5 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments B. the 6 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. C. a 3 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. D. the 6 percent rate will be used to calculate the present value of the face amount and a 2.5 percent rate will be used to calculate the present value of the periodic interest payments C. a 3 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments Since the payments are semi-annual, you take the market interest rate (typically given to you as an interest rate convertible semi-annually) and divide it by 2 to get the semi-annual rate You then use this to calculate the present value of the bond The market interest rate on bonds is lower than the stated or face rate when bonds sell A. at face value. B. below face value. C. above face value. D. at maturity value. C. above face value This is known as a premium (in this case, carrying value will DECREASE to the $$$ amount of bonds sold; refer to lecture slides) A discount is when the market interest rate is HIGHER than the stated interest rate (this makes sense if you think about it; since the rate you are buying the bond at is LOWER than the rate everywhere else, you're basically being offered a discount on the price) (in this case, carrying value will INCREASE to the $$$ amount of the bonds sold; refer to lecture slides) We have an expert-written solution to this problem! Bonds usually sell at a premium when A. investors are willing to invest in the bonds at rates that are lower than the stated interest rate. B. investors are willing to invest in the bonds at rates that are higher than the stated interest rate. C. investors are willing to invest in the bonds at the stated interest rate. D. An unfavorable tax event will impact the buyer. A. investors are willing to invest in the bonds at rates that are lower than the stated interest rate. (premiums are when the MARKET RATE is lower than the STATED RATE) If the market interest rate at the date of issuance of a bond exceeds the face or stated interest rate, the bond will probably be sold at a premium. A. True B. False B. finger gun retracts No A premium is when the MARKET RATE is lower than the STATED RATE. Premium = MR < SR Discount = MR > SR Stated Rate = MR=SR If bonds are issued at a premium, the face or stated interest rate is A. too low to attract investors. B. lower than the market rate of interest. C. higher than the market rate of interest. D. adjusted to a higher effective rate of interest. C. higher than the market rate of interest Premium = MR < SR Discount = MR > SR Stated Rate = MR=SR We have an expert-written solution to this problem! If the face interest rate at the date of bond issuance exceeds the market interest rate, the bond will probably be sold at a discount. A. True B. False B. There are a shit ton of these clicker questions that say basically the same thing so I feel like it's probably important to know that Premium = MR < SR Discount = MR > SR Stated Rate = MR=SR When bonds are issued at a discount, the interest expense for the period is the amount of cash interest payment for the period A. less the premium amortization for the period. B. plus the premium amortization for the period. C. plus the discount amortization for the period. D. less the discount amortization for the period. C. Plus the discount amortization for the period (ask me about this if you want a better explanation cuz it's kind of hard to type out -- or refer to lecture slides) We have an expert-written solution to this problem! Issuing bonds at a discount has the effect of decreasing interest expense below the face or stated amount of interest. A. True B. False B. 假 (ask me about this if you want a better explanation cuz it's kind of hard to type out -- or refer to lecture D. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size. (This allows for both vertical and horizontal analysis) In a common‐size financial statement, a designation of 25 percent could not be given to A. net revenues. B. total current assets. C. total long‐term debt. D. net earnings. A. net revenues Net revenues are the base percentage for everything else so this will always be 100%. In other words, every other item is a percentage of net revenues. When using vertical analysis, we express balance sheet accounts as a percentage of A. stockholders' equity. B. cash. C. total assets. D. current assets. C. total assets For common size FINANCIAL statements, the base amount is net revenues. For common size BALANCE SHEET'S (vertical analysis) the base amount is total assets. In other words, under vertical analysis, everything on a balance sheet is represented as a percentage of total assets. San Marcos, Inc. reports accounts receivable of $100,000 in 2017 and $250,000 in 2018. Using horizontal analysis, what would be the percentage increase or decrease in accounts receivable? A. 60% decrease B. 60% increase C. 150% decrease D. 150% increase D. 150% increase % increase (or decrease) is calculated as such: (Current-year amount less prior-year amount) / (prior-year amount) So (250-100)/(100)*100 = 150% Horizontal