Left side: Allowance for Doubtful Accounts

Right side: Accounts Receivable

Only when it is determined to be worthless.

Note: The expense is allocated to the period when the receivable is determined to be worthless

Held-to-maturity securities

Note:

• Represented on the balance sheet at cost
• If fair value declines below cost, the holder must determine if the decline is “other than temporary.” If it is, the carrying amount is reduced from cost to value and the change is reflected in net income as a realized loss.
• The new cost basis can’t be adjusted if the asset's value recovers

Trading securities

Note: unrealized gains and losses are included in net income

Also: represented on the balance sheet at fair value

Available-for-sale securities

Note: unrealized gains and losses are not included in net income, but instead are recorded as "other comprehensive income."

Also: represented on the balance sheet at fair value

The technique of using investees at 50% or less, enabling a party to fund substantial operations through that vehicle w/o burdening its own balance sheet (by having to prepare “consolidated financial statement”)

Financial instruments whose value is derived from some other benchmark.

Note: Derivatives reflect an innovation in ability to identify, measure and hedge certain kinds of financial risks.

An executory K to buy some commodity (say oil) at the prevailing price today for delivery at some future time.

This shifts a risk to someone else in exchange for stability.

A hedge against an asset with a fixed value that changes according to supply and demand.

Ex: an interest rate swap intended to hedge the risk that rising interest rates will decrease the fair value of a debt investment

A hedge derived from cash flows received from two or more financial products

Ex: a hedge may be linked to cash flows generated by a bond, one that provides payments of interest to investors. If the interest rate shifts, affecting the cash flow, the value of the bond shifts. A cash flow hedge protects against these shifts.

If you buy stock you are buying the liabilities (including hidden liabilities).

The value of an asset owned that is intangible but has a quantifiable "prudent value" in a business (reputation, employees, brand, customers, intellectual capital)

Note: Economic goodwill is NEVER recorded on the balance sheet

A typical lease

Is an asset for the lessor, and an expense (when paid) for the lessee

1. If the lessee ends up owning the property under the terms of the lease at the end of the lease term
2. If the lessee has the right to purchase the property under the terms of the lease at or near the end of the lease term for an option price that amounts to a “bargain price”- that is some price so dramatically below any possible sense of the asset’s market value that only a fool would fail to buy
3. If the term of the lease covers a period of time equal to or greater than 75% of the useful life of the property upon inception of the lease
   
4. If the present value of the total of the payments to be made under the lease amounts to 90% or more of the fair market value of the property

Loans and financial obligations lasting over one year; in the form of bonds or bank loans, mortgages on fixed assets, etc.

More reliable (less relevant).

Note: Cost is more suitable for assets lacking an organized trading market (inventory, buildings etc.)

More relevant (less reliable).

Note: Fair value is generally more suitable for assets w/ an organized trading market (stocks, certain financial instruments etc.)

If a business acquires another business for more than the market value, the difference is represented in an account called Goodwill.

Note: The Goodwill account doesn’t automatically have to be amortized. As long as the value of the goodwill (assessed annually) doesn’t decline in the years after the acquisition, it doesn’t have to be written off so there is no charge to earnings.

T or F: Intangible assets that don't have finite lives that are acquired from third are amortized.

Buy stock in the future (option period) for a specified price (exercise price).

Note: These are recorded as liabilities and paid compensation as an expense

What are loss contingincies?

How are they reflected in financial statements?

Anticipated losses for legal claims, regulation changes, warranty coverage, etc.

Is recorded in a footnote, not usually accompanied by a dollar amount BUT when a loss becomes probable (rather than possible), it must be recorded

What are the six main types of entities?

The dividend per share divided by the price per share

Note: Usually expressed as a percentage

A partnership where the profits and losses aren't divided up in a way that corresponds to the member's actual ownership interest.

Brotherton: the one with more money in the partnership uses 
their equity to pay a larger portion of the taxes at the beginning, and the person with less money has to use get that equity back later (usually the other person pays later income tax). Stictly a deferral technique.

True.

Note: A parent must also prepare a set of consolidated financial statments (but the subsidiary doesn't need to).