Final Exam - Part 2 (CONCEPTUAL)

Question 1

When an interest rate is called “Stated, Coupon, or Nomial,” what does this mean?

Answer 1

rate written in the terms of the bond indenture

Question 2

When an interest rate is called “Effective, Yield, or Market,” what does this mean?

Answer 2

rate that provides an acceptable return commensurate with the issuer’s risk; rate of interest ACTUALLY earned by the bondholders

Question 3

When are Bond Interest Payments usually made? And how are interest rates expressed?

Answer 3

payments made semi-annually

interest rates expressed as an ANNUAL rate

Question 4

What is the valuation of:

Market rate = Stated rate

Answer 4

Par

Question 5

What is the valuation of:

Market rate > Stated rate

Answer 5

Discount

Question 6

What is the valuation of:

Market rate < Stated rate

Answer 6

Premium

Question 7

If a bond is issued at DISCOUNT, what is amortization doing to interest expense, and how is this reported on the Balance Sheet?

Answer 7

amortization INCREASES interest expense

reported as “net reduction” of bond’s face amount

Question 8

If a bond is issued at PREMIUM, what is amortization doing to interest expense, and how is this reported on the Balance Sheet?

Answer 8

amortization DECREASES interest expense

reported as “net increase” of bond’s face amount

Question 9

What is the difference between the Straight-Line and Effective Interest methods for amortization?

Answer 9

Straight-Line:
Discount or Premium / # of periods

Effective Interest:
Amortization Amount = Bond Int. Exp - Bond Interest paid

Question 10

If a bond is issued between interest dates, what does the BUYER OF THE BOND do?

Answer 10

pay the seller the INTEREST ACCRUED from the last interest payment date to the date of the issue

Question 11

What are the 2 categories of Stockholders’ Equity?

Answer 11

1. Contributed Capital: stock and additional paid-in-capital
2. Earned Capital: retained earnings

Question 12

TRUE/FALSE:

The maximum number of shares that can be issued (sold) to the public are known as AUTHORIZED.

Answer 12

True

Question 13

Which of the Issued stocks are dividends paid on?

Answer 13

Outstanding common stock

Question 14

Which of the Issued stocks are issued, sold, and reacquired by the company?

Answer 14

Treasury common stock

Question 15

What does Treasury stock do to the SE of a company?

Answer 15

DECREASES SE

Question 16

Stock that is referred to as “Unissued” is what?

Answer 16

never been sold

Question 17

What is the Cost Method?

(when referring to the purchase of treasury stock)

Answer 17

Company purchases stock back at COST (not par value)

Question 18

Which of the following requires a JE regarding dividends?

Date of Declaration
Date of Record
Date of Payment

Answer 18

Date of Declaration - JE

Date of Record - NO JE

Date of Payment - JE

Question 19

What are the two types of dividends?

Answer 19

1. Cash - reduced SE
2. Stock - distributes no asset; reclassification of SE

Question 20

What are the two main reasons for companies to issue convertible debt?

Answer 20

1. to RAISE equity capital without giving up ownership control
2. to OBTAIN debt financing at cheaper rates

Question 21

What are Convertible Preferred Stock?

Answer 21

conversion of preferred stock into common stock
-requires par value of CS issued over the carrying amount of the preferred being converted REDUCED retained earnings

Question 22

What are Convertible Stock Warrants?

Answer 22

long-term options to buy common stock at a FIXED PRICE
-allocated using FMV

Question 23

What is the difference between the Proportional Method and the Incremental Method?

(regarding convertible stock warrants)

Answer 23

Proportional: FV of each class of security is known

Incremental: CANNOT determine FV of ALL classes of securities; know one FV, allocate remainder of purchase price to security whose FV is not known

Question 24

What are Convertible Stock Options?

Answer 24

compensation expense based on FV on grant date

Question 25

For Stock Compensation Plans, GAAP requires companies to recognize compensation expense using what method?

