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ACCT 2110 Miller Test 4 (Chapters 8-10)
Key Terms, Concepts, and Formulas. Do these definition first!
Terms in this set (103)
an obligation that arises when a business purchases goods or services on credit.
liabilities that usually represent the completed portion of activities that are in process at the end of the period
an obligation whose amount or timing is uncertain and depends on future events. For example, a firm may be contingently liable for damages under a lawsuit that has yet to be decided by the courts.
Obligations that require a firm to pay cash or another current asset, create a new current liability, or provide goods or services within one year or one operating cycle, whichever is longer.
a percentage of the principal that must be paid in order to have use of the principal. It is multiplied by the beginning-of-period balance to yield the amount of interest for the period.
probable future sacrifices of economic benefits; liabilities usually require the payment of cash, the transfer of assets other than cash, or the performance of services.
a payable that arises when a business borrows money or purchases goods or services from a company that requires a formal agreement or contract.
taxes that businesses must pay based on employee payrolls; these amounts are not withheld from employee pay, rather they are additional amounts that must be paid over and above gross pay.
money collected from the customer for the governmental unit levying the tax.
a liability that occurs when a company receives payment for goods that will be delivered or services that will be performed in the future.
a guarantee to repair or replace defective goods during a period (ranging from a few days to several years) following the sale.
businesses are required to _____ ____ from employees' earnings; standard ______ include federal, state, and possibly city or county income taxes, as well as Social Security and Medicare. Employees may also have amounts withheld for such things as retirement accounts and health insurance.
current assets/current liabilities
current ratio formula
(cash + marketable securities + accounts receivable)/ current liabilities
quick ratio formula
(cash + marketable securities)/ current liabilities
cash ratio formula
cash flows from operating activities/ current liabilities
operating cash flow ratio
principal x interest % x (months/12)
cash, accounts receivable, inventory, and marketable securities
examples of current assets
accounts payable, accrued expenses, wages payable, interest payable, taxes payable, notes payable, and unearned revenue
examples of current liabilities
1. withheld taxes from employee's paychecks
2. taxes the business itself must pay
what are two sources of withholding and payroll taxes?
a type of note that requires the issuing entity to pay the face value of the bond to the holder when it matures and, usually, periodic interest at a specified rate.
bonds that give the borrower the right to pay off (or call) the bonds prior to their due date. The borrower typically "calls" debt when the interest rate being paid is much higher than the current market conditions.
Rate of interest on the face value. For bonds, the borrower pays the interest to the creditor each period until maturity
bonds that allow the bondholder to convert the bond into another security—typically common stock.
when a bond sells at a price below face value, due to the yield being greater than the stated rate of interest.
Effective interest rate method
a method of interest amortization that is based on compound interest calculations.
the amount of money that a borrower must repay at maturity; also called par value or principal.
the process used to determine the amount of interest to be recorded in each of the periods a liability is outstanding.
unsecured bonds where the risk of the borrower failing to make the payments is relatively high.
an agreement that enables a company to use property without legally owning it.
the use of borrowed capital to produce more income than needed to pay the interest on a debt.
obligations that extend beyond one year.
the market rate of interest demanded by creditors.
the date on which a borrower agrees to pay the creditor the face (or par) value.
bonds that are secured by real estate.
for stock, it is an arbitrary monetary amount printed on each share of stock that establishes a minimum price for the stock when issued, but does not determine its market value. For debt, par value is the amount of money the borrower agrees to repay at maturity.
when a bond's selling price is above face value.
a term used for a bond that has some collateral pledged against the corporation's ability to pay.
an interest amortization method that amortizes equal amounts of premium or discount to interest expense each period.
a term used for bonds in which the lender is relying on the general credit of the borrowing corporation rather than on collateral.
the market rate of interest demanded by creditors; yield may differ from stated rate because the underwriter disagrees with the borrower as to the correct yield or because of changes in the economy or creditworthiness of the borrower between the setting of the stated rate and the date of issue.
Face Value - Unamortized Discount
Carrying Value Formula for DISCOUNT
face value + unamortized premium
Carrying Value Formula for PREMIUM
Periodic Interest Expense x Number of Interest Periods
Total Cost of Borrowing Formula
Discount/ number of interest periods
Periodic Amortization of DISCOUNT formula
Interest payment + Amortization of Discount
Interest Expense of DISCOUNT formula
Premium/ number of interest periods
Periodic Amortization of PREMIUM formula
Interest payment - Amortization of Premium
Interest Expense of PREMIUM formula
Total Liabilities/ Total Equity
Debt to Equity Formula
total liabilities/total assets
Debt to Total Assets Formula
Long-term debt/ total equity
Long-Term Debt to Equity Formula
Interest Expense x Number of Periods
Cost of Borrowing Formula
sales taxes, usage taxes or excise taxes for various state, local, and federal taxing authorities
Example of other payables to a business
when the event it is contingent on is probable and a reasonable estimate of the loss can be made
when is a contingent liability recognized?
