Term
| What are the advantages of a corporation? |
|
Definition
-Separate legal existence
-Limited liability of stockholders
-Transferable ownership rights
-Continuous life |
|
|
Term
| What are the disadvantages of a corporation? |
|
Definition
-Government regulations
-Additional taxes
-Corporation management |
|
|
Term
| What is corporation management? |
|
Definition
| The separation of ownership and management |
|
|
Term
| Term: Chief accounting officer |
|
Definition
|
|
Term
| What are the three duties of a controller? |
|
Definition
1) Maintain accounting records
2) Maintain adequate system of internal control
3) Prepare financial statements, tax returns, and internal reports |
|
|
Term
| What are the government regulations issued on corporations? |
|
Definition
-Requirements for issuing stock
-Distributions of earnings to stockholders
-Acceptable methods for retiring stock |
|
|
Term
| How much taxes are taken out of the taxable income of corporations? |
|
Definition
|
|
Term
| How many times are corporations' incomes taxed? |
|
Definition
| Twice - income and dividends |
|
|
Term
| Term: Hybrid company allowing for legal treatment as corporation but no double taxation (like a partner) and no more than 75 stockholders |
|
Definition
|
|
Term
| What are some other forms of organizations? |
|
Definition
-Limited partnership
-Limited liability partnership
-Limited liability company |
|
|
Term
| How can a corporation be formed? |
|
Definition
| By the grant of a state charter in only one state but can have many operating divisions |
|
|
Term
| Term: Document that describes the name, purpose, types and number of shares of stock authorized to be issued, names of individuals who formed company, and number of shares they agreed to purchase |
|
Definition
|
|
Term
| Term: Establish internal rules and procedures for conducting a corporation's affairs |
|
Definition
|
|
Term
| Term: Subjects corporation's operating activities to general corporation laws of the state |
|
Definition
|
|
Term
| Term: First type of stock established |
|
Definition
|
|
Term
| Term: Proof of stock ownership |
|
Definition
|
|
Term
| What does the face of a stock certificate show? |
|
Definition
| Name of corporation, stockholder's name, class and special features of stock, number of shares owned, and signature of authorized corporate official |
|
|
Term
| Why are certificates prenumbered? |
|
Definition
|
|
Term
| What are a few stockholders' rights? |
|
Definition
-Vote in board of elections
-Vote on actions requiring approval
-Share corporate earnings through dividends |
|
|
Term
| Term: Same percentage of shares when new shares issued |
|
Definition
|
|
Term
| Term: Owners are paid leftover assets after other claims |
|
Definition
|
|
Term
| Term: Amount of stock the corporation is authorized to sell |
|
Definition
|
|
Term
| Does authorization of stock require a formal entry? |
|
Definition
|
|
Term
| Term: How closely held companies issue stock |
|
Definition
|
|
Term
| Term: Publicly-held companies have investment banking firms bring securities to the attention of potential investors. |
|
Definition
|
|
Term
| Term: Capital stock assigned a value per share in corporate charter |
|
Definition
|
|
Term
| Term: Amount of stock not available for withdrawal by stockholders |
|
Definition
|
|
Term
| Term: Value the market puts on an item |
|
Definition
|
|
Term
| Term: Capital stock that hasn't been assigned a value in the corporate charter |
|
Definition
|
|
Term
| Term: Value of no-par shares |
|
Definition
|
|
Term
| True/False: In the past, many states did not require shares to be sold above par |
|
Definition
|
|
Term
| True/False: No-par stock is common today |
|
Definition
|
|
Term
| Term: Amount stockholders paid to corporation in exchange for ownership |
|
Definition
| Paid-in (contributed) capital |
|
|
Term
| Term: Earned capital held for future use |
|
Definition
|
|
Term
| What are the two steps in issuing common stock? |
|
Definition
1) Identify specific sources of paid-in capital
2) Maintain distinction between paid-in capital and retained earnings |
|
|
Term
| True/False: Issuance of common stock affects only paid-in capital accounts |