Answer 25

FMV

Question 26

In general, a company recognizes compensation expense in what period?

Answer 26

Service Period -periods in which its employees perform the service

Question 27

What does "dilutive" refer to in EPS?

Answer 27

ability to influence the EPS in a DOWNWARD DIRECTION

Question 28

In a Simple Capital Structure, are there any potentially dilutive securities?

Answer 28

No - it is just common stock

Question 29

What is the formula for Basic EPS?

Answer 29

Net Income - Preferred Dividends / Weighted-Average Number of Shares O/S

Question 30

Preferred Stock can either be Cumulative or Non-cumulative. Which of these do you deduct the annual preferred dividend only if declared?

Answer 30

Non-cumulative = only if declared Cumulative = always, whether declared or not

Question 31

In Equity Securities, the valuation is FAIR VALUE when the holding is ____________.

Answer 31

<20% and no significant influence -records only dividend income when investee declares a dividend -AFS - adjust to FV at year-end

Question 32

In Equity Securities, the valuation is EQUITY when the holding is _________________.

Answer 32

between 20-50% and significant influence exists -records a % of investee's income as an INCREASE to investment account -records a % of dividend declared as a REDUCTION to investment account

Question 33

In Equity Securities, the valuation is CONSOLIDATION when the holding is _________.

Answer 33

>50%

Question 34

With the new FASB/IASB Standard, what approach was adopted for Revenue Recognition?

Answer 34

asset-liability approach

Question 35

What are the 5 Steps in the Revenue Recognition Process? (HINT: "ISTAR")

Answer 35

1. IDENTIFY the contract with customers 2. Identify the SEPARATE performance obligations in the contract 3. Determine the TRANSACTION price 4. ALLOCATE the transaction price to the separate performance obligations 5. RECOGNIZE revenue when each performance obligation is satisfied

Question 36

When does the Completed Contract method recognize revenue and gross profit?

Answer 36

ONLY when the contract is COMPLETED

Question 37

When does the Percentage of Completion method recognize revenue and gross profit?

Answer 37

EACH PERIOD based upon the progress of the construction

Question 38

What method do companies use in financial reporting (GAAP)?

Answer 38

full accrual method ("pretax financial income")

Question 39

What method do companies use in tax reporting?

Answer 39

modified cash basis ("taxable income")

Question 40

What is the difference between Temporary and Permanent timing differences?

Answer 40

Temporary = reverse themselves in subsequent accounting periods Permanent = DO NOT reverse

Question 41

What is a Deferred Tax Liability (DTL)?

Answer 41

Financial Income > Taxable Income -Revenue is deferred for TAX PURPOSES, but not financial reporting purposes -Expense is deferred for FINANCIAL REPORTING PURPOSES, but not tax purposes

Question 42

What is Deferred Tax Asset (DTA)?

Answer 42

Financial Income < Taxable Income -Revenue is deferred for FINANCIAL REPORTING PURPOSES, but not tax purposes -Expense is deferred for TAX PURPOSES, but not financial reporting purposes

Question 43

What must Pension Plans account for?

Answer 43

-Measuring the AMOUNT of pension obligation -Disclosing the STATUS and EFFECTS of the plan in the financial statements - Allocating the COST of the plan to the proper periods

Question 44

TRUE/FALSE: Pension expense may be equal to, greater than, or less than the amount funded

Answer 44

True

Question 45

What are the components of Pension Expense?

Answer 45

Service Cost + Interest on PBO - Return on Plan Assets + Amortization of Prior Service Costs

Question 46

If PBO > FV of plan assets, the pension is ________.

Answer 46

Underfunded

Question 47

If PBO < FV of plan assets, the pension is ________.

Answer 47

Overfunded

Question 48

What is a lease?

Answer 48

contractual agreement between a lessor and a lessee that gives the LESSEE the RIGHT to use specific property owned by the lessor for a specified period of time

Question 49

Are ALL long-term leases (>12 months) recorded on the balance sheet?

