Accounting Final Review PDF

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This is a study guide to cover Chapters 14, 15 and 16. This material is covered in Professor Kurz's final exam. ...

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Chapter 14 from the borrower’s viewpoint How are bonds priced and quoted  Bonds sold at face but often sold at an amount not at face. If you see something quoted at 98, it is 98% of face value. (A discount) 102 is a premium, above face.  Note payable is always at face. Sold at Discount: % is less than market value Sold at Premium: % is more than market value Market Price = Contract Rate then SOLD AT FACE The price of a bond is quoted as a percentage of the bond’s face value.  For example, a $1,000 bond quoted at 98 could be purchased or sold for $980 ($1,000 × 0.98).  Likewise, bonds quoted at 109 could be purchased or sold for $1,090 ($1,000 × 1.09) What factors impact the pricing of bonds  Industry, economy, treasury, credit worthiness of particular company The market rate of interest is affected by: 1. investors’ expectations of current earning power 2. future economic conditions. 3. The financial condition of the corporation How is bond discount or premium amortized, effective interest method and straight- line. What is preferred  Effective interest rate method is preferred. Interest is changing.  Straight Line method. Interest per year stays the same The effective interest rate method of amortization provides for a constant rate of interest over the life of the bonds. The straight-line method provides for a constant amount of interest expense each period. Bond Discount Amortization Debit: Interest expense (Add the Cash # and Discount #) Credit: Cash (Interest= $Amount x % x period) period is ½ if semiannual Discount on bonds payable (Discount # / number of terms) The effect of the discount amortization is to increase the interest expense on every semiannual interest payment date. This increases the contract rate of interest to a rate of interest that approximates the market rate

Bond Premium Amortization Debit: Interest Expense (Subtract Premium # from Cash#) Premium on bonds payable (Premium # / number of terms) Credit: Cash (Interest= $Amount x % x period) period is ½ if semiannual

The amortization of bond premium decreases the contract rate of interest on a bond to the market rate of interest that existed on the date the bonds were issued. How are bonds presented on the balance sheet Bonds payable and notes payable are reported as liabilities on the balance sheet.  Any portion of the bonds or notes that are due within one year is reported as a current liability.  Any remaining bonds or notes are reported as a long-term liability.  Any unamortized premium is reported as an addition to the face amount of the bonds.  Any unamortized discount is reported as a deduction from the face amount of the bonds What happens when a bond is paid off The carrying amount on the note is zero, which indicates that the note has been paid in full. Any assets that secured the note would be released by the bank. What types of bonds are there  Callable bonds- bonds that can be redeemed by the borrower before maturity  Serial bonds- each year a certain amount of bonds gets redeemed. Similar to installment loans.  Bonds- borrowing money over years and pay the money back over years Convertible Bonds: may be exchanged for shares of common stock Callable Bonds: may be redeemed by the borrower before maturity. Term bonds: When all bonds of an issue mature at the same time Serial bonds: If bonds mature over several dates What are the pros and cons of financing with bonds  CON: Interest, expensive requirement  PRO: Tax deduction ANSWERS FOUND IN 679-691

Powerpoint Chapter 14

When a corporation issues bonds, the proceeds received for the bonds depend on: 1. The face amount of the bonds, which is the amount due at the maturity date. 2. The interest rate on the bonds. 3. The market rate of interest for similar bonds

Redemption of bonds payable A gain is recorded if the price paid for the redemption is below the bond carrying amount. A loss is recorded if the price paid for the redemption is above the carrying amount.  reported in the Other income (loss) section of the income statement. FOR Example: A $300,000 redeemed at 104 with a carrying value of 316,000. (300,000 x 104%= 312,000) You paid 312,000 for a 316,000 bond . YOU GAINED $4,000 A $300,000 redeemed at 104 with a carrying value of 310,000. (300,000 x 104%= 312,000) You paid 312,000 for a 310,000 bond. YOU LOST $2,000 Installment Notes: Every period you pay interest. Each note payment includes principal and payment of interest on the outstanding balance. At the end of the note’s term, the principal will have been repaid in full. Installment notes are often used to purchase specific assets, such as equipment, and are often secured by the purchased asset.  When the note is secured by an asset, it is called a mortgage note.

