ACCT 2331 1st EditionFinal Exam Study Guide Lectures: 16 -23Lecture 16 (March 31)Chapter 8Liabilities = 1) probable future sacrifices of economic benefits 2) arising from present obligations to other entities 3) resulting from past transactions or eventsCurrent Liabilities: payable within one year or an operating cycle i.e. notes payable, accounts payable, payroll liabilitiesLong-term Liabilities: payable more than one year or an operating cycle1) Recording Notes Payable: CREDIT Cash, DEBIT Notes Payable2) Adjustment for Interest: DEBIT Interest Expense, CREDIT Interest PayableInterest = Face Value x Annual interest Rate x Fraction of the year3) Repayment of Note: DEBIT Notes Payable, DEBIT Interest Expense, DEBIT Interest Payable, CREDIT CashMaturity Value= Principal Value + InterestContingent Liabilities- an existing uncertain situation that might result in a loss i.e. warranties (help increase sales)If payment is: 1) probable and known/reasonably estimable- liability recorded and disclosure required OR probable and not reasonably estimable- disclosure required2) reasonably possible and known/reasonably estimable- disclosure required OR probable and not reasonably estimable- disclosure required3) remote- disclosure never required*liability is only recorded if the loss is probable AND the payment is known/ reasonably estimableEmployee Costs (payroll withholdings): federal and state income taxes, FICA taxes Employer Costs: additional (matching) FICA tax on behalf of the employee, unemployment taxes, FUTA and SUTA, fringe benefits (additional employee benefits) *FICA and unemployment taxes are payroll expensesContingent Gains- an existing uncertain situation that might result in a gain (not recorded until the gain is certain)Liquidity- having sufficient cash or other current assets to pay currently maturing debtsLiquidity measures: 1) Working Capital = Current Assets - Current Liabilities (a large positive working capital is an indicator of liquidity)2) Current Ratio = Current Assets/Current Liabilities (the higher the current ratio, the greater the company’s liquidity)3) Acid-Test/Quick Ratio = (Cash + Current Investments + Accounts Receivable)/ Current Liabilities(quick assets are readily convertibleinto cash)Debt covenant- agreement between a borrower and a lender that requires certain minimum financial measures be met or the lender can recall the debtProblems worked from the book: E8-2, E8-10Lecture 17(April 2)Chapter 9Capital Structure- mixture of liabilities and stockholders’ equity a business usesDebt financing- borrowing moneyEquity financing- obtaining additional investment from stockholders*Interest expense- tax deductible*dividends- paid to stockholders and is not tax deductibleBonds: formal debt instrument, usually issued to many lenders; borrower repays the principal/face amount at a specified maturity datePrivate placement- selling debt securities directly to a single investorTypes of bonds: 1) secured- bonds are backed by collateral2) unsecured (debentures)- bonds are not backed by collateral3) term- bond issues on a single date *most common4)serial- bond issue matures in installments5) callable- borrower can pay off bonds early6) convertible- lender can convert bonds to common stock *sinking fund- a designated fund in an organization to repay bonds at maturity dateMarket Interest Rate: the true interest rate used by investors to value the bondStated Interest Rate: the rate in the contract used to calculate cash payments for interest rate each period*if Market Interest Rate is > Stated Interest Rate then: bonds issued at a discount (below face amount)*if Market Interest Rate is < Stated Interest Rate then: bonds issued at a premium (above face amount)*if Market Interest Rate = Stated Interest Rate then: bonds issued at face amount Lecture 18 (April 7)Long-term debt financing = Leases, Bonds, & Notes PayableLease- owner provides the user the right to use an asset for a specified amount of timeInstallment note- long term liability payments that include the amount that represents the effective interest rate and a reduction of outstanding loan balance*”effective interest rate” = market interest rateReturn on Equity = (Net Income)/(average Stockholder’s Equity)Return on Assets = (Net Income)/(average total Assets)Times Interest Earned Ratio = (Net Income + Interest Expense + Tax Expense)/(Interest Expense)Problems worked from book: BE9-7, BE9-13Lecture 19 (April 9)Issue Price = Principal Value of Face Value + Principal Value of Interest PaymentInterest Payment = Stated Rate x Face ValueInterest Expense = Market Rate x Carrying ValueCarrying Value = Market Rate x Issue PriceRecording bonds issued at face value: DEBIT Cash, CREDIT Bonds Payable; to record the interest due:DEBIT Interest Expense, CREDIT Cash Recording bonds issued at a discount: DEBIT Cash, CREDIT Bonds Payable (at discount amount); to record the interest due: DEBIT Interest Expense (for the interest amount using the market rate& carrying value), CREDIT Cash (for the interest amount using the stated rate & face value), CREDITBonds Payable (for the difference)Recording bonds at a premium: DEBIT Cash, CREDIT Bonds Payable (at premium amount); to record the interest due: DEBIT Interest Expense (for the interest amount using the market rate& carrying value), CREDIT Cash (for the interest amount using the stated rate & face value), CREDITBonds Payable (for the difference)Amortization schedule- provides a summary of the cash paid, interest expense, and changes in carrying value for each semiannual interest period*for bonds issued at a discount: carrying value will increase over time to meet the issuance*for bonds issued at a premium: carrying value will decrease over time to meet the issuanceProblems worked from the book: #12 (pg 441)Lecture 20 (April 14)Chapter 10Paid in capital- amount stockholders have invested in the corporationAdditional paid in capital- credited when the company issues par value stock Treasury stock- thecorporation’s own stock that it has reacquiredPar Value- legal capital per share of stock that is assigned when the corporation is first establishedRecording the issuance of Stock with par value: 1) Record the Cash received (DEBIT)2) Record Common Stock at the par value (CREDIT)3) Record Paid in Capital = the difference of #1 and #2 (CREDIT)Preferred stock- issued in addition to common stock to attract wider investment; have first rights to a specified amount of dividends