Statistical Techniques for Decision Making I
Statistical Techniques for Decision Making I BUSSTAT 207
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I nte upnn a time Location location location Mun erm nr mum lurm N mrrirAl wnwr nt39lhc lam dmni h m h1me Sum m trrvmllmls lmm m mm is mu n m N 54mm m nlrrmu aim mm Midilkwlne 1mm Nm unumno smarts nine avhm um Imam vanpmrd only 1mm he mm uluu hm hm Urdmal you um nu mmmmumv mu m m mm mm Mmlz Vamm m muquot Mny um um xlucmulu mx39uvmnn rm n4 quotm m cquzmlv n mama Might luu multipk mndm m m Nnmuul Box amp whisker Mullim 01 J r 2m 2411 5n 2quot 170 2210 m 3110 un 1m 30 340 xsn E E Medmvl Mam Mm Medun quot Mmquot Mum m xigmvsmm 1m kitskewed 1 Symm rii I Describing data with numerical measures 1mmquot 1312010 1312010 Empirical rule and standardized values 1 m 1 1 1 1 1 1 1 1 1 1 1 1 r 1 1 1H1 1 1 1 ma C11 1 8 2 recap preseniing daia I Descripiion analysis amp comparison 1 I nte upnn a time Location location location Mun erm nr mum lurm N mrrirAl wnwr nt39lhc lam dmni h m h1me Sum m trrvmllmls lmm m mm is mu n m N 54mm m nlrrmu aim mm Midilkwlne 1mm Nm unumno smarts nine avhm um Imam vanpmrd only 1mm he mm uluu hm hm Urdmal you um nu mmmmumv mu m m mm mm Mmlz Vamm m muquot Mny um um xlucmulu mx39uvmnn rm n4 quotm m cquzmlv n mama Might luu multipk mndm m m Nnmuul Box amp whisker Mullim 01 J r 2m 2411 5n 2quot 170 2210 m 3110 un 1m 30 340 xsn E E Medmvl Mam Mm Medun quot Mmquot Mum m xigmvsmm 1m kitskewed 1 Symm rii I Describing data with numerical measures 1mmquot 1312010 1312010 Empirical rule and standardized values 1 m 1 1 1 1 1 1 1 1 1 1 1 1 r 1 1 1H1 1 1 1 ma C11 1 8 2 recap preseniing daia I Descripiion analysis amp comparison 1 I Probability framework waer CnMiJeme Limit to Enos interval Confidence Interval Estimate i o I 1 mania Pain Himuie mi WIdII I af con denu m1qu l The general tormula tor all contidence intervals is Poinl Eslimule t Crilicul Vuluelandurd Error Finding the Critical Value Consider a 95 confidence mienohm 10242010 I Conticlence intervals Conticlence Interval tor p 0 Known Assumptions Population standard deviation 0 is known ePopulation is normally distributed Vlt population is not normal use large sample Contidence interval estimate Common Levels ot Conticlence Commonly used contidence levels are 90 95 and 99 Con dents Mi 39 i CDEIWHEIquot lava Vails z 17 a 50 5 25 90 90 1645 95 95 96 95 95 233 99 99 255 995 995 305 999 999 327 I Margin ot Error Exampio Mugin oi evvu ta estimating p a known U X 92 J Data variation 0 e 1 as 01 e l as n U Level ot confidence 1 a e I it i a1 Sample size n Student s t Distribution The t is a tamin ot distributions 39 The tvalue depends on de rees ot treedom oil 7 Number of observations that are tree to vary utter sample mean has been calculated dtni Required Sample Size Example t a 45 whatsample size is needed to be 90 contident of being correct within 1 5 2 2 2 Z 23 1645245 21919 e 5 So the required sample size is n 220 Always round up 10242010 Conticlence Interval tor p 0 Un nown Assumptions 7 Population standard eviction is un nawn 7 Population is normally distri uted r If population is not normal use large sample a Use Student s t Distribution Determining Sample Size 7 The required sample size can be tound to reach a desire margin ot error e and level ot contidence i a 39Required sample size a known Conticlence Intervals tor the Population Proportion I39I Recall that the distribution ot the sam le proportion is approximately normal i the sample size is large with standard deviation 39 We will estimate this with sample data 10242010 I a I C I Finding the Required Sample Size Con I ence Intervct en potnts for Propomon Probems Upper and lower contidence limits tor the population proportion are calculated with the Detine the tormulo margin or error Solve for n e where 2 ts tlne standard normal value tortne level of con dence desired 7 p rstne sample prop n r n ls tne sample size n can be estimated wtlw a pilot sample it necessary or conservatively use n 50 I Sampling Sampling distributions Properties ot a Sampling Distribution For any population 7 the averagevalueot oll poss ble sample means computed train all poss ble random samples oi a given size tram the population is equal io lhepopulation mean e Tnesiandard deviaiion ot the possible samplemeons computed train all random samples or size n is equal lathe population standard deviation divid d b m uareroot otthesample size 1052010 I Sampling error Sampling error The ditterence between a value a statistic computed trom a sample and the corresponding value a parameter computed trom a population Sampling theorems It the Population is Normal It a population is normal with mean p an standard deviation 0 the sampling distribution of is altso normally distributed with I Zvalue tor sampling Distribution ot Y where 2 sample mean p population mean a population standard deliation n samplesize How Large is Large Enough For most distributions n gt 30 will give a sampling distribution that Is nearly normal v For tairly symmetric distributions n gt l5 is sutticient normal population distributions the sampling distribution ot the mean is always normally distributed Proportions 1052010 7 Even it the population is nolnormal sample means lrom the population will be approximately normal as long as the amplesize is large enough Nana the sampling distribution will have I It the Population is not Normal We can apply the Central Limit Theorem I Ettect ot increasing sample size on sampling distributions m 7 A I Population Proportions 1T t e proportion ot the population having some characteristic Sample proportion p provides an estimate ot Tr numberof suCcessesin the sam ple sam plestze n 39 lt there are two possible outcomes p has a binomial distribution 1052010 I Sampling Distribution ot p Z Value tor Proportions Approximated by a normal distribution it Standardize p to a 2 value with the tormula n139r2 5 n17139r25 where r it sampling is without replacement and n is greater than 5 of the population style t must use