6: The amount of the annual payment is calculated by using the present value concepts discussed in Appendix 1 at the end of this chapter. The annual payment of $5,698 is computed by dividing the $24,000 loan amount by the present value of an annuity of $1 for five periods at 6% (4.21236) from Exhibit 10 (rounded to the nearest dollar).  If semiannual: divide the % by 2 and look at the chart

Chapter 15 from the investors view points Understand differences in accounting for available for sale and trading securities- Know what is included in cost, How dividends received are recorded and What happens when investments are sold  Trading- active trading securities, businesses  Available for sale- stocks and equities  Cost should be considered for both plus commissions is how cost is recorded  When dividend is received, it is revenue  When sold, you are measuring gain or loss against cost Debt securities: are notes and bonds that pay interest and have a fixed maturity date. Equity securities: are preferred and common stocks that represent ownership in a company and do not have a fixed maturity date.  Investments in debt securities and equity securities, termed investments or temporary investments, are reported in the Current Assets section of the balance sheet. Trading securities: debt and equity securities that are purchased and sold to earn short-term profits from changes in their market prices.  Trading securities are often held by banks, mutual funds, insurance companies, and other financial institutions.  reported as a current asset on the balance sheet. Available-for-sale securities: are debt and equity securities that are neither held for trading, held to maturity, nor held for strategic reasons.  Changes in the fair values of available-for-sale securities are reported as part of stockholders’ equity and, thus, excluded from the income statement. The purchase of bonds is recorded by debiting an investments account for the purchase price of the bonds, including any brokerage commissions.  A brokerage commission is the fee charged by the agent who arranges the transaction between the buyer and seller. If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment.  This is because the seller has earned the accrued interest, but the buyer will receive the accrued interest when it is paid. Understand the use of equity method of accounting for 20- 50% investments of common stock including entries for the purchase, dividends, share of income sale  Equity method- 20-50% equity accounting.  

stock primarily for strategic reasons, such as developing a supplier relationship. the investment account is adjusted for the investor’s share of the net income and dividends of the investee.

What is done when bonds are purchased between interest payment dates  In the bond agreement

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If bought at face, pay interest on dates requires bond investment and bond interest

LOOK AT PAGE 9-10 for ACCRUED INTEREST How are investments valued at reporting periods including of valuation accounts, calculation of portfolio value and adjustments  Market value, quoted market prices ANSWERS FOUND ON 725-735 Powerpoint Chapter 15 The primary objective of investing in temporary investments is to: 1. earn interest revenue. 2. receive dividends. 3. realize gains from increases in the market price of the securities.  

Investments in certificates of deposit and other securities that do not normally change in value are disclosed on the balance sheet as cash and cash equivalents. Such investments are held primarily for their interest revenue.

Long-term investments often involve the purchase of a significant portion of the stock of another company. Such investments usually have a strategic purpose: 1. Reduction of costs. 2. Replacement of management. 3. Expansion. 4. Integration. Less than 20% ownership: COST METHOD  the investor is considered to have no control over the investee More than 50% ownership: CONSOLIDATION  the investor is considered to have control over the investee. The purchase is termed a business combination.  A corporation owning all or a majority of the voting stock of another corporation is called a parent company.  The corporation that is controlled is called the subsidiary company.  At the end of the year, the financial statements of the parent and subsidiary are combined and reported as a single company. These combined financial statements are called consolidated financial statements The company investing in another company’s stock is the investor. The company whose stock is purchased is the investee.  The percent of the investee’s outstanding stock purchased by the investor determines the degree of control that the investor has over the investee

Held-to-maturity securities are debt investments, such as notes or bonds, that a company intends to hold until their maturity date.  primarily purchased to earn interest revenue.  If a held-to-maturity security will mature within a year, it is reported as a current asset on the balance sheet.  Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.  Only securities with maturity dates, such as corporate notes and bonds, are classified as held-to-maturity securities.  Equity securities are not held-to-maturity securities because they have no maturity date.  Held-to-maturity bond investments are recorded at their cost, including any brokerage commissions.  If the interest rate on the bonds differs from the market rate of interest, the bonds may be purchased at a premium or discount.  In such cases, the premium or discount is amortized over the life of the bonds.  Held-to-maturity bond investments are reported on the balance sheet at their amortized cost.

