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ACC 100 Study Guide - Final Guide: Cash Flow Statement, Net Income, Retained Earnings

89 views14 pages
salmoncamel137
3 Dec 2012
School
Ryerson University
Department
Accounting
Course
ACC 100
Professor
Else Grech

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Document Summary

Sole proprietorship: a business with one owner (and is not a taxable entity) Partnerships: owned by two or more individuals (also not a taxable entity) Non-business entities: organized for a purpose other than earning a profit. Economic entity concept: assuming that everything is accounted for in a business. Personal costs must be separate from the business. Investing activities: purchase and sale of long-term assets. Retained earnings equation: beginning re + net income dividends = ending retained earnings. Cost principle: assets are recorded at the cost to acquire them. Going concern: that a company will continue to operate in the near future. Income statement: reports the results from operations in a specific period of time, revenues, expenses, and net income/loss (part of performance ) Balance sheet: shows the financial position of the company up to date, assets, liabilities, and shareholders" equity. Shows the movements of cash and cash consequences of transactions by the type of activity for a period of time.

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Related Questions

Bob has a very successful used car business located at 210 Ocean View Drive in Pensacola, Florida. Last year, you filed a Schedule C for Bob that had $1,200,000 in taxable income. The business will have an income growth rate of 10% per year over the next several years. Bob’s personal wealth, including investments in land, stocks, and bonds, is about $14,000,000. Last year, he reported interest income of $20,000 and dividend income of $6,000. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000. The stocks and bonds have a tax basis of $1,200,000 and they are currently worth $5,000,000. All of the investments have been owned for more than a year. In addition to his investments, Bob paid $140,000 for his home in 1972 and it is now worth $600,000. The used car business is currently valued at $53,000,000 including the land and building, which are worth $41,000,000. Bob’s tax basis in the land and building is $2,000,000 and $400,000, respectively. The inventory is worth $12,000,000, with a cost basis of $5,000,000; the remaining assets, which include office furniture and equipment, make up the remainder of the business’s total value. The office furniture and equipment are fully depreciated. Bob wants your professional advice regarding whether he should continue to operate as a sole proprietor or convert the business to a partnership, an S corporation, or a C corporation. Based on one of the business entities selected, Bob wants to include Mandy—his daughter—in the business as an owner and manager with a possibility of 40% interest. One of his concerns is what would happen to his business after he passes away. Mandy’s personal tax information is as follows: Mandy Jones DOB: June 30, 1990 SSN: 999-99-9999 Marital Status: Single Home Address: 5990 Langley Road, Pensacola, FL 35203 You will need to describe the tax and limited liability effects on a chosen business entity should Bob decide to reduce the amount of tax paid per year, as well as the protection of personal assets should there be a possible claim against the company’s assets.

Please help me to Interpret the tax law pertaining to a S corporation business and justify my recommendation using details consistent with tax law, code, and regulations.

Investment and financing decisions, which may beshort-term or long-term decisions are best describedas:

financial decision making.

economic decision making.

accounting decision making.

Mutual funds, pension funds, investment dealers andinsurance companies are best described as examples of:

corporate finance.

market intermediaries.

financial intermediaries.

Farmers and Merchants Bank lends money to Ruth topurchase a car from Steven Toyota. Ruth is going to insure the carwith Allstate Insurance. Which party is best described as thecreditor?

Ruth

Steven Toyota

Allstate Insurance

Farmers and Merchants Bank

Which of the following would not be described as adebenture?

An unsecured loan

A loan secured by collateral

A loan secured by the “full faith and credit” of theissuer

Morgan Stanley was the investment banking firm that tookFacebook from being a closely held company to issuing stock to thepublic for the first time. Which of the following terms mostclosely describes this?

money market security.

issuing commercial paper.

initial public offering (IPO).

debt security backed by the general credit of theissuer.

Which of the following transactions does not take placein the primary market? An investor:

buying a newly issued municipal bond.

buying shares of an initial publicoffering.

selling one hundred shares of stock through a stockbroker.

buying a U.S. Treasury bill through the governmentauction.

The majority of home purchases in the U.S. are securedwith a mortgage. A mortgage is:

an unsecured loan.

an equity investment in the property.

a debt obligation secured by a specificproperty.

Which form of business would most likely describe thefollowing, a college student other students, a retired woman whobabysits children, a teenager who mows lawns, and a partyclown?

Partnership

Corporation

Sole proprietorship

Limited liability company

Flow-through taxation is a characteristic for all butthe following forms of business?

Partnership

Corporation

Sole proprietorship

Limited liability company

Your sister wants to start a tee shirt business on e-Baywith you to help pay for college tuition. All of the following areadvantages to partnerships that you should both consider, except____________?

Easy to form

Access to capital

Business income is taxed once, at the individualpartner’s level

Which of the following takes into account takes intoaccount the opportunity cost of funds?