The borrower "sells" or "issues" the bond and records a liability
What is the borrowers role in bond selling/ purchasing?
The creditor (lender or bond holder) "buys" the bond and records an investment
What is the creditors role in bond selling/ purchasing?
False; they are either secured or unsecured
T/F All bonds are both secured and unsecured
yield < stated rate
interest expense < interest paid
What is the effect on yield and stated rate & interest when bonds are sold at a premium?
yield = stated rate
interest expense = interest paid
What is the effect on yield and stated rate & interest when bonds are sold at face value (par)?
yield > stated rate
interest expense > interest paid
What is the effect on yield and stated rate & interest when bonds are sold at a discount?
T/F Interest payments can only be made annually or semi-annually
carrying value will equal face value
What happens to the carrying value of bonds at maturity?
Accumulated other comprehensive income
the total of comprehensive income for all periods and conveys the changes in assets and liabilities resulting from all transactions with nonowners.
Additional Paid-In Capital
the amount received in excess of the par value.
the maximum number of shares a company may issue in each class of stock.
the portion of a corporation's stockholders' equity contributed by investors (owners) in exchange for shares of stock.
the basic ownership interest in a corporation.
Cumulative dividend preference
a provision that requires the eventual payment of all preferred dividends—both dividends in arrears and current dividends—to preferred stockholders before any dividends are paid to common stockholders.
Current dividend preference
a provision that requires that current dividends must be paid to preferred stockholders before any dividends are paid to common stockholders.
Date of record
the date on which a stockholder must own one or more shares of stock in order to receive the dividend.
the date on which a corporation announces its intention to pay a dividend on common stock.
amounts paid periodically by a corporation to its stockholders as a return of their invested capital. Represent a distribution of retained earnings, not an expense.
Dividends in arrears
cumulative preferred stock dividends remaining unpaid for one or more years are considered to be in arrears.
Earnings per share (EPS)
a ratio that measures the income available for common stockholders on a per-share basis
the number of shares actually sold to stockholders.
dividends that return paid-in capital to stockholders
the number of issued shares actually in the hands of stockholders.
the date on which the dividend will actually be paid.
a class of stock that generally does not give voting rights, but grants specific guarantees and dividend preferences.
a dividend paid to stockholders in the form of additional shares of stock (instead of cash).
a stock issue that increases the number of outstanding shares of a corporation without changing the balances of its equity accounts.
the owners' claims against the assets of a corporation after all liabilities have been deducted.
previously issued stock that is repurchased by the issuing corporation.
Dividend % x par value per share x # of preferred shares outstanding
Annual Dividends for Preferred Stock Formula
(net income - preferred dividends)/ average common stockholder's equity
Return on common equity ratio
(net income-preferred dividends)/ average common shares outstanding
earnings per share ratio
dividend per common share/ common stock price
dividend yield ratio
common dividends/ net income
dividend payout ratio
- the right to vote in election of board of directors
- the right to participate proportionally in dividends
- the right to participate proportionally in residual assets in liquidation
- the right of preemption: keeping the same percentage of ownership if new shares are issued
what are the rights of common stockholders?
Preferred stockholders dismiss the right to vote in exchange for preference to dividends and preference to assets upon liquidation of the company
What are the differences in rights for preferred stock?
the stated capital of a corporation
What does par value represent?
Declared: stockholder's equity decreases, liabilities increase
Paid: No journal entry needed
Received: Liabilities decrease, assets decrease
what is the affect on the accounting equation when cash dividends are declared, paid ,and received?
- small stock dividend < 25% (record at market value)
- large stock dividend > 25% (record at par value)
what is the difference in recording of small vs. large stock dividends?
False, you can only use outstanding stock
T/F you can use either issued or outstanding stock to calculate dividends
Retained earnings decreases, contrived capital increases, and total stockholder's equity does not change. applies to both small and large dividends
What is the affect on the accounting equation when recording small and large stock dividends?
Assets and stockholder's equity increase
What is the affect on the accounting equation when recording the sale of common stock?
Assets and stockholder's equity decrease
What is the affect on the accounting equation when treasury stock is bought?
Assets increase and contributed capital increases
What is the affect on the accounting equation when treasury stock is resold?
Assets increase, contributed capital decreases, and equity balances (increases and decreases)
What is the affect on the accounting equation when treasury stock is resold below cost?
When issued shares are greater than outstanding shares
When does a company hold treasury stock?
Liabilities increase and stockholders' equity decrease
What is the affect on the accounting equation when cash dividends are declared?
Assets and liabilities decrease
What is the affect on the accounting equation at payment date of cash dividends?
Assets and stockholders' equity decrease
What is the affect on the accounting equation when combining declaration and payment dates for cash dividends?
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