ACCT 5103 Final

  1. Working capital is?
    net short-term investment needed to carry out day to day activities
  2. Compute working capital:
    current assets - current liabilities
  3. Creditors are focused on what?
  4. Investors are focused on what?
    Earnings capability
  5. Currently what is working capital an indication of?
    indication of liquity and degree of protection to short term creditors. Also a basis to predict future cash flows.
  6. The liquidity focus is in conflict with?
    Going concern assumption.
  7. PP&E represent a major source of?
    Future service potential, indication of physical resources available to the firm
  8. Major objective of PP&E accounting?
    accounting and reporting to investors on stewardship
  9. With PP&E what costs are capitalized?
    intial cost, all costs necessary to acquire and prepare for intended use
  10. Why is cost the prefered valuation for PPE
    it is reliable and verifiable, arms-length transactions
  11. What does capitlization imply?
    Future service potential.
  12. Depreciation is a form of?
    Cost allocation
  13. When to capitalize expenditures?
    Prolongs life or increases efficiency
  14. When to expense expenditures?
    Ordinary and necessary
  15. Asset retirement obligation?
    the liability associated with the ultimate disposal of a long-term asset
  16. Historic cost is?
    More reliable but less relevent
  17. Equity securities are?
    ownership interests, right to acquire or dispose of an ownership interest
  18. Debt securities are?
    investment in debt of another enterprise
  19. Uncertainty with R&D?
    whether present costs will result in future benefits and when those benefit will occur (if they do).
  20. R&D decreases the usesfulness of?
    The finacial statements, because the matching concept is not followed. Reality is distorted.
  21. Why is it important to seperate long-term and current liabilities?
    Implications of working capital, risks associated with long-term debt, finacial flexability
  22. Difference between liabilities and equities?
    Liabilities are creditor claims, equity is owner interest
  23. Both liabilities and equity provide what?
    resource/capital, used to acquire assets, both groups have claims to the firm's assets.
  24. Under the entity theory?
    liabilities and equity are the same, both receive a return from income of the firm (dividends/interest)
  25. Proprietary theory?
    Equity is the residual amount, assets- liabilities = equity
  26. Liabilites are?
    Arise from a past transaction, represent a current obligation, and are a future transfer of benefit.
  27. Under SFAC No. 6 what is equity?
    Residual interest
  28. SFAC No. 6's definition of equity is similar to what theory of equity?
    Proprietary theory.
  29. Measure liability?
    At present value of future cash flows, transaction approach
  30. Effective interest method?
    results in a stable interest rate each period, discloses the liability balance as equal to the present value of future cash flows discounted
  31. Straight line interest method
    Easier to calculate, stable interest cost per perioed, but not realistic.
  32. Contingency is a?
    Prossible future event
  33. Loss contingecnices are recognized if?
    probable, can be reasonably estimated, otherwise disclosed
  34. Permanent differences
    An item is only included in book income or taxable income, but will never be in both
  35. Temporary differences
    Item is included in both book income and taxable income at some point, but is not recognized in the same period for each purpose.
  36. Deferred tax assets
    Book income is less than taxable income
  37. Deferred tax liability
    Book income is greater than taxable income
  38. Asset/liability method
    deferred amount reported on the balance sheet at the estimated future rate when reversal will happen. Balance sheet focused, increased predictive value
  39. Intraperiod
    allocating tax among components, users are able to see the effect of tax down to the component level. Discourages users from using pretax measures of performance.
  40. Advantages of leasing
    less costly, off-balance sheet treatment, management compensation ignores leasing, debt covennants, tax advatages,
  41. Capital lease characteristics
    Transfers ownership by the end of the lease term, bargain purchase option, lease term >= 75% of economic life, present value of min payments >= 90% of FMV
  42. Methods of determining pension benefits:
    Defined contribution plan, defined benefit plan
  43. Defined contribution plan?
    employer promises to contribute a certain sum into the plan each period. Risk lies with employee.
  44. Defined benefit plan
    the amount of pension benefits to be received in the future are defined by the terms of the plan. Risk lies with the employer
  45. Cost approach
    estimates the total retirement benefits to be paid in the future, determines equal annual payment that wil be necessary to fund those benefits
  46. Benefit approach
    determines the amount of benefits earned by the employee service to date and then estimates the present value of these benefits
  47. View of pensions?
    A means of promoting efficiency (defined benefit), or a form of supplemental benefits (defined contribution)
  48. Means of promoting efficiency (Pensions)
    Costs associated with the plan and not the employee
  49. Supplemental benefits (Pensions)
    Costs related to specific employees
  50. Components of annual pension cost
    Service cost, interest cost, actual return on plan assets, prior service costs, transition amount
  51. Issues with working capital?
    inconsistencies in measurement of components, difference of opinion regarding what should be included, lack of precision in defining elements.
  52. SFAS No. 87 Minimum liability
    ABO - fair value of plan assets, conservative, but contrary to conceptual framework
  53. SFAS No. 158 liability
    PBO - fair value of plan assets. Critics argue overstates liability, but matches
  54. Capital structure is?
    the mix of debt and equity
  55. Proprietary theory of equity
    Assets, belong to owners, flow through to owners
  56. Entity theory of equity
    Entity is a separate legal entity
  57. Noncompensatory stock options
    Not designed as compensation, no expense
  58. Compensatory stock options
    Designed as compensation, expense
  59. Stock options are what to holders?
    Incentive that influences the holder to try to increase profits, help firm avoid taxes and expenses
  60. Pooling method negatives
    accounting is distorted, assets undervalued, income overstated
  61. Entity theory of consolidation
    purpose of finacial statements is to provide information to all shareholders
  62. Parent company theory of consolidation
    purpose of consolidated statements is to provide information for parent company stockholders
  63. Noncontrolling interest equity?
    SFAC 6, says is equity, residual interest
Card Set
ACCT 5103 Final
ACCT Final