PREPARED BY SARA TOYNBEE 1 Exam III Study Guide Disclaimer The following guide is intended to provide a brief overview of some of the material that we have covered in chapters 10 12 in ACCTG 215 This is not intended to provide a comprehensive overview of all material that could be examined in Exam III This should not substitute for your own study nor do I guarantee that it is free from errors I encourage you to read the textbook on your own and also attempt the not required practice problems on Connect Doing practice problems is very important and helpful in accounting as it is important to learn how to apply the concepts you learn in class Happy studying J Chapter 10 Bonds I Present value we use present value concepts to find the proceeds from a bond issue a Single sum one off payments principal of a bond b Ordinary annuity equal payments that occur over time cash payments associated with a bond c Three things we need to know in order to calculate the present value i Number of periods remember difference between periods and years when interest is paid quarterly or DRAW semi annually TIMELINE ii Interest rate per period for bonds this is the J effective rate iii Cash flows for bonds the stated rate determines the periodic cash payments Total number of II Timeline for a bond problem periods years x i effective rate interest payments per per period year Cash ANNUITY payments face amount x stated rate per period Principal over the life of the bond FOR COUPON BONDS ONLY SINGLE SUM III Use tables or calculator to calculate discount factors for each of cash flow amounts coupon payments annuity table face amount single sum table IV Bond proceeds PV of face amount PV of interest cash payments V Coupon bonds vs zero coupon bonds a Differences in the cash flows and accounting for each type VI Bond terminology a Discount bonds need to increase the net carrying value of the bond over its life i Stated rate Effective rate ii Proceeds Principal b Premium bonds need to decrease the net carrying value of the bond over its life i Stated rate Effective rate ii Proceeds Principal PREPARED BY SARA TOYNBEE 2 c Stated interest rate used to specify the cash payments made to bondholders d Effective interest rate used to find the discount factor to calculate the present value and the interest rate in the amortization table VII Amortization schedule remember you can get a lot of information from the amortization schedule You only need to know the effective interest method don t worry about the straight line method for bond amortization Date Cash Interest Difference Carrying value payment expense Principal x Carrying value Difference Change in carrying stated rate x effective rate between cash value either add or payment and subtract the difference interest expense depending on whether this will it is a discount or reduce the bond premium bond this discount or bond will be the principal at premium the end of the bond account maturity VIII Accounting for bonds a At issue Dr Cash proceeds Cr Bond payable proceeds b Every period could be quarterly semi annually annually Dr Interest expense see above Dr Cr Bond discount bond premium BALANCING DIFF Cr Cash see above c At end of maturity Dr Bond payable proceeds Cr Cash proceeds IX Early retirement of a bond i e bond call journal entry Dr Bond payable principal Dr Cr Bond discount Bond premium carrying value Dr Cr Loss Gain DEBITS CREDITS Cr Cash how much was paid to retire the bond Chapter 11 Stockholders Equity I Types of shares a Authorized Issued Unissued shares firm can legally sell b Issued Outstanding Treasury shares firm has sold c Outstanding shares currently held by investors II Common stock vs preferred stock III Treasury stock shares that a company has repurchased from investors a Journal entries i When purchased Dr Treasury stock shares x purchase price Cr Cash shares x purchase price PREPARED BY SARA TOYNBEE 3 IV V VI ii When resold Dr Cash shares x selling price Dr Cr APIC magical balancing account J Cr Treasury stock shares x purchase price Additional paid in capital APIC or called Capital Excess in Par Issuing stock a Par value versus no par value stock b Common Preferred stock balances only reflect par value when there is a par value c Journal entries Dr Cash shares x issue price Cr Common stock Preferred stock shares x par Cr APIC balance if required Dividends a Three dates i Date of declaration Dr Dividends Cr Dividend payable ii Date of record shareholders holding the stock receive the dividend No entry iii Date of payment Dr Dividend payable Cr Cash b Stock splits no journal entry Just adjust par value and number of shares issued and outstanding Chapter 12 Statement of Cash Flows I Three sections statement of cash flows recall diagrams that discuss specific items such as interest and dividends paid received a Operating b Investing c Financing PREPARED BY SARA TOYNBEE 4 II III Preparing the statement of cash flows a Prepare operating section b Prepare investing section c Prepare financing section d Combine the three sections and reconcile the amount with the cash balance reported on the balance sheet Operating section direct and indirect methods a Indirect method i Start with net income ii Adjust net income for non cash revenues gains and expenses losses iii Adjust net income for changes in current assets and current liabilities Current Current Asset Liability Increase Decrease IV V iv Sum amounts to get net cash from operating activities b Direct method you will not be responsible for this on exam 3 Investing section list inflows and outflows resulting from purchase and sale of long term assets and current investments and then sum amounts to get net cash from investing activities Financing section list inflows and outflows resulting from external financing activities and then sum amounts to get net cash from investing activities