Chapter 16 statement of cash flows What is included in operating, investing, and financing sections operating - working capital accounts- net income Investing- anything u put into the business- long term equipment. Ex. patents or spare money

financing- borrowing, issuing notes or stocks -Understand the indirect method- what adjustments are made to net income (loss) to arrive at cash flows from operations -Understand the impacts of working capital items on each flow -Know what do you do with cash/ non-cash items -Know format and how to compare balance sheets

Cash flows from operations, always start with net income/loss Noncash items like depreciation, amortization ADD Gain on sale (investments/land) SUBTRACT Loss on sale (investments/land) ADD

Current Assets Increase SUBTRACT Current Assets Decrease ADD Current Liabilities Increase ADD Current Liabilities Decrease SUBTRACT Statement of Cash Flow Indirect Method

What is free cash flow Net cash flow from operating SUBTRACT (Net cash flow from investing x % used) ANSWERS ON PAGE 774-787

Other matters; pulling it all together Earnings per share Net Income-Preferred Dividend / number of common shares outstanding Dividends per share Amount distributed in the year. Determine how much money preferred stockholders must receive. Carry over that amount to the next year IF NOT ENOUGH in a single year. Determined by multiple number of shares and par. Dividends per share = amount available for common stockholders/ # of outstanding common stock Dividend yield Dividends per share of common stock/ market price of common stock Working capital Current Assets - Current Liabilities Current ratio Current Assets / Current Liabilities

Horizontal, vertical and common size analysis (Worksheets) Horizontal year to year Vertical- measuring sales Common size- is comparing it to other companies

Chapter 16 Powerpoint Facts The statement of cash flows provides useful information about a company’s ability to do the following: 1. Generate cash from operations 2. Maintain and expand its operating capacity 3. Meet its financial obligations 4. Pay dividends The primary advantage of the direct method is that it directly reports cash receipts and cash payments in the statement of cash flows. Its primary disadvantage is that these data may not be readily available in the accounting records.  Thus, the direct method is normally more costly to prepare and, as a result, is used infrequently in practice The indirect method reports cash flows from operating activities by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt of cash or payment of cash

A primary advantage of the indirect method is that it reconciles the differences between net income and net cash flows from operations. Because the data are readily available, the indirect method is less costly to prepare than the direct method.  As a result, the indirect method of reporting cash flows from operations is most commonly used in practice

MIDTERM FACTS            

Cash dividends become a liability to a corporation on the date of DECLARATION The Cost Method of accounting for the purchase and sale of treasury stock is a commonly used method The declaration and issuance of a stock dividend do not affect the total amount of assets, liabs, and equity. The face value of term bond is payable at a single specific date in the future. Premium on bonds payable may be amortized by the straight line method if the results obtained by its use do not materially differ from the results obtained by use of interest method. To determine the six month interest payment: Stated rate x Amount x Period Common Stockholders DO NOT have the right to receive a minimum amount of dividends Bond Indenture: legal document indicates all data Effective interest method: amortization of the bond premium decreases interest expense Liability is created and recorded on declaration day Date of record= no entry. Just determines which stockholder will receive a dividend Date of payment= entry to payoff the payable o 1st entry: Debit: Cash Dividends Credit: Cash dividends payable  2nd entry: NOTHING 3rd entry: Debit Cash dividends payable Credit Cash Sold at Premium decreases total interest expense Sold at Discount increases total interest expense Bondholders’ claims rank ahead of stockholders’ claims 

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