|
Definition
|
|
Term
| Journalize the entry for issuing common stock |
|
Definition
[Cash ]
[ Common Stock ]
[ Paid-in Capital in Excess of Par] Value |
|
|
Term
| Term: Corporation's own stock reacquired for future use |
|
Definition
|
|
Term
| Why do corporations purchase treasury stock? |
|
Definition
-To reissue to officers as bonuses/stock compensation plans
-They believe stock is underpriced
-Additional shares for use in acquiring other companies
-Reduce shares outstanding
-Increase earnings per share
-Buying out/eliminating hostile shareholders |
|
|
Term
| Term: Companies increase treasury stock by price paid to reacquire and credit by this price when sold |
|
Definition
|
|
Term
| True/False: Companies show treasury stock as an addition to total paid-in capital and retained earnings |
|
Definition
| False, shown as a deduction |
|
|
Term
As shown by the balance sheet:
Number of shares issued - treasury shares = |
|
Definition
| Number of shares outstanding |
|
|
Term
| Term: Number of shares issued that are being held by stockholders |
|
Definition
|
|
Term
| Journalize the entry to show acquisition of treasury stock |
|
Definition
|
|
Term
| Term: Has contractual provisions that give preference over common stock for dividends, liquidating assets, etc. |
|
Definition
|
|
Term
| On the balance sheet, which type of stock is listed first? |
|
Definition
| Preferred stock is before common stock |
|
|
Term
| Term: Preferred stockholders must be paid current and unpaid dividends |
|
Definition
|
|
Term
| Term: Dividends cumulative; any undeclared dividends owed |
|
Definition
|
|
Term
| Are dividends in arrears considered a liability? |
|
Definition
|
|
Term
| Where should companies disclose the amount of dividends in arrears? |
|
Definition
| In notes of financial statements |
|
|
Term
| Term: Distribution by a corporation to its stockholders on a pro rata basis |
|
Definition
|
|
Term
|
Definition
| Pecent of shares you own is the percent of dividend you recieve |
|
|
Term
| What are the different forms of dividends? |
|
Definition
Cash
Property
Scrip (Promissory note)
Stock |
|
|
Term
| How are dividends generally reported? |
|
Definition
| Quarterly as a dollar amount per share |
|
|
Term
| Term: Pro rata cash distribution to stockholders |
|
Definition
|
|
Term
| For a corporation to pay dividends it must have ____ |
|
Definition
-Retained earnings
-Adequate cash
-Declared dividends |
|
|
Term
| Dividends from legal capital ____ in most states |
|
Definition
|
|
Term
| Dividends from excess paid-in capital ____ in some states |
|
Definition
|
|
Term
| Dividends from retained earnings ____ in all states |
|
Definition
|
|
Term
| What do investors looking for regular dividends look for? |
|
Definition
|
|
Term
| What do investors looking for growth in stock price look for? |
|
Definition
| Companies that retain their earnings |
|
|
Term
| Which dates are important for cash dividend entries? |
|
Definition
|
|
Term
| Term: Board of directors formally authorizes the cash dividend and announces it to stockholders |
|
Definition
|
|
Term
| Journalize the entry to record the declaration of a cash dividend |
|
Definition
[Cash Dividends ]
[ Dividends Payable] |
|
|
Term
| Term: Company determines ownership of outstanding shares for dividend purposes |
|
Definition
|
|
Term
| Term: Company makes cash dividend payments to stockholders on record |
|
Definition
|
|
Term
| Journalize the entry to record the payment of dividends |
|
Definition
[Dividends Payable]
[ Cash ] |
|
|
Term
| Declaration and payment entries decrease...? |
|
Definition
| Both stockholders' equity and total assets |
|
|
Term
| Term: Pro rata distribution of corporation's own stock to shareholders |
|
Definition
|
|
Term
| What does a stock dividend result in? |
|
Definition
| A decrease in retained earnings and an increase to paid-in capital |
|
|
Term
| Why are stock dividends issued? |
|
Definition
-Satisfy stockholders without spending cash
-Decrease market price per share
-Company is reinvesting |
|
|
Term
| Legally, the per share amount must be less than or equal to...? |
|
Definition
|
|
Term
| Term: Less than 20-25% issued stock |
|
Definition
