Accounting

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102.

5-2 (Q5-2) (a) Explain how an increase in financial leverage can increase a company's ROE. (b) Given the potentially positive relation between financial leverage and ROE, why don't we see companies with 100% financial leverage (entirely non-owner financed)? Accounting for Disposal of a LTA

ROE is the sum of return on assets (ROA) and the return that results from the effective use of financial leverage (ROFL). Increasing leverage increases ROE as long as ROA exceeds the after-tax interest rate. Financial leverage is also related to risk: the risk of potential bankruptcy and the risk of increased variability of profits. Companies 1. Record Depreciation Expense up to disposal date 2. Record any cash received at the time of disposal 3. Remove asset and any accumulated depreciation from the balance sheet. 4. Record a Gain or Loss (Sales Revenue/ Ave. Accounts Receivable) FIFO COGS = LIFO COGS - current period change in LIFO reserve FIFO Inventory = LIFO inventory +LIFO Reserve The reduction of the discount over the life of the bond. Amortization causes the effective interest expense to be greater than the periodic cash interest payments based on the coupon rate. Nissim 40 days between 11/21/2013 and 12/31/2013 (18,000 x .10) x (40/365)= $197.26 Klein 18 days between 12/13/2013 and 12/31/2013 (14,000 x .09) x (18/365) = $62.14 Bildersee 12 days between 12/19/2013 and 12/31/2013 (16,000 x .12) x (12/365) = $63.12 Added together they total: $322.52

98.

14. 28. 29. 72.

Accounts Receivable Turnover Adjusting LIFO COGS to FIFO (IS) Adjusting LIFO inventory to FIFO (BS) Amortization

100.

Analyzing and Computing Accrued Interest on Notes. Compute any interest accrued for each of the following notes payable owed by Penman,Inc. as of December 31, 2013 (use a 365-day year): Lender--Issue Dt--Principal--Coupon Rate (%)--Term (days) ------------------------------------------------------------------------Nissim...........11/21/13.............18,000.....10.....................120 Klein..............12/13/13............14,000......9......................90 Bildersee.......12/19/13.............16,000.....12.....................60

125.

Analyzing and Reporting Financial Statement Effects of Bond Transactions. On January 1, 2014, Hutton Corp. issued $300,000 for 15year, 11% bonds payable for $377,814, yielding an effective interest rate of 8%. Interest is payable semiannually on June 30 and December 31. a. Show computations to confirm the issue price of $377,814. b. Prepare journal entries to record the bond issuance, semiannual interest payment and premium amortization on June 30, 2014, and semiannual interest payment and premium amortization on December 31, 2014. Use the effective interest rate. c. Post the journal entries from part b to their respective T-accounts. d. Record each of the transactions from part b in the financial statement effects template. Asset Turnover Average Cost (Sales Revenue/Ave. Total Assets); ability to generate sales for a given level of assets COGS and inventory are priced on the average cost of items available during the period

16.

31.

70.

Balance Sheet Effects - Bonds Issued at a Discount

When a bond is sold at a discount, Cash (A) Increases, and Net Liabilities Increase. They are recorded at the amount of the proceeds received (NOT face value): Bond Payable (L) at face value less Bond Discount (XL). The Bond Discount (XL) is amortized each period until it reaches 0, and the total liability of the bond has been removed from the balance sheet. When a bond is sold at a premium, Cash (A) Increases (amount received will equal bond payable plus premium), and Net Liabilities Increase: Bond Payable (L) at face value plus Bond Premium (L). When Bonds are issued at Par, Cash (A) is increased and Bonds Payable (L) is increased by the face value. what physical goods should be included; what costs should be related to inventory; what cost assumption should be used The net liability remaining on the balance sheet. When a bond's coupon rate (issued rate driven by issuing firm) is greater than the market rate (driven by supply and demand). Bonds that sell at a premium are desirable to investors. The bond price equals the present value of the expected cash flows to the bondholder. Periodic Interest Payments - Equal payments are periodic intervals, called annuities. Single Payment - The face (principle) amount of the bond at maturity.

73.

Balance Sheet Effects - Bonds Issued at a Premium Balance Sheet Effects - Bonds Issued at Par Basic Issues of Inventory Accounting & Reporting Bond Book Value Bond Premium

69.

40.

78. 60.

57. 58.

Bond Price Bondholder cash flows Bushman, Inc. issues $500,000 of 9% bonds that pay interest semiannually and mature in 10 years. Compute the bond issue price assuming that the bonds' market rate is: a. 8% per year compounded semiannually. b. 10% per year compounded semiannually Can a company generate a Goodwill asset Capitalize or Expense - Paid $1,200 for routine maintenance of machinery Capitalize or Expense - Paid $1,600 to refurbish a machine, thereby extending its useful life Capitalize or Expense - Paid $2,000 to equip the production line with new instruments that measure quality Capitalize or Expense - Paid $5,400 to rent equipment for two years Capitalize or Expense - Paid $20,000 to repair the roof on the building Capitalize or Expense - Purchased a patent for $5,000 Challenges of Ratio Analysis

124.

96.