the finite population wherert population proportion correction factor r m 3 Backup material The Standard Normal Distribution teps 1 Draw What yuu are tanking m 2 Translate wateeste zrvatues urvtce verse 3 Usettre Standard Nurmal Tabte ltgwen a prubabtitiy DD wnch stepsz e3 Unitorm distribution characteristics Binomial distribution characteristics The mean emitted value 6 ifa x b Mean otherwise rhestmdaddwdms Variance and Standard Deviation were X e an ette gem term may X wee e tmr trmrtette treth Lt upper ltrmtoHte treth we S EFS e tmrtrmrrette Mum e 1 Calculate Mend mean t E 2 Dvawwhatyuu are lunktn r r ere upper trmrrette treth M e te e 3 Subtract iuw trumhtgh Va g e tue multiply hm 1052010 I Poisson distribution characteristics Mean l Variance and Standard Deviation where 1 numberot successes in a segmentot unit size t ttte size ot the segment ot interest I Where are we 51 1 2 Subbssnbs expeciedvaiue mm sssb Xand squave ibsiysius 3 9232010 Expected value 5D 65 7D 75 an Mumpiy sssb squaved ysius mm 54 pg 196 135 5 11 pg 197 127 Eps Mumpiy y by pvubabiiny sum up ibsss ysiuss Expected value 512 2 by 115 cuivespundmg pvubabiiiiy 4 Sum We ysiuss pmduced m 5123 gtvzriznce a squaved Weighied avevage 5 Take ibs squave mm bubs sum mm siep 4 a standard dwiminn 57 pg 196 mm 25 125 30 15B 45 1 DD Slaps 1 Muiiipiy y by pmbab my a sum up ibsss ysiuss sxnecied value 2 Subivad be expecied ysius mm sssb y and squave ibsi ysius 3 Muiiipiy sssb squaved ysius mm siep 2 by us cunespundmg pvubabiiny 4 Sum ibs ysiuss pmuussu m s12p3 variance a squaved Weighied avevage 5 Take ibs squave mm mm sum mm 512 A gtslzndzrd dwiminn Distributions I Binomial distribution 522 5 25 pg 209 5 22 n 15p2x4 A What is P4 are maxed out B What is Ps 4 are maxed out 525 n 20 A What is P5 if p 040 B What is Pgt6 ifp 025 0 expected value ifn 20 p 020 D what is standard deviation ifn 20 p 020 F321 and tribution 9232010 I Binomial distribution characteristics Mean Variance and Standard Deviation 5 34 pg 209 Old error rate 15 New error rate 05 An 10 x3 p 05 whatis Px 3 A B Based on answer to part A what is your conclusion Poisson distribution characteristics Mean Variance and Standard Deviation Where 1 number at sueeesses in a segrnentet unit size t the size erthe segment at interest I 5 50 5 51 pg 223 550 t 1 pager15 PartA t Xt 39Pxgt3 551 t 15minutes9r3 I 5 54 558 pg 240 Expected value Variance Standard deviation Part B Probability of exactly successes 8 t minutes 1 What are we looking for Px 7 Recommendation 9232010 Chapter 13 Current Liabilities and Contingencies LEARNING OBJECTIVES Alter studying this chapter you should be able to De ne liabilities and distinguish between current and longterm liabilities Account for the issuance and payment of various forms of notes and record the interest on the notes Characterize accrued liabilities and describe when and how they should be recorded l Determine when a liability can be classi ed as a noncurrent obligation including the exceptions to the general classi cation criteria Identify situations that constitute contingencies and the circumstances under which they should be accrued Describe the appropriate accounting treatment for contingencies including unasserted claims and assessments Discuss the primary differences between US GAAP and IFRS with respect to current liabilities and contingencies N Aw tn 1 F CHer HIGHLIGHTS PART A CURRENT LIABILITIES Three essential characteristics of a liability are identi ed in the de nition provided by Concepts Statement 6 Liabilities l are probable7 future sacri ces of economic bene ts 2 that arise from present obligations to transfer goods or provide services to other entities 3 that result from past transactions or even 5 In general liabilities should be recorded at their present values However liabilities payable within aneyear are exempted from this requirement and may be recorded at their face values For nancial reporting purposes liabilities are classi ed as either current liabilities or long term liabilities Current liabilities are those expected to be satis ed with current assets or by the creation of other current liabilities Usually with exceptions these are obligations payable I Within one year or within the rm39s operating cycle whichever is longer Classifying liabilities 7 Thu MchwIIII Crwnmen39 Ina 2w Student Sludv Guide 31 F Current Liabilities and Contingencies as either current or longterm assists investors and creditors in assessing the riskiness of a company s obligations The usual types of current liabilities and related accounting issues are described below Accounts Payable and Trade Notes Payable Accounts payable are obligations to suppliers of goods or services that are used in the production andor sale of goods and services and are purchased on credit These liabilities typically are nonintercst bearin The critical accounting aspects of accounts payable are determining their existence and insuring that they are recorded in the proper accounting period Trade notes payable differ from accounts payable in that they are formally recognized by a written note and generally bear interest Interest is calculated as Ft39lMUllNT X ANNUAL RAT X TIME TO MAlllRl39lY Short Term Notes Payable Shortterm notes payable may also arise from cash borrowings from banks or other nancial institutions Most companies rely heavily on short term nancing A line of credit allows a company to borrow cash without having to follow formal loan procedures and paperwork The interest may be paid in addiliun In the face amount interestbearing note or included in the face amount noninterestbea ng note ILLUSTRATION INTEREST BEARING NOTE Seattle Metal Works borrowed 400000 cash under a shortterm line of credit arrangement and issued a 4month 12 promissory note Interest was payable at maturity To record the issuance of the note Cash 400000 Notes p ld able 400000 wHly I39lllllqlnit x yll li i my AL 39 LL Current Liabilities and Contingencies To record the payment ofthe note plus interest interest expense 3400000 x 12 x 413 16000 