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75 Cards in this Set
- Front
- Back
Current Liabilities
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liabilities expected to be paid within one year |
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finding Working Capital
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CA - CL |
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finding Current Ratio
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CA / CL |
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examples of current liabilities |
2. short-term Notes Payable 3. Accrued Liabilities 4. Unearned Revenue 5. Current Maturities of long-term debt 6. Contingent Liabilities |
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difference in AP and s-t Notes Pay
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s-t NP have more formal written contracts, state a due date, have interest associated with it |
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interest-bearing short-term notes payable
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principle and interest are due at maturity |
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non-interest bearing short-term notes payable
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interest is deducted in advance, called a "discount" |
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how to record the issuance of an interest-bearing s-t notes payable
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cr notes payable for face value |
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how to record issuance of a non-interest bearing s-t notes payable
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dr discount for (FV x disc %) cr notes payable for face value |
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how to record payment at maturity of an interest-bearing s-t notes payable
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dr interest expense for (FV x int %) cr cash for (^ NP + Int Exp ^) |
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how to record payment at maturity of a non-interest bearing s-t notes payable
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dr interest expense for (FV x disc %) cr cash for face value cr discount for (FV x disc %) |
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how to find effective interest rate
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interest expense / cash received |
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what is a contingent liability
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an estimated liability. outcome is not known with certainty and depends on some event that will occur in the future |
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when to record a contingent liability
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If probable & $ can be estimated --> record ^^ & $ can't be est --> disclose in footnotes if possible --> disclosure in footnotes if remote --> no disclosure necessary |
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how to record a contingent liability
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dr expense cr estimated liability |
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simple interest
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interest accrued over time on principle only |
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compound interest
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principle plus accumulated interest earns interest in the future |
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definition of present value
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The current value of an amount to be received in the future; a future amount discounted for compound interest |
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definition of future value
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amount accumulated at a future time from a single payment or investment |
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definition of "n" |
time period; number of compounding periods |
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definition of "I" |
interest rate corresponding to the number of periods |
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definition of ordinary annuity
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pmt or receipt made at the end of each period |
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What are the headings of an amortization table in order?
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1. Date 2. interest expense 3. cash interest payment 4. amortization 5. carrying value |
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definition of a bond
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long-term debt sold to creditors |
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promises of a bond
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2. periodic interest payments (annual/semiannual/etc) |
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definition of face value
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Par value. the denomination of the bond. amount due at maturity. |
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coupon interest rate definition
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stated/face interest rate. fixed rate of interest that will be paid each interest payment. set by issuing company |
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market interest rate definition
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effective interest rate. rate of interest that bondholders/investors could obtain by investing in other bonds that are similar to the issuing firm's bonds. set by bond market |
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term bond definition |
all bonds mature on the same date |
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serial bond definition |
bonds retire in installments |
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debenture bonds definition |
unsecured. not backed by collateral. look at general credit worthiness of company |
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secured bonds definition |
bonds backed by specific collateral |
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callable bonds definition |
corporation reserves the right to buy them back early at a stated price (call price or redemption price) in order to save on interest |
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convertible bonds definition |
can be exchanged for a stated number of shares of common stock |
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advantages of issuing bonds vs stock
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2. interest expense is tax deductible |
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disadvantages of issuing bonds vs stock
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must have cash to repay principal and interest |
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if a bond is sold at face/par value
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coupon = market |
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if a bond is sold at a discount
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coupon < market |
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if a bond is sold at a premium |
coupon > market |
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how to find the selling price of a bond |
selling price = PV of face amount + PV of interest pmts |
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what rate is used to find the amount of the cash interest payments
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coupon rate |
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journal entry to record discounted bond on date of issuance
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dr discount cr bond payable |
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how to find interest expense of a bond
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Carrying Value x market rate |
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how to find cash interest pmt of a bond
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face value x coupon rate |
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how to find discount/premium amort of a bond |
difference in interest expense and cash interest payment
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how to find carrying value of a discounted bond |
last CV + discount amort |
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what's the effect of a discount
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2. amort of discount increases interest expense because int exp is calculated based on CV and true cost of borrowing (market rate) 3. carrying value increases over life of bond until it reaches its face value at maturity |
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ways to find total cost to borrow
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2. add discount to cash interest pmt/subtract premium from cash int pmt |
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Cash outflow vs cash inflow method
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(face value) + (total cash interest pmts) = cash out - (selling price/cash in) = total cost to borrow |
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journal entry for premium bond on date of issuance
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cr bond payable cr premium |
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what's the effect of premium
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2. amortization of premium reduces interest expense (market rate-the actual cost of borrowing-is less than coupon rate) 3. carrying value of bond is reduced over its life until it reaches face value at maturity |
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relationship between bond prices and market interest rates
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inverse |
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if a bond is originally sold at a premium and is now sold at a discount, then the market rates have ______
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increased, because bond price has decreased. the coupon doesn't change, only the market |
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finding cash needed for callable bonds
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FV x call price |
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determine gain/loss on retirement
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if repurchase price > CV, it's a loss (debit) |
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advantage of issuing equity vs bonds
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1. ease of raising capital - shares of ownership are available to a large group of potential investors 2. dividend flexibility - dividends are not liability until declared by the board of directors |
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disadvantages of issuing equity vs bonds
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2. no tax incentive - dividends are not tax-deductible 3. effect on key ratios - earnings per share goes down |
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what are the two sources of equity capital
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contributed capital and earned capital |
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SHE section of balance sheet
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+ Common Stock + APIC (all) = Total Contributed Capital + RE - Treasury Stock = Total SHE |
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common stock rights
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2. dividends 3. liquidation (after creditors, pref stock) 4. preemptive right - maintain percentage by buying a proportional number of future stocks |
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authorized shares definition
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issued shares definition
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total number of shares issued/sold to stockholders since formation |
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outstanding shares definition |
number of shares held by outside stockholders (doesn't count treasury stock) |
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treasury stock definition
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number of shares of the company's own stock that were issued to outside shareholers and are now held by the company |
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par value definition
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nominal value per share established in the corporate charter
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journal entry on date of declaration of a dividend
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cr dividends payable A (NE) = L (^) + SHE (v) |
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journal entry on date of record of a dividend
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no accounting entry |
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journal entry on date of payment of a dividend
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cr cash A (V) = L(V) + SHE (NE) |
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stock dividends
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why issue a stock dividend
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2. not taxable income to the stockholder 3. more shares on the market, could lower prices to attract more investors |
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effect of stock dividend
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2. increases contributed capital 3. decreases retained earnings |
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purpose of stock splits
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2. increase # of shares outstanding 3. decrease par value |
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effect of stock splits
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2. no change in total SHE 3. no change in RE |
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preferred stock rights
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2. liquidation preference - after creditors, before common stockholders 3. no voting rights |
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how to find earnings per share
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EPS = (net income - pref dividends)/(weighted avg number of common shares outstanding) |