Chapters 6 - 8

Question 1

What are tangible assets?

Answer 1

Assets that have a physical presence; they can be seen or touched such as equipment, machinery, natural resources and land.

Question 2

What are intangible assets?

Answer 2

Assets that are rights or privileges, such as a patent or copyrights.

Question 3

What are cost components of buildings?

Answer 3

• Purchase Price
• Sales Taxes
• Title search and transfer document costs
• Realtor’s and attorney’s fees
• Remodeling costs

Question 4

What are the cost components of land?

Answer 4

• Purchase price
• Sales taxes
• Title search and transfer document costs
• Realtor’s and attorney’s fees
• Costs for removal of old buildings
• Grading costs

Question 5

What are the cost components of equipment?

Answer 5

• Purchase price (less discounts)
• Sales taxes
• Delivery costs
• Installation costs
• Costs to adapt for intended use

Question 6

Acquiring a group of assets in a single transaction is known as what?

Answer 6

A basket purchase

Question 7

What are the 3 methods of depreciation?

Answer 7

1. Straight line
2. Double-declining balance (accelerated)
3. Units of Production

Question 8

The amount of an asset’s cost that is allocated to expense during an accounting period is called what?

Answer 8

Depreciation expense

Question 9

What is the formula for straight line depreciation?

Answer 9

Cost-Salvage/Useful life (years)

Question 10

What is the formula for double declining balance depreciation?

Answer 10

(Cost - Accumulated Depreciation) x 2(straight line rate)

Question 11

What is the formula for the units of production depreciation?

Answer 11

Cost - Salvage/Units of production x annual usage

Question 12

How do you determine the book value?

Answer 12

Cost - Accumulated Depreciation = Book Value

Question 13

Can an asset be depreciated below its salvage value?

Answer 13

No - this is true for any depreciation method used

Question 14

What are maintenance costs?

Answer 14

The costs of routine maintenance and minor repairs that are incurred to keep an asset in good working order. These costs are expensed in the period in which they are incurred.

Question 15

What are capital expenditures?

Answer 15

Substantial amounts spent to improve the quality or extend the life of an asset. These costs are accounted for in the one two ways, depending on whether the cost incurred improves the quality or extends the life of the asset.

Question 16

How does improving the quality of the asset affect depreciation?

Answer 16

The amount is added to the historical cost of the asset and the additional cost is expensed through higher depreciation charges over the asset’s remaining useful life.

Question 17

How does extending the life of an asset affect depreciation?

Answer 17

It cancels some of the depreciation previously charged to expense. The event is still an asset exchange; cash decreases, and the book value increases. However, the increase in the book value results from reducing the balance in the contra asset account, Accumulated Depreciation.

Question 18

What is the process of expensing natural resources called and what is the most common method used to account for this?

Answer 18

Depletion; units of production

Question 19

What is goodwill and how is it calculated?

Answer 19

Goodwill is the value attributable to favorable factors such as reputation, location, and superior products. It is calculated by taking the difference between the purchase price and the fair market value of the assets.

Price Paid - FMV of Net Assets Acquired = Goodwill

Question 20

What is treasury stock?

Answer 20

When a company buys back its own stock

Question 21

What are some reasons why a company would buy back its own stock?

Answer 21

1. To have stock available to give employees pursuant to stock option plans
2. To accumulate stock in preparation for a merger
3. To reduce the number of shares outstanding in order to increase earnings per share
4. To keep the price of the stock high when it appears to be falling
5. To avoid a hostile takeover

Question 22

What are 3 significant dates that affect cash dividends? Describe how they affect the financial statement.

Answer 22

1. Declaration date - when the liability is recognized, decrease in RE but no affect on income statement
2. Date of record - cut off date, does not affect the financial statement
3. Payment date - dividend actually paid. Cash and Dividends Payable decrease, along with cash flow as a FA. Income statement not affected

Question 23

Is interest classified as a Financial, Operating or Investing Activity?

Answer 23

Operating Activity

Question 24

What is a contingent liability?

Answer 24

A potential obligation arising from a past event.

Question 25

What are the 3 categories for contingent liabilities?

Answer 25

1. Probable of occurring and reasonably estimated 2. Reasonably possible; notable to estimate 3. Remote likelihood of occurrence

Question 26

What actions are to take place on the financial statement for each of the 3 types of contingent liabilities?

Answer 26

1. Probable of occurring and reasonably estimated - Accrue expenses/liabilities and disclose in notes in financial statement (required) 2. Reasonably possible; notable to estimate - Disclose nature of matter and management's response in notes to financial statements 3. Remote likelihood of occurrence - Not accrual or disclosure

Question 27

How does recognizing a warranty affect the financial statement?

Answer 27

Increases liabilities (warranties payable), reduces stockholder's equity (retained earnings), increases expenses and decreases net income

Question 28

What are the 3 forms of businesses?

Answer 28

1. Sole proprietorships 2. Partnerships 3. Corporation

Question 29

What is a closely held corporation?

Answer 29

Exchanges (the buying and selling of shares of stock) are limited to transactions between individuals

Question 30

The price an investor must pay to purchase a share of stock is called what?

Answer 30

Market Value

Question 31

How do you calculate book value per share?

Answer 31

Dividing total SE (assets - liabilities) by the number of shares of stock owned by investors

Question 32

When a corporation buys back some of its issued stock from the public, the repurchased stock is called what?

Answer 32

Treasury stock

Question 33

Describe some characteristics of common stock

Answer 33

- Bear the highest risk of losing their investment if a company is forced to liquidate - True owners of the company - Voting rights - Elect BOD - Receive dividends

Question 34

Describe some characteristics of preferred stock

Answer 34

- No voting rights - Receive a specified dividend amount (cumulative/non-cumulative) - Preference in liquidation

Question 35

What are dividend in arrears?

Answer 35

Cumulative dividends that have not been paid

Question 36

Any amount received above the par or stated value is recorded in an account called what?

Answer 36

Paid in Capital in Excess of Par (or stated) Value

Question 37

The number of shares can be verified by dividing what by what?

Answer 37

The total amount of common stock by the par value

Question 38

True or False: The buying and selling of stock affects the income statement

Answer 38

False - there is no affect on the income statement with the distribution of stocks

Question 39

What is a stock dividend?

Answer 39

When a company decides to distribute additional shares of stock to stockholders instead of a cash dividend

Question 40

How does a stock dividend affect the financial statement?

Answer 40

decrease RE, increase in Common Stock and PIC in Excess for Common Stock based on par vs the market value of the stock. No affect on assets or income statement.

Question 41

What happens to the market value of the stock when a stock dividend is issued?

Answer 41

The market value per share declines. A lower stock price makes the stock more affordable and may increase demand for the stock, which benefits both the company and its stockholders.

Question 42

What is a stock split?

Answer 42

A stock split replaces existing shares with a greater number of new shares. Any par or stated value of the stock is proportionately reduced to reflect the new number of shares outstanding.

Question 43

How does a stock split affect the financial statement?

Answer 43

No affect on the dollar amount of assets, liabilities, and stockholders' equity. They affect only the number of shares of stock outstanding on the balance sheet.

Question 44

What is double taxation and who does it apply to?

Answer 44

Income reported is reported on the corporation's income tax return and a second time when distributions are reported on an individual owners' tax returns.