Net profit

Economic profit

Accounting profit

When we talk about capital structure, this refersto:

the cash, inventory, and accountsreceivable.

mix of debt and equity to finance anenterprise.

the investment in plant, property andequipment.

The uncertainty associated with the use of debt tofinance a business enterprise is best described as:

financial risk.

business risk.

operating risk.

The mix of debt and equity that is used to finance abusiness enterprise is best described as theenterprise’s:

assets.

working capital.

capital structure.

capital expenditures

Generally accepted accounting principles (GAAP) are bestdescribed as a(n):

organization that establishes the accounting principlesfor U.S. financial reporting.

accounting standards promulgated by the InternationalAccounting Standards Board (IASB.)

set of basic principles and conventions that are appliedin the preparation of financial statements.

organization that establishes the accounting principlesfor business entities in the European EconomicCommunity.

Which reporting convention requires recording revenueand expenses when the transaction occurs, regardless of when cashchanges hands?

Cost basis

Cash basis

Accrual basis

The summary of the company’s performance over a periodof time, typically a fiscal quarter or fiscal year

Balance sheet

Statement of stockholder’s equity

Income statement

Statement of cash flows

_______ is the cash flow from the day-to-day operationsof the business; the result of subtracting the increase in newworking capital from traditional cash flow.

Cash flow from investing

Cash flow from financing

Simple cash flow

Cash flow from operations

The debt ratio is classified as which type ofratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

Inventory turnover, accountsreceivable turnover, fixed asset turnover, and total asset turnoverare all classified as which type of ratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

ABC Company attempts tomanage its earnings by extending the useful life of all of itsequipment. Which of the following will not be an outcome of thischoice by management?

Income will be higher than it would have been underprior accounting methods.

Equipment values will be higher than they would havebeen without the change.

Depreciation expense will be lower than it would havebeen under prior accounting methods.

Depreciation expense will be higher than it would havebeen under prior accounting methods.

It is important for a companyto know the level of sales at which it covers all its variable andfixed operating costs. This level of sales is best described asthe:

gross profit margin.

contribution margin.

operating break even.

operating profit margin.

The minimum return thatinvestors expect to earn on the investment in stock is bestdescribed as:

growth rate.

risk premium.

capital gains yield.

required rate of return

If a company returns more than the required rate ofreturn on a stock, what happens to the value of thatstock?

The stock price falls.

The stock price rises.

The stock price stays the same.

When market rates are greaterthan the dividend rate, preferred shares will tradeat:

par.

a discount.

a premium.

Russell has earned a fortune manufacturing educational toys forchildren. After 10 years of designing and producing toys, he soldhis patents and got out of the business. At the present time, theonly non-cash assets left in his wholly-owned corporation are someequipment (basis $100,000; fair market value, $100,000) and a pieceof appreciated land which had been purchased for $50,000 and is nowworth $550,000. The balance sheet of the corporation as of thisdate it:

Assets

Liabilities

Cash

$ 105,000

Notes Payable:

Equipment

$ 100,000

To Russell

$125,000

Land

$ 50,000

To Others

$15,000

Total Liabilities

$140,000

Owner’s Equity

Common Stock

$88,000

Retain Earnings

$27,000

Total Owners Equity

$115,000

Total Assets

$ 255,000

Total Liabilities & Owner’s Equity

$255,000

Russell’s attorneys have convinced him to liquidate hiscorporation and suggested he seek your assistance concerning theliquidation. The corporation has been dormant since December 31,2010, so it will have no revenues or expenses for the currenttaxable year ending December 31, 2011.

Russell and his wife, Jane, have a joint taxable income ofapproximately $100,000 from their other 2011 activities. Theirprevious year’s joint taxable income were $500,000, buy they expectsubsequent years’ incomes to be similar to that of this year.Russell plans to liquidate the Illinois-based corporation near theend of this year. He will use some of the cash to pay off the notedue to others and keep the rest of the assets for personal use withno foreseeable likelihood of subsequent disposition.

Additional facts from the client:

Interest on notes payable is simple 10% payable after the end ofcash calendar year

The equipment was purchased on January 1, 2002. It had afour-year life for tax purposes with the straight-line depreciationmethod used. The original cost of equipment was $300,000, A salvagevalue of $100,000 is used for financial accounting purposes.

The land was purchased on January 1, 2000.

The “Retained Earnings” equals “Earning and Profits”

The taxable income of the corporation in each prior year hasbeen $10,000

Russell and Jane each earned about one-half of their jointincome. Both are on the cash basis.

The corporation is on the accrual basis.

Russell’s basis in his stock is $88,000.

Russell and Jane are in their late 50’s. Their two children areyoung adults both secure in their financial situations.

Please advise Russell concerning the tax aspects of theliquidation alternatives. Determine any actions he could takebetween now and the liquidation, which may affect thesealternatives as part of your analysis.Support answer using IRS taxcodes.