Notes payable 400000 Cash 400000 l 10000 416000 NONINTEREST BEARING NOTE Assume the preceding note was packaged as a 400000 uonlnterestbearing note with a 12 discount rate In that case the 16000 interest would be discounted at the outset To record the issuance of the note Cash iditTcrcntc 384000 Discount on notes payable 6400000 x 12w x 41211 16000 Notes payablc mm nmmmn 400000 To record the payment of the note plus interest Interest expense 16000 Discount on notes payable 16000 Notes payable Him unmmt 400000 Cash 400000 When interest is discounted from the face amount of a note the effective interest rate is higher than the stated discount rate because the amount borrowed is only 384000 but the interest is calculated as the discount rate times the 400000 face amotmt S 16000 interest or 4 months 384000 amount borrowed 4167 a rate for4 months X 124 to annualize Lhe rate 7 125 effective interest rate A i gt 7 i TIM MuGrmvHHI Crmmnnim Ill39 20 Student Sludy innc I 3 3 F Current Liabilities and Contingencies Commercial Paper Commercial paper refers to unsecured notes sold in minimum denominations of 25000 with maturities ranging from 30 to 270 days Commercial paper Frequently is purchased by other companies as a short term investment and interest usually is discounted at the issuance of the note It usually is backed by a line of credit with a bank allowing the interest rate to be lower than in a bank loan Accounting for commercial paper is exactly the same as for other shortterm notes as shown in our previous illustration Accrued Liabilities Accrued liabilities arise when expenses already have been incurred but cash has not yet been paid accrued expenses These are recorded by adjusting entries at the end of the reporting period prior to preparing nancial statements Examples are salaries payable income taxes payable and interest payable For illustration assume salaries of 600000 have been earned by employees by the end of the period but will not be paid to employees until the following period The expense and related liability are recorded as Salaries e pen c 600000 Salaries payable 600000 Compensation for Future Absences An employer accrues an expense and related liability for employees compensation for future absences such as vacation pay if the obligation meets four conditions 1 The obligation is attributable to employees39 services already performed 2 The paid absence can be taken in a later ear 7 the bene t vests will be compensated even if employment is terminated or the bene t can be accumulated over time 3 Payment is probable 4 The amount can be reasonably estimated Deposits and Advances from Customers When cash is received from a customer as a refundable deposit or as an advance payment for products or services a liability is created to return the deposit or to supply the products or services For instance if a utility company collects a deposit when service is begun for a new customer a liability say Liability 7 refundable deposits is recorded Similarly a magazine publisher records a liability from the sale of magazine subscriptions The liability say Liability 7 magazine subscriptions converts to revenue when magazines are mailed in Chapter 5 we discuss circumsmnces in which customers have paid but the company isn t allowed to recognize revenue because it hasn t performed what needs to be performed to earn revenue in those circumstances we debit the asset paid by the customer typically cash and TheMchw7 quot I 21111 g 174 Intermediate Accounting le Slutml Study Guide Current Liabilities and Contingencies credit unearned revenue a liability When the company performs we debit unearned revenue and credit revenue Like other liabilities obligations produced by customer deposits and advances are classi ed as current or long term liabilities depending on when the obligation is expected to be satis ed Gift Cards Gi cards are a particular type of unearned revenuei Revenue is recognized either when the gi card is redeemed or when the probability of redemption is viewed as remote based on expiration or the company s experience Collections for Third Parties Firms often make collections from customers or from employees on behalf of tax authorities or other third parties The companies then periodically remit these amounts to the appropriate parties in the meantime these amounts represent liabilities Examples include sales taxes payroll taxes employee withholding taxes insurance and union dues Current Maturities of LongTerm Debt A long term obligation usually is reclassified as a current liability when it becomes payable or callable within the coming year or operating cycle For instance a 30 year note is reported as a longterm liability for 29 years but is classi ed as a current liability in its 30th year Exception SherHem obligations can be reported as noncurrent liabilities if the company intend to re nance on a longterm basis an b demonstrates the ability to do so by a re nancing agreement or by actual nancing For instance if new longterm notes or bonds or even new stock will be issued and the proceeds used to pay the maturity amount of the 30year notes above the liability is classi ed as a long term liability Several weeks usually pass between the end of a company s scal year and the date the nancial statements are issued To su rt a company s ability to re nance on a longterm basis a re nancing agreement or actual nancing can occur after the end of the scal year but must exist prior to the issuance of nancial statements An existing credit agreement with a bank that permits longterm borrowing of a suf cient amount can be used to meet this criterion International Financial Reporting Standards Classi cation of the current portion of longterm debt is an area of difference between US GAAP and FRSi Under US GAAP liabilities payable within the coming year are classi ed as longterm liabilities if re nancing is completed before date of issuance of the nancial statements Under IFRS re nancing must be completed before the balance sheet dare on M Ll l 39lnc2ll 13gt