Accounting Final 2
Terms
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- Define asset
- Economic resources to generate revenue and ultimately a profit
- What CF does dividends paid go into?
- CFF
- What CF does the acq/div business unit go into?
- CFI
- What CF does gain/sale trading securites go into?
- CFO
- What is the difference between 10-K & 10-Q?
- 10-K: Annual, official ; 10-Q: Quarterly, not-audited
- What is proxy statement?
- Qualitative, exec compensation, stock price trends, board of directors
- What are the 3 buckets of cash bonuses?
- Income statement measures, returns, cash flows
- What is a material deficiency?
- A material weakness in internal controls that creates -more of a remote chance- that a material misstatement will not be prevented or detected
- What is a deferred expense?
- Asset allocated over multiple periods, ex. prepaid rent
- What is an accrued expense?
- Expense incurred, not paid for, ex. wage expense
- What is a deferred revenue?
- Previously recorded liabilities adjusted for revenue earned, ex. unearned revenue
- What is an accrued revenue?
- Previously unrecorded revenue adjusted for revenue earned, ex. interest receivable, unbilled A/R
- What 4 factors influence sales?
- Volume, price, product mix, foreign exchange, (also acq)
- How to qualify special charges? Examples?
- Unusual or infrequent. Restructuring, gains/losses on asset sales, write-down/write-off.
- How to qualify extraordinary items? Examples?
- Unusual AND infrequent. Floods, quakes, expenses from new laws, special theft.
- Completed contract method. Advantages? Disadvantages?
- Adv: Don't pay taxes till the end. Dis: Might be in higher tax bracket later
- Describe Disney & CapCities ABC
- Disney acquired for $18b of goodwill
- Percentage of completion: Journal entry to record costs incurred
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Dr. Inventory: Construction in progress
Cr. Cash - Percentage of completion: Journal entry to record income
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Dr. Inventory: Construction in progress
Cr. Income from continuing operations - Percentage of completion: Journal entry to record billings
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Dr. Accounts receivable
Cr. Billings on construction in progress - Percentage of completion: Journal entry to terminate contract
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Dr. Billings on construction in progress
Cr. Inventory: Construction in progress - How do you record the buying back of treasury stock (2 ways)?
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1. Treasury stock acct.
2. Reduce contributed capital - How do you calculate cost of capital?
- Firm's weighted average of cost of debt & cost of equity (= to % amt of debt * cost of debt)
- How do you calculate diluted EPS?
- (NI - Pref. Div + Tax effects) / (Weighted Outstanding Shares + Pot. Dilutive Securities)
- What are the five key drivers of financial results?
- Profit margin, Asset turnover, Debt to Equity, Cash Flow Yield, Turnover Ratios
- How does percentage of net sales method work?
- Calculate a % to go from NET SALES to UNCOLLECTIBLE ACCTS EXPENSE.
- How does aging of accounts receivable work?
- Calculate a % to go from ACCTS RECEIVABLE to TARGETED BALANCE OF UNCOLLECTIBLE ACCTS
- What factors influence the estimate of percentage uncollectible?
- Credit quality of customers, economic conditions, industry boom/busts, change in current policy (Lucent), earnings mgmt, prior period estimates
- Detail journal entry for obsolescence.
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Dr. Loss due to inventory revaluation
Cr. Allowance for inventory revaluation - What is the REALISTIC inventory turnover equation?
- LIFO COGS + LIFO Dipping Gain / FIFO Avg Inventory
- How do you calculate estimated average life?
- Avg. Depreciable Assets / Dep Exp
- What are good income quality estimates?
- Fast depreciation, short useful life, minimal residual value, short amortization, high uncollectible estimate, LIFO
- What are the four types of "Other comprehensive income" items?
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1. Unrealized GL on "Available for sale" securities
2. Unrealized currency translation GL
3. Losses related to minimum pension obligations
4. Unrealized GL related to hedging - How are bonds carried?
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At amortized cost.
At issuance: market value
Later on: book/carry value = FV +- premium/discount - Why issue convertible bonds?
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1. Investors like them-- can offer lower interest rates
2. Bondholders have no voting rights; no control seded
3. Bond interest is tax deductible - Journal entry for bond conversion into common stock
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Dr. Bonds Payable 100k
Dr. Unamortized Bond Premium 1447
Cr. Common Stock (par) 32k
Cr. PIC in Excess of Par (plug) - What are the four hedge accounting considerations?
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1. Hedged Item
2. Hedging Instrument
3. Hedging Risk
4. Hedge Effectiveness - How do you define hedge effectiveness? What is the diff. of effective & non-effective hedge?
- Effectiveness: Within 80% to 125%. Effective hedge goes to Other Comprehensive Income; Ineffective hedge goes to earnings
- What are the three types of hedges?
- Fair value hedge, Cash flow hedge, Foreign currency hedge
- What are the FOUR capital lease criteria?
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1. Lease transfers ownership of the asset by end of lease term
2. Discount guarantee for sale
3. Lease term is 75% or more of useful life
4. PV of payments at least 90% of fair value -
How does operating lease affect:
a) Debt-to-equity
b) RoA
c) Current ratio -
a) Lower D/E in operating
b) Higher ROA in operating
c) Higher current ratio in operating - Where do LESSEE capital & operating payments flow in CFS?
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Capital lease payments:
Interest - operating cf
Principal - financing cf
Operating lease payments:
Expense - operating cf - In evaluating capital/operating leases, how do you estimate the income statement effect?
- Make adjustments to see the change in retained earnings over two years. That is the income effect!
- Lessor accounting: Direct financing vs Operating leases. How do they affect income?
- In operating leases, the asset stays on the books.