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!10912!!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!9!remember!difference!between!periods!and!years!when!interest!is!paid!quarterly!or!semi9annually!ii. Interest!rate!(per%period)!–!for!bonds!this!is!the!effective!rate!iii. Cash!flows!–!for!bonds!the!stated!rate!determines!the!periodic.cash!payments!!II. Timeline!for!a!bond!problem:!! ! ! ! !!!!!!!III. Use!tables!or!calculator!to!calculate!discount!factors!for!each!of!cash!flow!amounts!(coupon!payments!à!annuity!table;!face!amount!à!single!sum!table)!IV. Bond!proceeds!=!PV!of!face!amount!+!PV!of!interest/cash!payments!V. Coupon!bonds!vs.!zero9coupon!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!DRAW!TIMELINE!!!J!!i=effective!rate!per%period!Total%number%of%periods!=!#!years!x!#!interest!paymen ts!per!year!Cash!ANN UITY!payme nts=!f ace !am ou nt!x!stated!rat e!pe r!per iod!(over!the!life!of!the!bond)!à!FOR!COUPON!BONDS!ONLY!Principal!(SINGLE!SUM)!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!straight9line!method!for!bond!amortization)!Date%Cash%payment%Interest%expense%Difference%Carrying%value%!Principal!x!stated!rate!Carrying!value!x!effective!rate!Difference!between!cash!payment!and!interest!expense!à!this!will!reduce!the!bond!discount!or!bond!premium!account!Change!in!carrying!value!–!either!add!or!subtract!the!difference!depending!on!whether!it!is!a!discount!or!premium!bond!–!this!will!be!the!principal!at!the!end!of!the!bond!maturity!!VIII. Accounting!for!bonds!a. At!issue!Dr:!Cash! ! ! ! (proceeds)! !! Cr!Bond!payable! ! ! (proceeds).b. Every!period!(could!be!quarterly,!semi9annually,!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)!9!#!shares!firm!can!legally!sell!b. Issued!(=Outstanding+Treasury)!9!#!shares!firm!has!sold!c. Outstanding!9!#!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!!ii. When!resold!!Dr:!Cash!! ! ! (#shares!x!selling!price)!Dr/Cr:!APIC! ! ! (magical!balancing!account!J)!Cr:!Treasury!stock! !!!!!!!!!(#shares!x!purchase!price)!IV. Additional!paid9in9capital!(APIC)!or!called!Capital!Excess!in!Par!V. 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)!VI. 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. 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!III. Operating!section!–!direct!and!indirect!methods!a. Indirect!method!i. Start!with!net!income!ii. Adjust!net!income!for!“non9cash”!revenues/gains!and!expenses/losses!iii. Adjust!net!income!for!changes!in!current!assets!and!current!liabilities!!Current!Asset!Current!Liability!Increase!!9!+!Decrease!+!9!!iv. Sum!amounts!to!get!net!cash!from!operating!activities!b. Direct!method!–!you!will!not!be!responsible!for!this!on!exam!3.!!IV. Investing!section!–!list!inflows!and!outflows!resulting!from!purchase!and!sale!of!long9term!assets!and!current!investments!and!then!sum!amounts!to!get!net!cash!from!investing!activities!V.
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