Current Liabilities and Contingencies PART B CONTINGENCIES A loss contingency exists when a potential loss depends on whether some future event occurs g a pending lawsuit at yearend for w to the outcome will not be known until after the nancial statements are issued Whether a contingency is accrued and reported as a liability depends on a the likelihood that the con rming event will occur It pro able con rming event is likely to occur 2 reasonably possible 7 the chance the continuing event will occur is more than remote but less than likely 34 remote the chance the continuing event will occur is slight and b what can be determined about the amount of loss 1 own 2 reasonably estimable 3 not reasonably estimable A contingent liability is recorded if 1 a loss is probable the continuing event is likely to occur and 2 the amount of loss can be at least reasonably estimated Loss or a pm 9 Liability xxxx xxxx If either of these criteria is not met and if there is at least a reasonable possibility that the loss will occur only footnote disclosure should be made The possibilities are illustrated below Donna AMqu39r 01quot POTENTIAL Loss Reasona easonabiy Known Estlmablc Estimablc LIKELIHOOI Liability Liability Disclosure Probable Note amp Disclosure Note amp Disclosure Note Only Reasonably Disclosure Disclosure Disclosure Possible Note Note Note Only me Only No Disclosure No Disclosure Nn Disclosure Remote Required Re uired Requir39 n M U39 39 l 7m 1376 Inlermediatu Adminmg 37 Current Liabilities and Contingencies Most consumer products are accompanied by a warranty or guarantee Warranties and guarantees are loss contingencies for which the conditions for accrual almost always are met Warranty expense 113quot 4jx 39 Estimated warranty liability 140000 l4tt Thus we record the costs of satisfying guarantees as expenses in the same accounting period as the revenues from the products sold matching principle Similarly we also accrue a liability in connection with premium offers Companies frequently offer premium cash rebates centsoff coupons toys For box tops etc to stimulate sales The cost ofpremiums estimated to be provided to customers represents an expense and an estimated liability in the reporting period the product is sold Subsequent Events Recall that several weeks usually pass between the end ofa company s scal year and the date the nancial statements or that year are issued When the cause of a loss contingency occurs before the yearend a clarifying event after the ycar cnd but before the Financial statements are issued can be used to determine how the contingency is reported Unasserted Claims and Assessments Even ifa claim has yet to be made when the nancial statements are issued we still may necd to accrue or disclose a contingency For instance the EPA may have been investigating a chemical spill by a chemical company but hasn t yet proposed a penalty for violation of environmental laws Even then if it is probable that an unassertcd claim or assessment or an untiled lawsuit will occur we apply the usual criteria probable unfavorable outcome and reasonably estimable amount to consider whether and how to report the possible loss Gain Contingencies A gain contingency an uncertain situation that might result in a gain is not accrued Instead we disclose them in the notes to the nancial statements being careful not to give misleading implications about the likelihood of their being realized Executory Contracts Executory unpcrformed contracts or agreements such as Jurymm lgl39eumcnm39 and lines of credit usuall are not rccordcd because a transfer of assets or liabilities has not yet occurred However if the anticipated considerations are material note disulosurc is require i m womanIII CowmanJ 111 Smdem Sttmiv meIc 1L 7 Current Liabilities and Contingencies International Financial Reporting Standards Overall accounting for contingent losses currently is quite similar between IFRS and US GAAP IFRS defines probable as more likely than not which is a lower threshold than typically associated with probable in US GAAP Also lFRS refer to these accrued liabilities as provisions and refer to possible obligations that are not accrued as contingent liabilities The term contingent liabilitiesquot is used for all of these obligations in Us GAAPr And if there is a range of equally likely outcomes associated with a contingency IFRS requires using the midpoint of the range while US GAAP requires using the low end of the range Last IFRS requires reporting present values of estimated cash ows when the effect oftimc value of mono is material US GAAP allows using present values under some circumstances when the timing of cash ows is xed or reliably determinable SELF STUDY QUESTIONS AND EXERCISES Concept Review l The three essential characteristics of liabilities for purposes of nancial reporting are that liabilities are probable that arise from to other entities that result from sacri ces of economic bene ts obligations to transfer goods or provide services 5 transactions 01 events 0 N In most cases current liabilities are obligations payable within one year or within the rm39s whichever is longer are obligations to suppliers of merchandise or of services purchased on open account 5 Trade notes payable differ from accounts payable in that they are formally recognized by a written Often these are ot a somcw at term than open accounts and sometimes bear A allows a company to borrow cash without having to follow formal loan procedures and paperwork 9 Interest payable on notes is calculated as face amount gtlt annual rate X S When interest is discounted from the face amount of a note the effective interest rate is than the stated discount rate 8 refers to unsecured notes usually sold to other corporations in minimum denominations of 25000 with maturities ranging from 30 to 270 days gar1e Mrgatimciwanm 1n I if 1378 Intermediate Accounting 6e Slutuni Sludv Gmqu Current Liabilities and Contingencies 9 represent expenses already incurred but for which cash has yet to be paid accrued