|
|
Term
| Term: Greater than 20-25% issued stock |
|
Definition
|
|
Term
| What value is used to record large stock dividends? |
|
Definition
|
|
Term
| What does issuing a stock dividend do? |
|
Definition
-Change the composition of stockholders' equity but the total stockholders' equity remains the same
-Number of shares outstanding increases |
|
|
Term
| What do stock splits result in? |
|
Definition
| A reduction in the par/stated value per share |
|
|
Term
| What is the purpose of a stock split? |
|
Definition
| Increase marketability and lowers market value per share |
|
|
Term
| True/False: The effect on paid-in capital is inversely proportional to the size of the split, but the split has no effect on paid-in capital, retained earnings, and total stockholders' equity |
|
Definition
|
|
Term
| Does a stock split need to be journalized? |
|
Definition
|
|
Term
Show how a stock dividend effects the following items:
Paid-in capital
Retained earnings
Par value
Par value per share |
|
Definition
Increase
Decrease
Increase
No change |
|
|
Term
Show how a stock split effects the following items:
Paid-in capital
Retained earnings
Par value
Par value per share |
|
Definition
No change
No change
No change
Decrease |
|
|
Term
| Term: Net income company retains in business |
|
Definition
|
|
Term
| Term: Expenses exceed revenue; Decreases retained earnings |
|
Definition
|
|
Term
| Term: Debit balance in retained earnings |
|
Definition
|
|
Term
| What are the two parts of paid-in capital? |
|
Definition
| Capital stock and additional paid-in capital |
|
|
Term
| Term: Preferred and common stock |
|
Definition
|
|
Term
| Term: Excess of par/stated value |
|
Definition
| Additional paid-in capital |
|
|
Term
| Term: Percentage of cash dividend earnings to common stockholders |
|
Definition
|
|
Term
|
Definition
Total cash dividends to common stockholders
------------------------------
Net income |
|
|
Term
| What do high growth rates signal? |
|
Definition
|
|
Term
| Return on common stockholders' equity |
|
Definition
Net income - preferred stock dividend
-------------------------------------
Average common stockholders' equity |
|
|
Term
| What are the advantages of bonds? |
|
Definition
-Stockholder control not affected
-Tax savings
-Return on stockholders' equity may be higher |
|
|
Term
| How can you increase the return on common stockholder's equity? |
|
Definition
| Either increase return on assets or increase reliance on debt financing |
|
|
Term
| What happens if the return on assets rate exceeds the rate paid on debt? |
|
Definition
| Company will increase return on common stockholders' equity by the use of debt |
|
|
Term
|
Definition
|
|
Term
| Term: Money tomorrow is worth more than money today due to interest |
|
Definition
|
|
Term
| Term: Original amount borrowed/invested |
|
Definition
|
|
Term
| Term: Annual percentage of principal |
|
Definition
|
|
Term
| Term: Number of years principal is borrowed/invested |
|
Definition
|
|
Term
| Term: Value at a future date of a given amount invested, assuming compound interest |
|
Definition
| Future value of a single amount |
|
|
Term
| Term: Series of equal dollar amounts to be paid/received periodically |
|
Definition
|
|
Term
| Give an example of annuities |
|
Definition
|
|
Term
| Term: Sum of all payments plus accumulated compound interest |
|
Definition
| Future value of an annuity |
|
|
Term
| Term: Value now of a given amount to be paid/received in the future |
|
Definition
|
|
Term
| Term: Process of determining the present value |
|
Definition
| Discounting the future amount |
|
|
Term
| Term: Value now of a series of future payments, discounted assuming compound interest |
|
Definition
| Present value of an annuity |
|
|
Term
| Term: Interest computed on principal only |
|
Definition
|
|
Term
| How is the rate of interest usually stated? |
|
Definition
|
|
Term
|
Definition
|
|
Term
| Future value of a single amount formula |
|
Definition
|
|
Term
| In order to compute the future value of an annuity, what do you need? |
|
Definition
-Interest rate
-Number of compounded periods
-Amount of periodic payments |
|
|
Term