analysis will reveal, for example, the percentage of net sales consumed by salaries expense. A. True B. False B. Incorrectamundo Expenses are not that specific on an income statement or balance sheet. On an income statement expenses are separated by operating expenses and other expenses, while on a balance sheet they're separated sorted into different liabilities. Liquidity is the ability to earn a satisfactory net income. A. True B. False B. Liquidity is the conversion of all a companies assets to cash, aka what the company is worth as a dollar amount in real time What is the effect of the collection of accounts receivable on the current ratio and net working capital, respectively? Current Ratio Net Working Capital a. Increase - Increase b. No effect - Increase c. No effect - No effect d. Increase - No effect C. No effect - no effect Current ratio is calculated as such (current assets)/(current liabilities) Net working capital is calculated as such (current liabilities less current assets) SO since current assets do not change in either case (+/- an asset) then neither of them change. Allegheny Corporation's 2017 gross margin ratio on the following schedule is: Allegheny Corporation 2017 - Accounts receivable $30,000 - Inventory 25,000 - Net sales 200,000 - Cost of goods sold 150,000 - Total assets 400,000 - Total stockholders' equity 200,000 - Net income 20,000 A. 30.0%. B. 25.0%. C. 15.0%. D. 10.0%. B. 25% Gross profit margin ratio is calculated as such Gross profit/sales Where gross profit = sales less costs of goods sold A company reported net income of $500 on net sales of $20,000. The company's profit margin is: A. 19.5 B. 2.5% C. 25% D. .0025 B. 2.5% Profit margin is calculated as net income/net sales SO 500/20,000 = .025 (or 2.5%) Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company a. True b. False common stock. So you take the amount of stock issued times the price of those shares, less the common stock amount.) Thiel, Inc. issued 5,000 shares of $1 par value stock for $5 per share. What is true about the journal entry to record the issuance? a. Debit Cash $25,000 b. Credit Common Stock $25,000 c. Debit Additional Paid‐In Capital $20,000 d. Debit Common Stock $5,000 a. Debit Cash $25,000 (Cash amounted received is recorded as the number of shares sold times the amount they were sold for) Dividends in arrears pertain to noncumulative preferred stock. A. True B. False B. If you're ever unsure whether it's true or false, guess false. Like 75% of these T/F questions are false. (arrears means: money that is owed and should have been paid earlier) (I'm going to assume that dividends in arrears do NOT pertain to non-cumulative preferred stock because non-cumulative preferred stock receives priority over common shares for dividends declared in the CURRENT accounting period therefore they won't ever be "arreared") Preferred stock is least likely to have which of the following characteristics? A. Preference as to dividends. B. The right of the holder to vote at stockholders' meetings. C. Preference as to assets upon liquidation of the corporation. D. The right of the holder to convert to common stock. B. The right of the holder to vote at stockholders' meetings (voting rights are typically reserved for those who own common stock, as it is the highest risk / highest reward category of stock) Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to a. dividends and distribution of assets if the corporation is dissolved. b. dividends and voting rights. c. par value and dividends. d. the conversion to a bond and voting rights. A. Dividends and distribution of assets if the corporation is dissolved. The Golden, Inc. issues 1,000 shares of 3%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. Golden was not able to pay dividends in 2017, but plans to pay dividends of $10,000 in 2018. Assuming the preferred stock is noncumulative, how much of the $10,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018? a. $10,000 to preferred stockholders and $0 to common stockholders. b. $6,000 to preferred stockholders and $4,000 to common stockholders c. $3,000 to preferred stockholders and $7,000 to common stockholders. d. none to preferred stockholders and $10,000 to common stockholders C. $3,000 to preferred stockholders and $7,000 to common stockholders (3% preferred stock $100 par value) 1000 shares = $3,000 of preferred stock. $10,000 was paid so the rest is common stock The purchase of treasury stock will result in A. no net changes in assets, liabilities, or stockholders' equity. B. an increase in assets and an increase in liabilities. C. an increase in assets and an increase in stockholders' equity. D. a decrease in assets and a decrease in stockholders' equity D. A decrease in assets and a decrease in stockholders' equity (Company uses cash to purchase back common stock therefore the company's cash decreases and so does their common stock) San Bruno Corporation's stockholders' equity section shows the par value of its common stock at $.25 and the balance in the common stock account of $50,000. Also, the equity section reflects 