Quiz 5 Flashcards
Chapter 10 - Liabilities and Bonds
What is a liability? Tap to reveal
A present obligation resulting from a past event that will require the company to give up resources in the future.
What generally makes a liability current? Tap to reveal
It is expected to be paid within one year or the operating cycle, whichever is longer.
Is sales tax collected from customers revenue? Tap to reveal
No. The company owes the amount to the government, so it records a liability.
What is the difference between gross pay and net pay? Tap to reveal
Gross pay is total earnings before deductions. Net pay is the cash the employee receives after deductions.
Why do employee payroll deductions create liabilities for the employer? Tap to reveal
The employer withholds amounts from employees and must later remit those amounts to other parties.
Are employer payroll taxes the same as amounts withheld from employees? Tap to reveal
No. Employer payroll taxes are an additional cost of employing workers.
What is the basic interest formula? Tap to reveal
Principal × Annual Interest Rate × Time
What happens when interest has been incurred but not yet paid? Tap to reveal
The company records Interest Expense and Interest Payable.
What is a bond from the issuing company's perspective? Tap to reveal
A bond is a form of long-term borrowing.
What is a bond from the bondholder's perspective? Tap to reveal
It is an investment and a marketable security that can generally be bought and sold.
What is the face value of a bond? Tap to reveal
The amount the issuer promises to repay at maturity.
What determines the cash interest payment on a bond? Tap to reveal
Face Value × Stated Interest Rate, adjusted for the interest period.
What is the stated interest rate? Tap to reveal
The rate in the bond contract used to determine the issuer's cash interest payments.
What is the market interest rate? Tap to reveal
The rate investors currently demand for investments with similar risk and maturity.
When does a bond sell at face value? Tap to reveal
When the stated interest rate equals the market interest rate.
When does a bond sell at a discount? Tap to reveal
When the stated rate is lower than the market rate.
Why would investors pay less than face value for a bond? Tap to reveal
The bond's interest payments are less attractive than the return investors can currently earn elsewhere.
When does a bond sell at a premium? Tap to reveal
When the stated rate is higher than the market rate.
Why would investors pay more than face value for a bond? Tap to reveal
The bond's interest payments are more attractive than the return currently available in the market.
Does a premium or discount change a bond's face value? Tap to reveal
No. Face value remains the amount the issuer will repay at maturity.
How is the carrying value of a discount bond calculated? Tap to reveal
Face Value − Unamortized Discount
How is the carrying value of a premium bond calculated? Tap to reveal
Face Value + Unamortized Premium
What happens to a discount bond's carrying value over time? Tap to reveal
It increases toward face value.
What happens to a premium bond's carrying value over time? Tap to reveal
It decreases toward face value.
What should a bond's carrying value equal at maturity? Tap to reveal
Face value.
Under effective interest, how is bond interest expense calculated? Tap to reveal
Beginning Carrying Value × Market Interest Rate for the interest period.
For a discount bond, how does interest expense compare with cash interest? Tap to reveal
Interest expense is greater than cash interest.
For a premium bond, how does interest expense compare with cash interest? Tap to reveal
Interest expense is less than cash interest.
Can a company retire bonds before maturity? Tap to reveal
Yes. The company may repurchase its bonds in the market.
What do you compare with the retirement price to find a bond gain or loss? Tap to reveal
The bond's carrying value on the retirement date.
When does bond retirement create a gain? Tap to reveal
When the company pays less than carrying value.
When does bond retirement create a loss? Tap to reveal
When the company pays more than carrying value.
Chapter 11 - Stockholders' Equity
What are the two major sources of stockholders' equity? Tap to reveal
Contributed capital and retained earnings.
How does debt financing differ from equity financing? Tap to reveal
Debt creates an obligation to repay. Equity represents ownership.
What are authorized shares? Tap to reveal
The maximum number of shares the corporation is legally permitted to issue.
What are issued shares? Tap to reveal
Shares the corporation has actually issued to stockholders.
What are outstanding shares? Tap to reveal
Issued shares currently held by investors outside the corporation.
How are outstanding shares calculated? Tap to reveal
Issued Shares − Treasury Shares
What is par value? Tap to reveal
A small legal or stated amount assigned to each share. It is not market value.
Where is stock issued above par value recorded? Tap to reveal
The excess above par is recorded in Additional Paid-in Capital.
What is treasury stock? Tap to reveal
A company's own shares that it previously issued and later reacquired.
Is treasury stock an asset? Tap to reveal
No. Treasury Stock is a contra-equity account.
What is the normal balance of Treasury Stock? Tap to reveal
Debit. It reduces total stockholders' equity.
Does reselling treasury stock create an Income Statement gain or loss? Tap to reveal
No. Transactions involving a company's own stock do not produce gains or losses on the Income Statement.
On what date does a cash dividend become a liability? Tap to reveal
The declaration date.
What happens on the record date of a cash dividend? Tap to reveal
The company identifies the stockholders entitled to receive the dividend. No journal entry is required.
What happens on the payment date of a cash dividend? Tap to reveal
The company pays cash and removes the dividend liability.
Is a cash dividend an expense? Tap to reveal
No. A dividend is a distribution to owners and reduces retained earnings.
What does a stock dividend distribute? Tap to reveal
Additional shares of stock rather than cash.
Does a stock dividend reduce total stockholders' equity? Tap to reveal
No. It reallocates amounts within stockholders' equity.
What is the basic effect of a stock split? Tap to reveal
Shares outstanding increase while the amount associated with each individual share decreases proportionately.
Does a stock split change total stockholders' equity? Tap to reveal
No.
Does a stock split normally require a journal entry? Tap to reveal
No.
What advantage is commonly associated with preferred stock? Tap to reveal
Preferred stockholders generally receive dividends before common stockholders.
What does cumulative preferred stock mean? Tap to reveal
Unpaid preferred dividends from prior years must be paid before dividends can be distributed to common stockholders.
What are dividends in arrears? Tap to reveal
Past unpaid dividends on cumulative preferred stock.
Are dividends in arrears liabilities before they are declared? Tap to reveal
No. They become liabilities only when declared.
What does earnings per share measure? Tap to reveal
The amount of income earned for each share of common stock outstanding.
What does return on equity help investors evaluate? Tap to reveal
How effectively the company generates income from the stockholders' investment.
What does the price-earnings ratio compare? Tap to reveal
Market Price per Share ÷ Earnings per Share