| In order to compute the present value of an annuity, what do you need? |
|
Definition
-Dollar amount of periodic payments
-Number of discounted periods
-Discount rate |
|
|
Term
| How do you calculate the present value of a single amount? |
|
Definition
Future value
------------
(1+i)^n |
|
|
Term
| Give an example of an annuity |
|
Definition
-Loan agreements
-Installment sales
-Mortgage notes
-Lease contracts
-Pension obligations |
|
|
Term
| What does the present value of bonds equal if the market interest rate = bond's contractual interest rate? |
|
Definition
|
|
Term
| What are the most common keys of financial calculators, and what do they mean? |
|
Definition
N: # of periods
I: Interest rate
PV: Present value
PMT: Payment amount
FV: Future value |
|
|
Term
| True/False: Most financial calculators assume interest earned once a year |
|
Definition
|
|
Term
| How many decimal places should be placed when rounding? |
|
Definition
|
|
Term
| Why are financial calculators used? |
|
Definition
-Auto loans
-Mortgage loans |
|
|
Term
| Term: Legal document stating name of issuer, face value, interest rate, and maturity date |
|
Definition
|
|
Term
| Term: Interest bearing notes payable |
|
Definition
|
|
Term
| Term: Bonds the issuing company can retire at stated value before maturity |
|
Definition
|
|
Term
| Term: Contract where one party can use the assets of another |
|
Definition
|
|
Term
| Term: Events with uncertain events that may represent potential liabilities |
|
Definition
|
|
Term
| Term: To determine amount paid/received |
|
Definition
| Contractual (stated) interest rate |
|
|
Term
| Term: Bonds that can be converted into common stock |
|
Definition
|
|
Term
| Term: Debt that the company expects to pay with existing current assets or within a year |
|
Definition
|
|
Term
| Term: Difference between face value and selling price of a bond |
|
Definition
|
|
Term
| Term: Amortizing bond discount/premium resulting in periodic interest expense that equals constant percent of carrying value of bonds |
|
Definition
| Effective interest method of amortizations |
|
|
Term
| Term: Rate that remains constant and is established when issued |
|
Definition
|
|
Term
| Term: Principal due at maturity of bond |
|
Definition
|
|
Term
| Term: Obligation a company plans to pay in a year or more |
|
Definition
|
|
Term
| Term: Rate investors demand for loaning money |
|
Definition
|
|
Term
| Term: Date on which final payment on bond is due from issuer |
|
Definition
|
|
Term
| Term: Long term note secured by mortgage that pledges assets as securities |
|
Definition
|
|
Term
| Term: Obligation in the form of a note |
|
Definition
|
|
Term
| Term: Trying to avoid showing liabilities on balance sheet |
|
Definition
| Off balance-sheet financing |
|
|
Term
| Term: Allowing one party to use assets of another as a rental |
|
Definition
|
|
Term
| Term: Difference between (+) selling price and (-) face value |
|
Definition
|
|
Term
| Term: Value today of future amount considering current interest rates |
|
Definition
|
|
Term
| Term: Bonds with specific assets pledged as collateral |
|
Definition
|
|
Term
| Term: Same amount to interest expense each period |
|
Definition
| Straight-line method of amortization |
|
|
Term
|
Definition
|
|
Term
|
Definition
Income before interest expense and taxes
---------------------------------------
Interest expense |
|
|
Term
| Term: Bond issued against general credit of borrower |
|
Definition
|
|
Term
| What if there are more current liabilities than current assets? |
|
Definition
| The company lacks liquidity |
|
|
Term
| Term: Short-term debt paying ability |
|
Definition
|
|
Term
| Name some current liabilities |
|
Definition
-Notes payable
-Accounts payable
-Unearned revenues
-Accrued liabilities (taxes, salaries, wages, and interest) |
|
|
Term
| Which are more important, notes payable or accounts payable? |
|
Definition
| Notes payable, because they are legal documents in case legal remedies are needed to collect debt |
|
|
Term
| What are notes payable used for? |
|
Definition
| Most frequently short-term |
|
|
Term
| True/False: Notes payable requires interest |
|
Definition
|
|
Term
| Journalize the entry to issue notes payable |