expenses recorded by adjusting entries at the end of the reporting perio 10 Collecting cash from a customer as a refundable deposit or as an advance payment for products or services creates a 11 Sales taxes collected from customers represent until remitted 12 Longterrn liabilities that are clue on demand by terms of the contract or violation of contract covenants 7 must be reported as 13 Short term obligations can be reported as noncurrent liabilities ifthe company a intends to and b demonstrates the w 14 A involves an existing uncertainty as to whether a loss really exists where the uncertainty will be resolved only when some future event occurs 15 A liability is accrued ifit is both that the con rming event will occur and tie amount can be at least 16 A loss contingency must be disclosed in notes to the nancial statements ifthere is at least a that the loss will occur l7 The estimated amount of cash rebates or the cost of noneash premiums estimated to be given out represents both an in t e reporting period the product is sold 18 Events occurring after the yearend but before can be used to clarify the nature of nancial statement elements at the report date l9 It must be that an unasserted claim or assessment or an un led lawsuit will occur before considering whether and how to report the possible loss 20 contingencies are not accrued Answelzr I a future b prCSent c past 2 operating cycle 3 Accounts payable 4 promissory note longer interest 5 line of credit 6 time to maturity 7 higher 8 Commercial pa er 9 Accrued liabilities ll liability to return the deposit or to supply the products or services 11 liabilities 12 current liabilities 13 a re nance on a longterm basis and b ability to do so by a re nancing agreement or by actual nancing 4 loss contingency 15 Probable reasonably estimated 16 reasonable possibility 17 an expense estimated liability 18 nancial statements are issued 19 probable 20 Gain rg lyutiicgm nicamgmw gig 704 39 Current Liabilities and Contingencies REVIEW EXERCISES Exercise 1 On October 1 Alexander Supplies bonowed 300000 cash from First Bank under a line of credit arrangement Alexander issued a 5month 8 promissory note Alexander s scal period is the calendar year Interest was payable at maturity Required 1 Prepare thejoumal entry for the issuance of the note 2 Prepare the appropriate adjusting entry for the note on December 31 3 Prepare Lhe journal entry for the payment of the note at maturity Salminn equiremenl 1 Cash 300000 lnt mm 300000 Requirement 2 3 I 6000 inl Ire 4m 39ahle 6000 Requirement 3 m ngt1 m 2 x 4000 MmeI 39 6000 n r w 300000 thr 17 310000 Tm Mimi Compunm39 mi 20 7 7 3 I 0 Intermediate Accmmmg 6e Current Liabilities and Contingencies Exercise 2 Suppose the note in the previous exercise was a noninterest bearing notequot and 8 is the bank s stated discount rate Required Prepare the journal entry for the issuance of the note 2 Prepare the appropriate adjusting entry for the note on December 31 3 Prepare the journal entry for the payment of Lhe note at maturity Somian Re In ementl L 4 290000 Discount on 5m 10000 300000 Requiremenl 2 39 r 312 5000 n39 m 01 6000 or 0200000 x 2275144 x 302 56000 The effective imcmsl me is 0275500 510000 e 5290000 x 125 Requirement 3 39 2m 4000 mi 39rnum n n4 nu ma 4000 y 300000 m in 300000 r or 200000 x 8275244 x 202 54000 The effective inlercsl rule is 8275234 0 I000 L 290000 x 125 Emmy 5000 Guide try 71m MrG Ii Cmngania Inr 7 Current Liabilities and Contingencies Exercise 3 Bennett Plastics has 20 employees Each employee is granted 2 weeks of paid vacation per year Vacation time not taken in the year earned can be carried over to subsequent years At the and of the reporting year four employees each of who earn 800 per weekq had vacation time carryovers as fol ows Vacation Vacation Emgloyee Weeks Earned Time Taken Laverne 2 1 Shirley 2 0 Ken 2 0 Stimpy 2 1 Required 1 Calculate the amount of any liability that Bennett should accrue at the end of the reporting year for vacation time 2 Prepare the journal entry to record vacation salaries Sululion Requirement 1 Weeks earned 8 Time taken 2 Untaken vacation time 6 x 800 Liability for vacation time 4800 Requirement 2 4800 hr n r Liability compensated absences 4800 39Jquot 39 In 2011 lmermedime Accounting 66 Exercise 4 Current Liabilities and Contingencies General Phil s Cereal 01Tch a VCR Voodoo Code Reader in exchange for 5 return box tops Funzy estimates that 40 will be redeemed The cardboard and plastic VCRs cost the company 50 600 000 boxes of cereal were sold during the year By the end of the year 90000 box tops had been redeemed Required Calculate the liability that General Phil s Cereal should report at December 31 Spinion 600000 X 40 240000 Box tops expected to be redeemed 5 48000 Total VCRs cxpected 90000 5 184000 VCRs issued 30000 VCRs to be issued X 50 5315000 Liability MULTIPLE CHOICE Enter the letter corresponding to the response which best completes each of the following statements or questions The essential characteristics ofa liability do not include The existence of a past causal Lransaction or event b Present obligation c The existence ofa legal obligations d A future sacri ce of economic bene ts 9 Of39the following which usually would not be classi ed as a current liability 21 A nine month note to be paid with the proceeds from the sale of common stock b Bonds payable maturing within the coming year c Estimated warranty liability d Subscription revenue received in advance Sim2n shalt Tmle 7 c lmwmwmsany1 I 3 I J Current Liabilities and Contingencies 3 Equot Which of the following results in an accrued liability Sales taxes collected on recent sales Interest on a 6 month bank loan due in two months Yes a es b Yes No c No No d No Yes On November 1 Epic Distributors borrowed 24 million cash to hind an expansion of its facilities The loan was made by W BancCorp under a shortterm line of credit Epic issued a 9month 12 promissory note Interest was payable at maturity Epic s scal period is the calendar year In Epic s adjusting