Answer 49

YES

Question 50

What are the two classifications of leases?

Answer 50

1. Finance (must meet at least 1 of the classification tests to be this) 2. Operating

Question 51

In which section would the CURRENT PORTION (<12 months) of disclosure for lease receivable/liability be found in the financial statement?

Answer 51

current receivable/liability section (lease and interest)

Question 52

In which section would the REMAINDER of disclosure for lease receivable/liability be found in the financial statement?

Answer 52

long-term asset/liability section (>12 months, noncurrent)

Question 53

PROBLEM III: (MATCHING): Changes in Principle What are examples of changes in principles, and how are they reported?

Answer 53

-LIFO to FIFO -Completed Contract Method to Percentage of Completion Method RETROSPECTIVELY -must adjust financial statements for each prior period presented -adjusts beginning retained earnings balance

Question 54

PROBLEM III: (MATCHING): Changes in Accounting Estimates What are examples of changes in accounting estimates, and how are they reported?

Answer 54

1. Uncollectible receivables 2. Inventory obsolescence 3. Useful life and salvage value of assets 4. Periods benefited by deferred costs 5. Liabilities for warranty costs and income taxes 6. Recoverable mineral reserves 7. Change in depreciation methods PROSPECTIVELY -changes in CURRENT year and future periods

Question 55

PROBLEM III: (MATCHING): Changes in Accounting Errors What are examples of changes in accounting errors, and how are they reported?

Answer 55

1. Change from an accounting principle that is NOT generally accepted to an accounting policy that is acceptable (e.g., cash basis to accrual basis) 2. Mathematical mistakes 3. Changes in estimates that occur because a company did not prepare the estimates in good faith 4. Failure to accrue or defer certain expenses ore revenues 5. Misuse of facts 6. incorrect classification of a cost as an expense instead of an asset (vice versa) -reported as a PRIOR PERIOD ADJUSTMENT -restate PRIOR YEAR (retrospective) by ADJUSTING beginning Retained Earnings balance

Question 56

Broadly, what does the Operating section of the Statement of Cash Flows show a change in?

Answer 56

Current Assets and Current Liabilities

Question 57

Broadly, what does the Investing section of the Statement of Cash Flows show a change in?

Answer 57

Long Term Assets

Question 58

Broadly, what does the Financing section of the Statement of Cash Flows show a change in?

Answer 58

Long-Term Liabilities and Stockholders' Equity

Question 59

Per FASB, what are Cash Equivalents?

Answer 59

short-term, highly liquid investments that are: -readily convertible to known amounts of cash -so near their maturity that they present an insignificant risk of changes in interest rates (i.e. 3 months or less)

Question 60

What does the Full Disclosure Principle call for in financial reporting?

Answer 60

financial reporting of ANY financial facts SIGNIFICANT enough to INFLUENCE the judgement of an informed reader

Question 61

One of the Notes to Financial Statements is a "Summary of Significant Accounting Policies" (Footnote 1). What are some examples that would be shown here?

Answer 61

-Allowance for Doubtful Accounts -Inventory valuation -PP&E -Revenue Recognition -Intangible Assets

Question 62

What are the two types of Subsequent events?

Answer 62

TYPE 1: events that provide additional evidence about conditions that existed AT THE BALANCE SHEET DATE, which requires an adjustment to the financial statements if material TYPE 2: events that provide additional evidence about conditions that existed SUBSEQUENT TO THE BALANCE SHEET DATE (i.e., following), which requires a disclosure if material

Question 63

What are examples of Type 1 and Type 2 Subsequent Events?

Answer 63

Type 1: loss on a lawsuit after year-end that was uncertain at year-end; material loss on a year-end receivable due to customer bankruptcy Type 2: loss of plant or inventories from a fire after year-end; merger with another company; issuance of a significant number of ordinary shares