|
Definition
|
|
Term
| Journalize the entry to acknowledge interest accumulated |
|
Definition
[Interest Expense ]
[ Interest Payable] |
|
|
Term
| Journalize the entry to show payment of note |
|
Definition
[Notes Payable ]
[Interest Payable]
[ Cash ] |
|
|
Term
| Journalize the entry to record sales and sales tax |
|
Definition
[Cash ]
[ Sales ]
[ Sales Taxes Payable] |
|
|
Term
| Journalize the entry to record sales of unearned revenue |
|
Definition
[Cash ]
[ Unearned _ Revenue] |
|
|
Term
| Journalize the entry to show earning unearned revenue |
|
Definition
[Unearned _ Revenue]
[ _ Revenue ] |
|
|
Term
| What is unearned revenue reported as? |
|
Definition
|
|
Term
| What are current maturities of long-term debt referred to as? |
|
Definition
| Long-term debt due within one year |
|
|
Term
| Journalize the entry to show the current maturity of long-term debt? |
|
Definition
| There is no entry for this |
|
|
Term
| What are the different types of taxes? |
|
Definition
-FICA
-Federal income tax
-State and city income tax
-Insurance, pension, union dues
-Charity? |
|
|
Term
| Journalize the entry to report wages and wages taxes |
|
Definition
[Salaries and wages expense ]
[ FICA taxes payable ]
[ Federal income tax payable]
[ State income tax payable ]
[ Salaries and wages payable] |
|
|
Term
| Journalize the entry to pay employees |
|
Definition
[Salaries and wages payable]
[ Cash ] |
|
|
Term
| Journalize the entry to record payroll employer's expense |
|
Definition
[Payroll tax expense ]
[ FICA taxes payable ]
[ Federal income taxes payable]
[ State income taxes payable ] |
|
|
Term
| Give an example of a long-term liability |
|
Definition
|
|
Term
| Why are convertible bonds attractive to bondholders AND issuers? |
|
Definition
-Bondholders benefit if market price of common stock increases a lot
-Until conversion, bondholder receives interest
-Issuer sells these bonds at a higher price
-Issuer pays lower interest rate |
|
|
Term
| What factors is the current market value a function of? |
|
Definition
-Dollar amounts to be received
-Length of time until amount is received
-Market interest rate |
|
|
Term
| Journalize the entry to record a bond at face value |
|
Definition
|
|
Term
| Journalize the entry to acknowledge interest incurred |
|
Definition
[Bond interest incurred ]
[ Bond interest payable] |
|
|
Term
| Journalize the entry to record payment of bond interest |
|
Definition
[Bond interest payable]
[ Cash ] |
|
|
Term
| What factors are interest rates affected by? |
|
Definition
-State of economy
-Type of bond issued
-Current industry conditions performance |
|
|
Term
| Is the contractual interest rate < market interest rate, you pay..? |
|
Definition
|
|
Term
| Journalize the entry to issue bonds at a discount |
|
Definition
[Cash ]
[Discount on Bonds Payable]
[ Bonds Payable ] |
|
|
Term
| What type of account is Discount on Bonds Payable? |
|
Definition
| Contra account (not a debit account) |
|
|
Term
| What is a contra account? |
|
Definition
| An account that is deducted from bonds payable on balance sheet |
|
|
Term
|
Definition
|
|
Term
| What is the difference between issuance price and face value? |
|
Definition
| An additional cost of borrowing |
|
|
Term
| What does a company record the additional cost of borrowing? |
|
Definition
|
|
Term
| The amortization of a discount ___ the amount of ______ reported |
|
Definition
| Increases; Interest expense |
|
|
Term
| After amortization _ contractual amount |
|
Definition
|
|
Term
| Journalize the entry to issue a bond at a premium |
|
Definition
[Cash ]
[ Bonds Payable ]
[ Premium on Bonds Payable] |
|
|
Term
| What does the sale of bonds above face value cause the total cost of borrowing to do? |
|
Definition
| Be less than the bond interest paid |
|
|
Term
| What is the premium considered? |
|
Definition
| A reduction in cost of borrowing that reduces bond interest expense over the life of the bonds |
|
|
Term
| What does amortization of the premium do to the amount of interest expense reported each period? |
|
Definition
|
|
Term
| If a bond is redeemed at maturity, what does the book value equal? |
|
Definition
|
|
Term