No. Goodwill is an asset that is acquired and transferred to the acquirer's balance sheet when all assets have been accounted for and there is residual value. Expense. Capitalize. The useful life is extended Capitalize. The new equipment enhances the assembly line. Capitalize. It improves operations. Recognize rental expense over the next two years. Expense. This is routine maintenance of the building, unless it extends the building's useful life Capitalize. This is a purchased intangible asset 1.what measure of earnings to use 2.how changes in the accounting, acquisitions, will change value 3.identifying comparable companies 4.understanding calculation of ratios 5.understand limitations of accouting-ambiguities, accounting methods standardize the various line items in financial statements so thet can be compared across many companies

89.

93.

91.

90.

92.

94.

1.

23.

Common Size Financial Statements

121.

Computing and Recording Depletion Expense. In 2013, Eldenburg Mining Company purchased land for $7,200,000 that had a natural resource reserve estimated to be 500,000 tons. Development and road construction costs on the land were $420,000, and a building was constructed at a cost of $50,000. When the natural resources are completely extracted, the land has an estimated residual value of $1,200,000. In addition, the cost to restore the property to comply with environmental regulations is estimated to be $800,000. Production in 2013 and 2014 was 60,000 tons and 85,000 tons, respectively. a. Compute the depletion charge for 2013 and 2014. (You should include depreciation on the building, if any, as part of the depletion charge.) b. Prepare a journal entry to record each year's depletion expense as determined in part a. Computing Depreciation and Accounting for a Change of Estimate. In January 2013, Rankine Company paid $8,500,000 for land and a building. An appraisal estimated that the land had a fair market value of $2,500,000 and the building was worth $6,000,000. Rankine estimated that the useful life of the building was 30 years, with no residual value. a. Calculate annual depreciation expense using the straight-line method. Computing Depreciation, Asset Book Value, and Gain or Loss on Asset Sale. Sloan Company uses its own executive charter plane that originally cost $800,000. It has recorded straight-line depreciation on the plane for six full years, with an $80,000 expected salvage value at the end of its estimated 10-year useful life. Sloan disposes of the plan at the end of the sixth year. a. At the disposal date, what is the (1) cumulative depreciation expense and (2) net book value of the plane? b. Prepare a journal entry to record the disposal of the plane assuming that the sales price is 1. Cash equal to the book value of the plane 2. $195,000 cash 3. $600,000 cash Computing Present Values of Single Amounts and Annuities. Refer to Tables 2 and 3 in Appendix A near the end of the book to compute the present value for each of the following amounts: a. $90,000 received 10 years hence if the annual interest rate is 1. 8% compounded annually 2. 8% compounded semiannually b. $1,000 received at the end of each year for the next 8 years if money is worth 10% per year compounded annually. c. $600 received at the end of each six months for the next 15 years if the interest rate is 8% per year compounded semiannually. d. $500,000 inheritance 10 years hence if money is worth 10% per year compounded annually. Coupon Rate (Contract or Stated Rate) The coupon rate of interest is stated in the bond contract. It is used to compute the dollar amount of (semiannual) interest payments that are paid to bond holders during the life of the bond issue. Fixed prior to issuance and remains so throughout the life of the bond. Bond sells at a discount (below face value) Bond sells at Par Value (at face value) Bond sells at a premium (above face value) a. Straight-line: $6,000,000 / 30 = $200,000 per year each year.

122.

120.

127.

55.

63.

Coupon Rate < Market Rate Coupon Rate = Market Rate Coupon Rate > Market Rate

62. 61.

9. 4. 47.

Current Ratio Debt to Equity Depletion

(Current Assets / Current Liabilities) (Total Liabilities/Shareholders Equity) the process of allocating (recording as an expense) the cost of natural resources over the period of use All long term assets (LTA) are depreciated except for Land. Asset turnover measures the amount of revenue volume compared with the investment in an asset. Generally speaking, we want turnover to be higher rather than lower. Turnover measures productivity and an important company objective is to make assets as productive as possible. After fully depreciated - record cash received as salvage value, remove asset and accum. Depreciation from balance sheet, record gain (loss) on sale (net income + (interest expense x (1-tax rate)) When a bond sells for Par, the cost to the issuing company is the cash interest paid. When a bond sells at a discount, the issuer's effective costs are two: The cash interest paid, and the discount that occurred. Reflected in the issuer's Income statement in the income statement as an expense. The effective interest rate always equals the market rate. The discount is the difference between the face value (par) and the lower issue price. It is a cost that must be reflected in the issuer's income statement as an expense. The effective cost of a discount bond is greater than if the bond sells at face value (par) When a bond is sold at a premium, the issuer's effective costs are: the cash interest paid, and a cost reduction due to the premium received. This ultimately is reflected on the Balance Sheet as a reduction of interest expense. The effective cost of a premium bond is less than if the bond sold at face value (par). Straight-line: ($130,000 - $10,000)/ 6 years = $20,000 for both 2013 and 2014.

97.

Depreciation and Long Term Assets (LTA) Describe the concept of asset turnover. What does the concept mean and why is it so important to understanding the interpreting financial performance?

104.

45.

Disposal fo Asset

19. 64.