entry for the note on December 3 interest expense will he 50 a b 240000 0 480000 d 640000 On October 1 2009 Parton Industries borrowed 12 million cash to provide working capital The loan was made by Second Bank under a shortterm line of credit Parton issued an 8month noninterest bearing note 8 is the bank s stated discount rate Patton s scal period is the calendar year In Patton s 2006 income statement interest expense for the note will be 0 b 240000 0 360000 d 480000 Commercial paper has become an increasingly popular way for companies to raise funds Which of the following is not true regarding commercial paper a Commercial paper is often purchased by other companies as a shortaterm investment Commercial paper usually is sold in minimum denominations of 25000 with maturities of greater than 270 days c Interest often is discounted at the issuance of the note d Usually the interest rate is lower than in a bank loan On November 1 Shearer Shoes borrowed 18 million cash and issued a 6month noninterestbearing note The loan was made b Third Commercial Bank whose stated discount ratequot is 9 Shearer s effective interest rate on this loan is a o b 90 c 942 d InmrmedmEi coawm 7675 Current Liabilities and Contingencies 8 Under US GAAP liabilities payable within one year can be excluded from current liabilities only if a The business intends to re nance the obligations on a longtemi basis 1 The business has the demonstrated ability to re nance the obligations on a long term basis Both a and b Liabilities payable within one year always must be classi ed as current l on liabi ittes 9 Under IFRS a company can demonstrate their ability to re nance long term debt for purposes of excluding the debt from current liabilities b a Completing re nancing before the date of issuance of the nancial statements b Completing refinancing before the balance sheet date c Promising to re nance the liabilities d None of the above 10 Reunion BBQ has 4000000 of notes payable due on March 11 2010 which Reunion intends to re nance On January 5 2010 Reunion signed a line of credit agreement to borrow up to 3500000 cash on a two year renewable basis 0n the December 31 2009 balance sheet Reunion should classify a 500000 of notes payable as shorvterm and 3500000 as longterm obligations b 500000 of notes payable as longterm and 3500000 as shortterm obligations c 4000000 of notes payable as shortterm obligations d 4000000 of notes payable as long term obligations 11 Which of the following statements concerning lines of credit is untrue A line of credit is an agreement that permits a com any to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork A noncommi ed line of credit is a formal agreement that usually requires the rm to pay a commitment fee to the bank 0 Banks sometimes require the company to maintain a compensating balance on deposit with the bank say 5 as part of the line of credit agreement 1 Most short tern1bank loans are arranged under an existing line of credit 12 On January 1 2009 Yukon Company agreed to grant its employees two weeks vacation each year with the provision that vacations earned in a particular year could be taken the following year For the year ended December 31 2009 all twelve onukon39s employees earned 1200 per week each Eight of these vacation weeks were not taken during 2009 In Yukon39s 2009 income statement how much expense should be reported for compensated absences 0 b 9600 c 14400 d 28800 7 o iMcGr nwIlrlCongumer Inc 20 Srudem Sludy Guide 1315 Current Liabilities and Contingencies 13 An enterprise should accrue a liability for compensation of employees unpaid c The McGrvaliI ypyniyx Inc 2011 1346 9 vacations if certain conditions exist Each of the following is a condition for accrual except 3 Compensation for the vacations is probable b The employee has the right to carry forward the vacation time beyond the current period c The amount of compensation is known d The employee bene t has been earned In its nancial statements an enterprise should accrue a liability for a loss contingency involving a possible cash payment if certain conditions exist Each of the following is a condition for accrual except a The payment is probable b The cause of the loss contingency occurred prior to the end of the year c The amount of payment can be estimated before the nancial statements are issued d The obligation is a legally enforceable claim Which ofthe following loss contingencies generally do not require accrual a Manufacturers product guaran ees b Claims by government agencies with probable negative outcomes c Obligations due to cash rebate o ers d Retailers extended warranties Warren Advertising becomes aware of a lawsuit after the end of the scal year but prior to the issuance of nancial statements A loss should be accrued and a liability should be reported if the amount can be reasonably estimated and a The cause for action occurred prior to the end of the scal year I The damages would be payable within a year c Both a an do The contingency should not be accrued A loss contingency should be accrued when the amount of loss is known and the occurrence of the loss is Remote Reasonably possible a No No b Yes Yes c Yes No d No Yes Immumdiuze At39caunling 6 gt so gt5 N o A nswers MPPNr 7057 End39squot Study Quinta Current Liabilities and Contingencies During 2009 Green Thumb Company introduced a new line of garden shears that carry a twoyear wananty against defects Experience indicates that warranty costs should be 2 ofnet sales in the year of sale and 3 in the year after sale Net sales and actual warranty expenditures were as follows Net Actual warranty sales expenditures 2009 45000 81 000 20 l 0 120000 3500 At December 31 ZOIO Green Thumb should report as a warranty liability of a 900 b 1250 2 3750 1 4500 There is a possibility of a safety hazard for a manufactured product As yet no claim has been made or damages though there is a reasonable possibility that a claim will be made lfa claim is made it is probable that damages will be paid and the amount of the loss