ACCTG 201 Final: Accounting 201 – Study Guide 3

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San Diego State University
De Boskey

Terms to Know Chapter 9 • debt financing – borrowing money from creditors (liabilities) • equity financing – obtaining investment from stockholders (stockholders’ equity) • capital structure – the mixture of liabilities and stockholders’ equity a business uses • installment payment – includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance • amortization schedule – provides a summary of the cash paid, interest expense, and decrease in carrying value for each monthly payment • lease – a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to an asset for a specified period of time o operating leases – the lessor owns the asset, and the lessee simple uses the asset temporarily o capital leases – when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset • bond – a formal debt instrument that obligates the borrower to repay a state amount, referred to as the principal or face amount, at a specified maturity date • underwritten – when bonds are sold by large corporations • private placement – when the issuing company chooses to sell the debt securities directly to a single investor, such as a large investment fund or an insurance company • secured bonds – supported by specific assets the issuer has pledged as collateral, and if the borrower defaults on the payments, the lender is entitled to the assets pledged as collateral • unsecured bonds – not backed by a specific asset, only secured by “full faith and credit”; aka debentures • term bonds – require payment of the full principal amount of the bond at the end of the loan term o sinking fund – an investment fund to which an organization makes payments each year over the life of its outstanding debt • serial bonds – require payments in installments over a series of years • callable bonds – allow the borrower to repay the bonds before their scheduled maturity date at a specified call price; aka redeemable bonds • convertible bonds – allow the lender (the investor) to convert each bond into a specified number of shares of common stock • stated interest rate – the rate quoted in the bond contract used to calculate the cash payments for interest • market interest rate – the true interest rate used by investors to value the bond issue • annuity – a series of equal amounts over equal time periods • default risk – the possibility that a company will be unable to pay the bond’s face amount or interest payments as they become due • discount – bonds issued below face amount are said to be issued at a discount • premium – when the issue price of a bond is above its face amount • carrying value – the difference between the Bonds Payable account and the Discount of Bonds Payable account • retired – when the issuing corporation buys back its bonds from the investors, the company has retired the bonds • early establishment of debt – when the issuer retires debt of any type before its schedules maturity date Chapter 10 • paid-in capital – the amount stockholders have invested in the company 2 • retained earnings – the amount of earnings the corporation has kept or retained (not paid in dividends) • treasury stock – the corporation’s own stock that it has reacquired Invested Capital • invested capital – the amount of money paid into a company by its owners • corporation – an entity that is legally separate from its owners and even pays its own income taxes • articles of incorporation – describe (a) the nature of the firm’s business activities, (b) the shares of stock to be issued, (c) the initial board of directors • organization chart – traces the line of authority for a typical corporation • angel investors – wealthy individuals in the business community, like those featured in Shark Tank, willing to risk investment funds on a promising business venture • venture capital firms – provide additional financing, often in the millions, for a percentage of the company • initial public offering (IPO) – the first time a corporation issues stock to the public • publicly held corporation – trades on the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ), or by over-the-counter (OTC) trading; regulated by the Securities and Exchange Commission (SEC) meaning there are more reporting and filing requirements • privately held corporation – does not allow investment by the general public and normally has fewer stockholders than a public corporation • limited liability – guarantees that stockholders in a corporation can lose no more than the amount they invested in the company, even in the event of bankruptcy 3 • double taxation – corporate income is taxed once on earning at the corporate level and again on dividends at the individual level • authorized stock – the total number of shares available to sell, stated in the company’s articles of incorporation • accumulated deficit – a debit balance in retained earnings • dividends – distributions by a corporation to its stockholders • declaration date – the day that the board of directors declares the cash dividend to be paid • record date – the specific date on which the company will determine the registered owners of stock and therefor who will receive the dividend • payment date – the date of the actual distribution of the dividends • property dividend – a noncash asset distributed to stockholders • stock dividends/stock splits – additional shares of the companies’ own stock distributed to shareholders instead of cash • statement of stockholders’ equity – summarizes the changes in the balance in each stockholders’ equity account over a period of time • growth stocks – stocks whose future earnings investors expect to be higher • value stocks – stocks that are priced low in relation to current earnings Chapter 11 • statement of cash flows – provides a summary of cash inflows and cash outflows during the reporting period • operating activities – include cash receipts and cash payments for transactions relating to revenue and expense activities, similar to activities recorded in the income statement • investing activities – include cash transactions involving the purchase and sale of long-term assets and current investments • financing activities – both inflows and outflows of cash resulting from the external financing of a business 4 • noncash activities – transactions that do not increase or decrease cash, but that result in significant investing and financing activities • indirect method – we begin with net income and then list adjustments to net income, in order to arrive at operating cash flows • direct method – we adjust the items in the income statement to directly show the cash inflows and outflows from operation such as cash received from customers and cash paid for inventory, salaries, rent, interest, and taxes • cash flow to sales – measures the operating cash flows generated for each dollar of sales • asset turnover – measure the sales revenue generated per dollar of assets Chapter 12 • vertical analysis – when we express each item in a financial statement as a percentage of sales • horizontal analysis – used to analyze trends in financial statement data for a single company over time • liquidity – refers to having sufficient cash to pay its current liabilities • solvency – refers to a company’s ability to pay its long-term liabilities as well • profitability ratio – measures the earnings or operating effectiveness of a company • growth stocks – have high expectations of future earnings growth and therefore usually trade at higher PE ratios • value stocks – have lower share prices in relationship to their fundamental ratios and therefor trade at lower PE ratios • discontinued operation – a business or a component of a business, that is organization has already discontinued or plans to discontinue • quality of earnings – refers to the ability of reported earnings to reflect the company’s true earnings, as well as the usefulness of reported earnings to predict future earnings 5 • conservative accounts practices – those that result in reporting lower income, lower assets, and higher liabilities • aggressive accounting practices – result in reporting higher income, higher assets, and lower liabilities Review Chapter 9 • there are three main types of debt financing o notes, leases, and bonds • interest expense incurred when borrowing money is tax-deductible, whereas dividends paid to stockholders are not tax-deductible • each installment payment includes an amount that represents interest expense, and an amount that represents a reduction of the outstanding loan balance • the distinguishing characteristics of bonds include whether they are backed by collateral (secured or unsecured), become due at a single date or over a series of years (term or serial), can be redeemed prior to maturity (callable), or can be converted into common stock (convertible) • most corporate bonds pay interest semiannually (every 6 months) rather than paying interest monthly, quarterly or annually • the interest rate we use to calculate the bond issue price is always the market rate, never the stated rate o use the stated rate to calculate the interest payment each period, but use the market rate to calculate the present value of cash flows • no gain or loss is recorded on bonds retired at maturity o for bonds retired before maturity, we record a gain or loss on early establishment equal to the difference between the price paid to repurchase the bonds and the bonds’ carrying value • debt to equity ratio 6 o a measure of financial leverage 𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑑𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = ′ 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 • times interest earned ratio o measures a company’s ability to meet interest payments as they become due 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 + 𝑡𝑎𝑥 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑡𝑖𝑚𝑒𝑠 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 𝑟𝑎𝑡𝑖𝑜 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 •
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