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AC 210 Exam 4 Study Guide

by: Kristen Marie

AC 210 Exam 4 Study Guide AC 210

Kristen Marie
GPA 3.5
Intro to Accounting
Jordan Rippy

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About this Document

Study guide for Exam 4 on Chapters 10-12
Intro to Accounting
Jordan Rippy
Study Guide
AC 210, Exam 4, Rippy
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This 5 page Study Guide was uploaded by Kristen Marie on Thursday June 18, 2015. The Study Guide belongs to AC 210 at University of Alabama - Tuscaloosa taught by Jordan Rippy in Summer 2015. Since its upload, it has received 264 views. For similar materials see Intro to Accounting in Accounting at University of Alabama - Tuscaloosa.


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Date Created: 06/18/15
AC 210 Exam 4 Study Guide Chapter 10 The role of Liabilities Liabilities are created when a company 0 Buys goods and services on credit 0 Obtains shortterm loans 0 Issues longterm debt Current Liabilities Accounts Payable Increases credited when a company receives goods or services on credit Decreases debited when a company pays on its account Liabilities that have been incurred but not yet paid Accrued Payroll Payroll Deductions are either required by law or voluntarily requested by employees and create a current liability for the company 1 Income tax 2 FICA tax 3 Other deductions charitable donations union dues etc Employers have other liabilities related to payroll l FICA tax a matching contribution 2 Federal unemployment 3 State unemployment tax Notes Payable Four key events occur with any note payable 1 Establishing the note 2 Accruing interest incurred by not yet paid 3 Recording interest paid 4 Recording the principal paid Current Portion of LongTerm Debt Long term debt is divided into two portions Current debt that is due within one year Noncurrent debt that is due beyond one year Additional Current Liabilities payments collected from customers at time of sale create a liability that is due to the state government Cash received in advance of providing services created a liability of services due to the customer LongTerm Liabilities Common LongTerm Liabilities 1 Longterm notes payable 2 Deferred income taxes 3 Bonds payable are financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now Bonds Key elements of a Bond 1 Maturity date 2 Face value 3 Stated interest rate the bond price involves present value computations and is the amount that investors ae willing to pay on the issue date for the bonds 0 Premium Market interest rate is lower than stated interest rate 0 Face value Market interest rate is the same as the stated interest rate 0 Discount Market interest rate is higher than stated interest rate Bond Retirement Complete journal entry Bonds Payable XX Cash XX Contingent Liabilities are potential liabilities that arise from past transactions or events but their ultimate resolution depends is contingent on a future event 0 Probable Make a journal entry to record the liability 0 Possible Make a note on financial statement 0 Remote Do nothing Evaluate the Results Quick ratio Times Interest Earned ratio Chapter 1 1 Corporate Ownership The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership 0 Simple to become an owner 0 Easy to transfer ownership 0 Provides limited liability Because a corporation is a separate legal entity it can 0 Own assets 0 Incur liabilities 0 Sue and be sued 0 Enter into contracts Stockholder Benefits 0 Voting rights vote on board of directors 0 Dividends payments of company s retained earnings 0 Residual claims claim on what s leftover company goes out of business not bankruptcy o Preemptive rights first dibs on new stock Equity vs Debt Financing Advantages of equity and debt financing Advantages of equity Advantages of debt Equity does not have to be repaid Interest on debt is tax deductible Dividends are optional Debt does not change stockholder control Authorization Issuance and Repurchase of Stock The maximum number of shares a company can offer publicly Issued and unissued Comprised of outstanding and treasury stock Issued shares that are owned by stockholders Issued shares that have been reacquired by the corporation Stock Authorization is an arbitrary amount assigned to each share of stock when it is authorized is the amount that each share of stock will sell for in the market Stock Issuance the first time a corporation issues stock to the public Seasoned new issue Subseiuent issues of new stock to the public Cash XX Common Stock XX Additional PaidIn Cap XX Stock Exchanged between Investors Transactions between two investors do not affect the corporation s accounting records Stock Used to Compensate Employees Employees pay packages can include stock options Gives the employees the option to acquire company stock at a predetermined price Repurchase of Stock A corporation repurchases its stock to l Distribute excess cash to stockholders 2 Send a signal that the company believes its stock is worth acquiring 3 Obtain shares to reissue for the purchase of other companies 4 Obtain shares to reissue to employees as part of stock option plans Dividends on Common Stock 0 Declared by board of directors 0 Not legally required 0 Creates liability at declaration o Requires sufficient Retained Earnings and Cash Dividend Dates Liability created Company decides who will receive the dividend Liability eliminated and paid Stock Dividends Distribution of additional shares of stock to stockholders 0 No change in total stockholders equity 0 No change in par value 0 All stockholders retain same percentage ownership Corporations issue stock dividends to l Remind stockholders of the accumulating wealth in the company 2 Reduce the market price per share of stock 3 Signal that the company expects strong financial performance in the future Small stock dividend less than 2025 Large stock dividend more than 2025 Record at current market value of stock Record at par value of stock Stock Splits An increase in the number of shares and the corresponding decrease in par value per share Retained earnings is not affected A stock split creates more pieces of the same pie Preferred Stock Issuance 0 Priority over common stock 0 Usually has fixed dividend rate 0 Usually has no voting rights The current preferred dividends must be paid before paying any dividends to common stock Any unpaid dividends from previous years dividends in arrears must be paid before common dividends are paid Retained Earnings Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating Earnings Per Share EPS Return on Equity Price Earnings PE Ratio Chapter 12 Business Activities and Cash Flows The Statement of Cash Flows focuses attention on O Operating Activities Cash received and paid for daytoday activities with customers suppliers and employees Cash paid and received from buying and selling longterm assets Cash received and paid for exchanges with lenders and stockholders Cash in ows and out ows that directly relate to revenues and expenses reported on the Income Statement In ows Cash provided by Collecting from customers Receiving dividends Receiving interest Investing Activities In ows Cash provided by Sale or disposal of Property Plant and Equipment Sale or maturity of investments in securities Financing Activities In ows Cash provided by Borrowing from lenders through formal debt contracts Issuing stock to lenders Out ows Cash used for Purchasing services and goods for resale Paying salaries and wages Paying income taxes Paying interest Out ows Cash used for Purchase of Property Plant and Equipment Purchase of investments in securities Out ows Cash used for Repaying principal to lenders Repurchasing stock from owners Paying cash dividends to owners Relationship to Other Financial Statements Information needed to prepare a Statement of Cash Flows 0 Comparative Balance Sheets 0 Income Statement 0 Additional details concerning selected accounts Cash Flows from Operating Activities Indirect Method The indirect method adjusts Net Income by analyzing noncash items 1 Net Income 2 Add back noncash expenses 3 Address changes in Current Assets and Current Liabilities


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