can be reasonably estimated This possible loss must be Accrued Disclosed a Yes Yes b Yes No at No Yes d No No Under IFRS if every amount in a range of contingent losses is equally likely the amount accrued is the a Low end of the range b High end of the ranger e Midpoint of the ranger d None of the above Gain contingencies usually are recognized in the income statement when The gain is realized The gain is probable and the amount is known The gain is probable and the amount can be reasonably estimated The gain is reasonably possible and the amount can be reasonably estimated P F F F 6 b ll b 6 a 21 a 7 c 12 b 17 a 8 c 13 c l8 c 9 b 14 d l9 d 10 at 15 d 20 c m rm twat 4112ralwiii uigng A A 1317 Hypothesis testing i AMAZING is the new awesome Hypothesis testing The Null e ls the statement about the population parameter that w ll be tested s Always includes an equal ty e gt e The benefit ot the doubtquot goes to the null hypothesis e thestatus auo goes into the null hypothesis The Alternative e ls the oppos te ot the null hypothesis e Challenges thestatus auo e Never contains the s or 2 sign e ls generally the hypothesis that is belieed or needs to be supported by the researcher e a research hypothesis Formulating Hypotheses Example11he average annual income ot buyers ot Ford F150 pi kuptrucks is claimed to be o5000 per year An industry analyst wouldl llte to test this claim it What is the appropriate test i The analystwill believe the claim Unless sutticient evidence is tound to discredit it 1122010 Hypothesis testing overview Innocentuntil proven guilty ull and alternative hypotheses Signiticanceleel critical value reiection region amp errors 7 Decision rule Means and proportions sigma known and unknown s Upper lower twotail tests to ego Formulating Hypotheses i Example 1 rord motor company has worked to reduce road noise inside the cab otthe redesigned rtso pickup tructc it would like to report in its advertising that the trbck isauieter the average otthe prior design was o3 decibelsat oo mph s What is the appropriate lest It the null hypothesis is re39ected Ford has sufficient evidence to support that e truck is now quieter Errors in Making Decisions I Error 7 Reiect a true null hypothesis r Considered a serioustype oterror The probability 01 Type 1 Erroris a r Called level ot signi icance ot the test d Set by researc er ina vance type II Error s Fall to reiect a talse null hypothesis l the probability ot type ll Error is p I Process of Hypothesis Testing 1 Specify population parameter of interest 2 Formulate the null and alternative hypotheses 3 Specify the desired significance level a 39 4 Define the reiection region 5 Take a random sample and determine whether or not the sample result is in the reiection region 39 6 Reach a decision and draw a conclusion Level of Significance and the Relection Region Lower to t test Upper tot39l test Two tailed test Example lt 3 Example Hm tt 7 Hui tt 3 HA tt gt 3 HA tt e 3 t t l A l A o I 115 o 232 x nQL 2mm t mm mm Dom mew pValue Approach to Testing H Convert Sample Statistic i to Test Statistic a 2 value if a is known Determine the pvalue from a table or computer 39 Compare the pvalue with a elf pvalue lt 1 reiectHO elf p value 2 a do not reject HO am new er RetectHntl1gt RetectHntl Remove tent 7gtz tett xlt xztta7gtzm 1122010 I Level of Significance a 1 Defines unlikely values of sample statistic if null hypothesis is true Defines reiection region of the sampling distribution 1 Is designated by a level of significance Typical values are 01 05 or 10 Is selected by the researcher at the beginning Provides the critical values of the test Two Equivalent Approaches to Hypothesis Testing Zunits e For given a nd tne crtical z values 39 rzu Zuor 232 7 Convert tne sample mean 1 to o 1 test stott39stt39c e Reiect t tu tr 1 is in thereiection region otherwise do not reiect HE 39 x units 7 Given a calculatethecritical values X or 21211 Vida2M r Thesample mean t39s tne test stott39stt39c Reiect HE it x t39s t39n tne reiection regt on otnerwt39se do not reiect HE Hypothesis Tests for p 0 Unknown 1 1 Specify the population value of interest I 2 Formulate the appropriate null and alternative hypotheses I 3 Specify the desired level of significance 4 Determine the reiection region critical values are from the tdistribution with n1 5 Obtain sample evidence and compute the t test statistic 6 Reach a decision and interpret the result 1122010 Hypothesis Tests for Propor ons 962010 It39s inevitableunti it isn39t v IILite looks just a little more mathematical and regular than it is its exactitude is obvious but its inexactitude is hidden its wildness lies in wait GK Chesterton as quoted in When Genius Failed Lowenstein quotNotice there is a key difference between a share of IBM or an infectious disease and a pair of dice With dice there is risk you could roII snake eyes but there is no uncertainty because you know tor certain the chances of getting a 7 and every other result Investing contronts us with both risk and uncertainty There is a risk that the price of a share of IBM will fall and there is uncertainty about how likely it is to do so When Genius Failed Lowenstein 962010 962010 Visualizing events 962010 4 9 a Using relative trequency method what is the probability that an item is rowni b Probability that an item is a YZ99 c Joint probability that an item is a YZ99 and browni d Product chosen at random Event that a YZ99 was chosen and event that a white product was chosen Are these events mutually exclusive lam XB 50 302 105 200 607 YZQQ 40 205 130 375 Total 342 310 330 982 48 a Using relative trequency method what is the probability that a randomly selected employee will be temale b Probability that balance will be between 25000 and 49999 c Probability that an employee will be temale with account between 50000 and 99999 Balance Male lt25llt 635 495 1130 25 to lt50k 185 210 395 50 to lt 100k 515 260 775 gtiook 155 45 200 Total 1490 1010 2500 Probability rules Probability rules summary 2 sum at all probabilities ot all