ACCT 5103 Final
Card Set Information
ACCT 5103 Final
Working capital is?
net short-term investment needed to carry out day to day activities
Compute working capital:
current assets - current liabilities
Creditors are focused on what?
Investors are focused on what?
Currently what is working capital an indication of?
indication of liquity and degree of protection to short term creditors. Also a basis to predict future cash flows.
The liquidity focus is in conflict with?
Going concern assumption.
PP&E represent a major source of?
Future service potential, indication of physical resources available to the firm
Major objective of PP&E accounting?
accounting and reporting to investors on stewardship
With PP&E what costs are capitalized?
intial cost, all costs necessary to acquire and prepare for intended use
Why is cost the prefered valuation for PPE
it is reliable and verifiable, arms-length transactions
What does capitlization imply?
Future service potential.
Depreciation is a form of?
When to capitalize expenditures?
Prolongs life or increases efficiency
When to expense expenditures?
Ordinary and necessary
Asset retirement obligation?
the liability associated with the ultimate disposal of a long-term asset
Historic cost is?
More reliable but less relevent
Equity securities are?
ownership interests, right to acquire or dispose of an ownership interest
Debt securities are?
investment in debt of another enterprise
Uncertainty with R&D?
whether present costs will result in future benefits and when those benefit will occur (if they do).
R&D decreases the usesfulness of?
The finacial statements, because the matching concept is not followed. Reality is distorted.
Why is it important to seperate long-term and current liabilities?
Implications of working capital, risks associated with long-term debt, finacial flexability
Difference between liabilities and equities?
Liabilities are creditor claims, equity is owner interest
Both liabilities and equity provide what?
resource/capital, used to acquire assets, both groups have claims to the firm's assets.
Under the entity theory?
liabilities and equity are the same, both receive a return from income of the firm (dividends/interest)
Equity is the residual amount, assets- liabilities = equity
Arise from a past transaction, represent a current obligation, and are a future transfer of benefit.
Under SFAC No. 6 what is equity?
SFAC No. 6's definition of equity is similar to what theory of equity?
At present value of future cash flows, transaction approach
Effective interest method?
results in a stable interest rate each period, discloses the liability balance as equal to the present value of future cash flows discounted
Straight line interest method
Easier to calculate, stable interest cost per perioed, but not realistic.
Contingency is a?
Prossible future event
Loss contingecnices are recognized if?
probable, can be reasonably estimated, otherwise disclosed
An item is only included in book income or taxable income, but will never be in both
Item is included in both book income and taxable income at some point, but is not recognized in the same period for each purpose.
Deferred tax assets
Book income is less than taxable income
Deferred tax liability
Book income is greater than taxable income
deferred amount reported on the balance sheet at the estimated future rate when reversal will happen. Balance sheet focused, increased predictive value
allocating tax among components, users are able to see the effect of tax down to the component level. Discourages users from using pretax measures of performance.
Advantages of leasing
less costly, off-balance sheet treatment, management compensation ignores leasing, debt covennants, tax advatages,
Capital lease characteristics
Transfers ownership by the end of the lease term, bargain purchase option, lease term >= 75% of economic life, present value of min payments >= 90% of FMV
Methods of determining pension benefits:
Defined contribution plan, defined benefit plan
Defined contribution plan?
employer promises to contribute a certain sum into the plan each period. Risk lies with employee.
Defined benefit plan
the amount of pension benefits to be received in the future are defined by the terms of the plan. Risk lies with the employer
estimates the total retirement benefits to be paid in the future, determines equal annual payment that wil be necessary to fund those benefits
determines the amount of benefits earned by the employee service to date and then estimates the present value of these benefits
View of pensions?
A means of promoting efficiency (defined benefit), or a form of supplemental benefits (defined contribution)
Means of promoting efficiency (Pensions)
Costs associated with the plan and not the employee
Supplemental benefits (Pensions)
Costs related to specific employees
Components of annual pension cost
Service cost, interest cost, actual return on plan assets, prior service costs, transition amount
Issues with working capital?
inconsistencies in measurement of components, difference of opinion regarding what should be included, lack of precision in defining elements.
SFAS No. 87 Minimum liability
ABO - fair value of plan assets, conservative, but contrary to conceptual framework
SFAS No. 158 liability
PBO - fair value of plan assets. Critics argue overstates liability, but matches
Capital structure is?
the mix of debt and equity
Proprietary theory of equity
Assets, belong to owners, flow through to owners
Entity theory of equity
Entity is a separate legal entity
Noncompensatory stock options
Not designed as compensation, no expense
Compensatory stock options
Designed as compensation, expense
Stock options are what to holders?
Incentive that influences the holder to try to increase profits, help firm avoid taxes and expenses
Pooling method negatives
accounting is distorted, assets undervalued, income overstated
Entity theory of consolidation
purpose of finacial statements is to provide information to all shareholders
Parent company theory of consolidation
purpose of consolidated statements is to provide information for parent company stockholders
Noncontrolling interest equity?
SFAC 6, says is equity, residual interest