| Journalize the entry to redeem a bond at maturity |
|
Definition
|
|
Term
| Why would a bond be redeemed before maturity? |
|
Definition
-To reduce interest cost
-To remove debt from balance sheet |
|
|
Term
| What are the necessary steps to redeem a bond before maturity? |
|
Definition
1) Eliminate carrying value at redemption date
2) Record cash paid
3) Recognize gain/loss on redemption |
|
|
Term
| Journalize the entry to redeem a bond before maturity |
|
Definition
[Bonds Payable ]
[Premium on Bonds Payable]
[Loss on Bonds Payable ]
[ Cash ] |
|
|
Term
| When redeeming a bond before maturity, what does the loss or gain signify? |
|
Definition
| The difference between carrying value and cash paid to redeem |
|
|
Term
| Where are current liabilities located on the balance sheet? |
|
Definition
| They are the first category under liabilities |
|
|
Term
| In what order are current liabilities listed? |
|
Definition
1) Notes Payable
2) Accounts Payable
3) Others listed by size of magnitude |
|
|
Term
| What do liquidity ratios measure? |
|
Definition
| Short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash |
|
|
Term
|
Definition
Current assets
--------------
Current liabilities |
|
|
Term
| What does the current ratio measure? |
|
Definition
|
|
Term
| How do many companies improve their profitability measures (such as return on assets)? |
|
Definition
| Minimize their liquid assets (inventory, accounts receivable) |
|
|
Term
| What must companies with few liquid assets on hand do? |
|
Definition
| Rely on other sources of liquidity, such as a bank line of credit |
|
|
Term
| Term: Pre-arranged agreement between a company and lenders that permits the company to borrow up to an agreed upon amount |
|
Definition
|
|
Term
| What do solvency ratios measure? |
|
Definition
| The ability of a company to survive over a long period of time |
|
|
Term
| Debt to total assets ratio |
|
Definition
Total liabilities
-----------------
Total assets |
|
|
Term
| What does the debt to total assets ratio show? |
|
Definition
| How much assets are financed with debt |
|
|
Term
| Times interest earned ratio |
|
Definition
Income before interest expense and taxes
---------------------------------------
Interest expense |
|
|
Term
| What does the times interest earned ratio show? |
|
Definition
| Company's ability to make interest payments as the come due |
|
|
Term
| What are the two most common types of off balance-sheet financing? |
|
Definition
Unreported contingencies
Lease transactions |
|
|
Term
| Are are some common contingencies? |
|
Definition
Lawsuits
Product warranties
Environmental clean-up obligations |
|
|
Term
| Where do accounting rules require contingencies to be disclosed? |
|
Definition
In the notes of financial statements
Extra: In some cases, they must be accrued as liabilities |
|
|
Term
| When must contingencies be accrued as liabilities? |
|
Definition
| If they'll lose (a lawsuit) and have a reasonable estimate |
|
|
Term
| Determining payroll requires the following to be computed: |
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Definition
-Gross earnings
-Payroll deductions
-Net pay |
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Term
| What are the values a market value is made of? |
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Definition
-Dollars to be received
-Time until received
-Market rate of interest |
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Term
| Under the effective interest method, how do you calculate amortization amount? |
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Definition
| (Carrying value * effective interest rate)[[which is bond interest expense]] - (face amount * contractual interest) [[which is bond interest paid]] |
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Term
| What is the amount under straight-line amortization? |
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Definition
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Term
| What is the amount under effective interest amortization? |
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Definition
| Same percentage each time |
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