possible X Pei l outcomes l p l60 event probability sum ot all individual PE Pe1 Pez Peg outcomes that term the event pl O an OR probability is the sum ot the event PEl or E2 PE1 PE2PE1 and E2 probabilities minus the events ioint probability pl64 Probability ot El given E2 events ioint PEl E2 PEl and E2E2 probability divided by the probability ot the given event p l68 EX 4l0 It two events are independent the conditional probability will equal the individual probability it both events probability is greater than 0 p l7l Probability ot El and E2 equals the Dependent product at the two events multiply PEl and E2 PElPE2 El probabilities p l72 Independent PEl and E2 PElPE2 PE1E2 PEl and PE2E1 PE2 It not events are dependent 962010 432 Q Probability ot randomly selected trom Boston Probability ot between 30 and 90 days Probability of over 90 days and trom Seattle 7 n d It randomly selected trom LA probability ot 60 days or tewer Days Seu le Boston overdue 122 198 Under 30 137 287 7721 3060 85 46 76 109 316 6190 33 27 55 48 163 Over 90 18 32 45 66 161 16161 273 227 374 510 1384 166 13 Exam 1 topics 3 Class limits and width how to calculate 39 types ot charts to use and when quartiles calculating and meaning interquartile range calculation and meaning measures ot center calculations when preterred advantagesdisadvantages out 39ers a standard deviation calculations meaning what causes standard deviation to c ange a empirical rule meaning and sigma measures coetticient ot variation meaning calculation v z scores calculation and meaning 39 data hierarchy quantitative qualitative nominal ordinal ratiointerval types ot bias in collecting data 3 methods ot collecting data random cluster stratitied convenience non statistica e c a probability concepts rules and how to solve probability problems 962010 962010 Backup Ch 1 amp 2 recop presenting do ro Chapter 3 recap describing doto wnumericol measures Luczniun Rulinlumrml Numma Location Equations Variance Standard deviation N 2 N C x x g 209 u2 2 Z 2 20 m2 E62 1 N G H o m N N N n f x2 n 3 2 xi gt02 Z Z 209 gt02 g 2 i1 n S 11 n 1 n1 n1 Coefficient of variation Standardized quot2quot values x H ZX X c S 962010 I lnterence Overview Chapters 810 Menhud Purummr Chap m Requiredacrnplesize na 8 Carilidence interval Mean 1 in Sigma known a Hm Sigrid unknuwri Pvapcvtiun z a Hypothesis test a 2 la Sigma known Q Hey eigna unknown Piepoiiien i 9 iwe Contidence inienei Mean 1 la igrn39a known io Hay Sigrid unknuwn Hypothexm39lesl Mean 2 re sigma known 10 llarsigna urian Hypothesis testing recap The Null 7 is ine statement about ine population paramder inai w it be tested 7 Always includes an equally e gt 7 The benefii ot ine doubtquot goes io ine null hypothesis 7 Theslatus quo goes inio the null hypothesis v The Alternative 7 is the oppos ie ot ine null hypothesis 7 Challenges lheslatus quo 7 Never containslhe s or 2 sign 7 is generally ine hypothesis inai is believed or needs io be supported by the researcher 7 a research hypothesis Working with two populations Form interval estimates Test hypotheses E For two independent population means r Standard deviations know Standard deviations unknown 11102010 I Hypothesis testing two populations v n iii bio asrnu ea can Sax statsticxluadwadsab nn cridhcxnsteshlrnl Process ot Hypothesis Testing 39 1 Specity population parameter ot interest v 2 Formulate the null and alternative hypotheses 3 Specity the desired signiticance level a a 4 Detine the reiection region L 5 Take a random sample and determine whether or not the sample result is in the reiection region a 6 Reach a decision and draw a conclusion Assumptions 7 When oi and 02 are known Samples are independent Samplesize gt 30 When 01 and 02 are unknown Populations are normally distributed Populations have equal variances Samples are independent Confidence Interval Estimate Upper Cnnlidenm Poinf Hima39 4 Width of confidence imerval i ironquot I i Contidence intervals p1 p2 o unknown Hypothesis Tests tor Two Populations Two Population Means IndependentSamples a known Single pmulatim For two oopulofions fonnulos ore milnr o onri o2 ore known o onri o2 ore unknown X1 X2 i Z 7 2 Loweriaii test Upper tail test Twortailed test Ho vi vz Horvisvz Howin HAViltl 2 HArvigtv2 HArim iAz ie ie ie Horviwzzo Horvrvzso H it i tlzo HAVV V2ltO HArviov2gt0 Humour 11102010 Point estimate and standard error Poinl Eslimule i Crilicul Vuluehndurd Error Poiniesiimoie for fire difference is x1 7x2 Critical value is z for known sigma i for unknown Standard error formulas a and a are known 11 and 62 are Hypothesis Tests tor the Ditterence Between Two Means H Testing Hypotheses about pr 112 i Use the same situations discussed already Standard deviations known A Standard deviations unknown Hypothesis tests tor p1 p2 Two Populoiion Means Independent Samples r 1 i a 02 um i l l i i i i 39an Zo o Zo2 Reiect HD if z lt 1 Reiect HE if z gt zu Reiect HE if z lt 1W2 or z gt 242 11102010 I Tesfsfa s cs p1 p2 a known a unknuwn Smgb pwubhm For two nnnulminns fumulus m n39rnilnr n um a m known a um a m unknuwn XwiX2H1H2 tX1X2H1H2 2 2 1 1 01 02 Sp int i 01 n2 n1 n2 I Continuous probability distributions The Standard Normal Distribution 1er 1 Draw What yuu are luukmg m 2 Translat e wsiues tn zrvalues Divine verse 3 Use the Standard Nurmai Tabte w given a pvubab My steps 2 m witch Unitorm distribution characteristics The mean emitted value 6 if a39 S X i b otherwise Thestandud deviation s mm X e mm nth sew Mam MW X mm a ism wens Newt L upquot imam Newt 5 a imnmsme Mum s 1 Calculate mane me w E 2 Dvawwhatyuu are lunkin r it We limqum insmi ism s to L 3 Subtract iuw mmhigh Va g u tue multiply win I The Normal Distribution 9262010 Unitorm distribution Backup material I Binomial distribution characteristics Mean H Ex np l Variance and Standard Deviation 9262010 I Poisson distribution characteristics Variance and Standard Deviation I Mean where A numberot successes in a segment ot unit size t the size otthe segmentot interest
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