15,000 shares of treasury stock. What is the number of shares outstanding? A. 215,000 B. 200,000 C. 50,000 D. 185,000 D. $185,000 Issued shares = Balance of common stock divided by par value ($50,000/$0.25)=200,000 Outstanding shares = shares issued less treasury shares 200,000 - 15,000 = 185,000 We have an expert-written solution to this problem! On November 26, Portland Corp. acquired 1,000 shares of its $1 par value common stock for $20 each. On December 31, Portland reissued 500 shares for $19 each. Which of the following is correct regarding the journal entry for the reissued shares? a. Credit Cash $9,000 b. Debit Treasury Stock $9,000 c. Credit Treasury Stock $10,000 d. Credit Additional Paid‐in Capital $500 C. Credit Treasury Stock $10,000 Dr. Cash $9500 (500 shares * $19) Dr. Additional Paid-In Capital $500 Cr. Treasury Stock $10,000 Note: if the shares were reissued for an amount GREATER than what they were bought at, you're Cr. Additional Paid-In Capital Funston Corporation's board of directors declared a cash dividend of $1.00 per share on 50,000 shares of common stock on April 1, 2016. The dividend is to be paid on April 30, 2016, to shareholders of record on April 15, 2016. The effects of the entry to record the declaration of the dividend on April 1, 2016, are to B. No effect and no effect C. Decrease and increase D. No effect and increase A. Decrease and no effect 10 percent stock dividend is considered a small stock dividend, which typically decreases retained earnings and increases common stock / paid-in capital. SO R/E decreases, but since common stock increases accordingly, total equity has no change Investors and creditors would find the statement of cash flows least useful in assessing a company's A. financial position at a point in time. B. ability to manage cash flows. C. ability to pay dividends and liabilities. D. uses or sources of working capital. A. Financial position at a point in time. Cash flows show the company's financial position over the course of a period of time The primary purpose of the statement of cash flows is to provide information A. about a company's investing and financing activities during an accounting period. B. regarding a company's financial position at the end of an accounting period. C. regarding the results of operations for a period of time. D. about a company's cash receipts and cash payments during an accounting period. D. About a company's cash receipts and cash payments during an accounting period This is basically operating activities (Cash receipts and cash payments for transactions relating to revenue and expense activities). Operating activities is the largest portion of a cash flows statement, therefore it makes sense that the primary purpose of such is tracking operating activities. The most likely situation in which reported earnings are positive but operations are consuming rather than generating cash would be a A. company using very conservative accounting standards that lower earnings. B. rapidly growing company. C. company reporting large noncash expenses. D. company paying large cash dividends to its shareholders. B. Rapidly growing company Think about this. If a company is growing rapidly, then the earnings will be POSITIVE, but typically a rapidly growing business takes those earnings and pours them straight back into the business by buying more land, equipment, etc. The increase in assets other than cash results in a reduction on the operating activities section of a cash flows statement. A decrease in the building account during an accounting period represents a increase in cash. a) True b) False A. True If an asset account OTHER THAN cash DECREASES, then that means cash must have increased (because it would have been a sale of land in this case) An increase in inventories during the accounting period represents a increase in cash. a) True b) False B. ⁿᵒ ₙₒ ⁿᵒ ₙₒ ⁿᵒ ₙₒ In order to increase inventories, you need to pay for items which would result in a reduction of cash A decrease in accrued wages during an accounting period represents a increase in cash. a) True b) False B. https://www.youtube.com/watch?v=r5X8qDDMC-o Accrued wages is a liability and to decrease a liability you must decrease cash as well (or decrease equity) Which of the following represents a decrease in cash flows? a) Increase in Accounts Payable b) Increase in Prepaid Rent c) Increase in Wages Payable d) Increase in Deferred Revenue B. Increase in Prepaid Rent If you increase prepaid rent (increase an asset OTHER THAN cash) then cash must have been used to generate the asset Cotswolds Corporation repaid a 90‐day note payable to a bank. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. A. Operating activities section B. Investing activities section C. Financing activities section D. Schedule of noncash investing and financing transactions C. Financing activities section Financing activities deal with *inflows and outflows of cash resulting from the external financing of a business* (Long-term liabilities and stockholders' equity are generally classified as financing activities) Repayments of a six month notes payable or other loans are considered repayments of loans under financing activities. A. True B. False A. True Financing activities deal with *inflows and outflows of cash resulting from the external financing of a business* Which of the following would not appear in the investing activities of the statement of cash flows? A. Depreciation B. Sale of investments C. Purchase of land D. Sale of a copyright A. Depreciation Depreciation is an operating activity Investing activities deal with *cash transactions involving the purchase and sale of long‐term assets and current investments* C. $30,000 D. $50,000 B. $15,000 Net income plus depreciation expense less gain on the sale of land less increase in inventory equals $15,000. Basically anything that uses cash will be subtracted from the net income, HOWEVER, gain / loss on sale of land is tricky. These are the only 2 that are kind of "flipped," as the cash effect will be transferred to investing or financing activities so you subtract it from operating activities where you think it would be added, and vice versa. The income statement indicates a company's success or failure in deriving a profit from its operations, it also reflects the inflow and outflow of cash from operating activities. A. True B. False B. Erroneous The inflow and outflow of cash from operating activities is basically what a cash flows statement is, not an income statement Given the items below, which of the following is an addition to net income to arrive at operating cash flows? I. Gain on sale of assets II. Decrease in Supplies III. Increase in Accounts Receivable IV. Decrease in Accounts Payable A. I and IV B. II. only C. III. and IV D. II. and III B. Decrease in Supplies (recorded as an expense, didn't require cash) (You allocate the cost of supplies over the course of its useful lifetime, so a decrease in supplies is recorded as an expense) Kensal Green, Inc. reports net income of $100,000. The accounting records reveal Depreciation Expense of $50,000 as well as increases in Prepaid Rent, Accounts Payable, and Income Tax Payable of $40,000, $40,000, and $30,000, respectively. What is the net cash flows from operating activities? A. $100,000 B. $140,000 C. $150,000 D. $180,000 D. $180,000 Net income less any decrease in cash and plus any increase in cash. Depreciation expense is added to net income, while an increase in prepaid rent uses cash so is subtracted, an increase in accounts payable (liabilities) means that cash has been gained and should therefore be added to net income, and then another increase in a liability of tax payable means cashed is gained and therefore added to net income. teh quik maff's = $180,000 Maida Vale Corporation sold a patent for cash. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. A. Operating activities section B. Investing activities section C. Financing activities section D. Does not appear on cash flow statement B. Investing activities section A patent is a long-term asset and should therefore be classified as an investing activity Which of the following is an example of a cash inflow from a financing activity? A. Cash dividends to shareholders. B. Redemption of a bond issue. C. Issuance of common stock. D. Purchase of treasury stock. C. Issuance of common stock Issuance of common stock falls under stockholders' equity which is classified as a financing activity, and since stock was issued, cash has been gained so it is an inflow. Brighton, Inc. issued 25,000 shares of $10 par value common stock for $300,000, purchased 10,000 shares of treasury stock with a par value of $10 for $250,000, and paid $50,000 in cash dividends. Net cash flows from financing activities totaled A. $0. B. $300,000. C. $50,000. D. $250,000. A. $0 Pretty straightforward; it's just the $ amount of common stock issued less treasury stock and dividends so $300,000 - 250,000 - 50,000 = 0 Woodcrest Corporation issued common stock for $50,000 to pay off a notes payable of the same amount. How will the transaction be reported on the Statement of Cash Flows? A. Financing activities - payment of a notes payable of $50,000. B. Financing activities - cash received of $50,000 for the issuance of common stock. C. Non‐cash activities disclosure. D. Both answers (a.) and (b.) are correct. C. Non-cash activities disclosure. Types of transactions 1) long‐term debt converted to common stock 2) long‐term debt issued or borrowed for a capital expenditure 3) declare & issue a stock dividend These are the 3 cases in which a transaction is recorded as a non-cash activity. This one is #1 on the list, since it's long-term debt converted to common stock, but I would also have #2 and #3 memorized. Which of the following would not be disclosed as a non-cash activity on the cash flow statement? A. long‐term debt converted to common stock B. current liabilities converted to external funds C. long‐term debt issued or borrowed for a capital expenditure D. declare & issue a stock dividend B. current liabilities converted to external funds The other 3 are the only types of non-cash activities that are disclosed on a balance sheet