Earnings Before Interest (EBI) Effective Cost of Debt

68.

Effective Cost of Debt - 2 Effective Interest Rate Effects of a Discount Bond

67.

65.

66.

Effects of a Premium Bond

117.

Equipment costing $130,000 is expected to have a residual value of $10,000 at the end of its six-year useful life. The equipment is metered so that the number of units processed is counted. The equipment is designed to process 1,000,000 units in its lifetime. In 2013 and 2014, the equipment processed 180,000 units and 140,000 units respectively. Calculate the depreciation expense for 2013 and 2014 using the straightline method. Even though it may not reflect their physical flow of goods, why might companies adopt last-in, first-out inventory costing in periods when costs are consistently rising?

111.

A significant tax benefit results from using LIFO when costs are consistently rising. LIFO results in lower pretax income and, therefore, lower taxes payable, than other inventory costing methods.

101.

Explain in general terms the concept of return on investment. Why is this concept important in the analysis of financial performance? FIFO

Return on investment measures profitability in relation to the amount of investment that has been made in the business. First In First Out; assumes company sells goos in the order they were purchased; COGS contains earliest items purchased; ending inventory contains the latest items purchased use of debt to fund assets of the firm - if firm can earn an after tax rate of ROA that exceeds the after tax cost of debt funding, the common shareholders benefit

33.

11.

Financial Leverage

151.

Formula - Asset Turnover Formula - Current Ratio

157.

160.

Formula - Debt to Equity

148.

Formula - Effective Tax Rate Formula - Inventory Turnover Formula - Net Working Capital

154.

162.

159.

Formula - OCFCL

155.

Formula - PPE Turnover Formula - Quick Assets Formula - Quick Ratio

163. 158.

153.

Formula - Receivables Days to Collection Formula - Receivables Turnover Formula - ROA Formula - ROE Formula - ROFL Formula - Times Interest Earned

152.

150.

149.

156. 161.

53.

Goodwill

Only recorded when entire business is purchased; never internally created; excess of the purchase price over the fair market value of net assets aquired Gross profit margins can decline because 1) the industry has become more competitive, and/or the firm's products have lost their competitive advantage so that the company has had to reduce prices or is selling fewer units or 2) product costs have increased, or 3) margin/slowly-turning products to lower-margin/higher-turning products.

103.

Gross profit margin (Gross profit/Sales) is an important determinant of profit margin. Identify two factors that can cause gross profit margin to decline. Is a reduction in the gross profit margin always bad news?

113.

How is the LIFO reserve related to unrealized holding gains?

The LIFO reserve represents the difference between the historical, LIFO cost of inventory and its current cost. This disparity between the book value and the current value represents a gain from holding the inventory that has not yet been recognized in income or in equity an unrealized holding gain. When a change occurs in the estimate of an asset's useful life or its salvage value, the revision of depreciation expense is handled by depreciating the current undepreciated cost of the asset (original cost - accumulated depreciation) using the revised assumptions of remaining useful life and salvage value. Betterment or improvement costs should be capitalized if the outlay enhances the usefulness of the asset or extends the asset's useful life beyond original expectations. As would be the case with any cost, an immaterial amount should be expensed as incurred. Routine maintenance costs that are expensed. Improvement costs should be capitalized if they enhance the usefulness of the asset or extends the asset's useful life beyond original expectations. Routine maintenance costs that are necessary to realize the full benefits of ownership of the asset should be expensed.

82.

How should a company treat a change in an asset's estimated useful life or residual value? How should companies account for costs, such as improvements, which are incurred after an asset is acquired? How should companies account for costs, such as maintenance or improvements, which are incurred after an asset is acquired? How should companies account for costs, such as maintenance, which are incurred after an asset is acquired? How should premium and discount non-bonds payable be presented in the balance sheet? If a business had a net loss for the year, under what circumstances would the statement of cash flows show a positive net cash flow from operating activities? If inventory costs are rising, which inventory costing methodfirst-in, first-out; last-in, first-out; or average costyields the greatest cash flow assuming that method is used for tax purposes. If inventory costs are rising, which inventory costing methodfirst-in, first-out; last-in, first-out; or average costyields the largest ending inventory? If inventory costs are rising, which inventory costing methodfirst-in, first-out; last-in, first-out; or average costyields the largest net income? If inventory costs are rising, which inventory costing methodfirst-in, first-out; last-in, first-out; or average costyields the lowest ending If inventory costs are rising, which inventory costing methodfirst-in, first-out; last-in, first-out; or average costyields the lowest net income? Impairment

115.

79.

114.

123.

Bonds payable is presented in the balance sheet net of any discount or plus any premium.

140.

The statement of cash flows will show a positive net cash flow from operating activities if operating cash receipts exceed operating cash payments. This could happen, for example, if noncash expenses (such as depreciation and amortization) exceed the net loss. It would also happen if operating cash receipts exceed sales by more than the loss or if operating cash payments are less than accrual expenses by more than the loss (or some combination of these events). Last-in, first-out

110.

108.

First-in, first-out

109.

First-in, first-out

106.

Last-in, first-out

107.

Last-in, first-out

46.

The write-off when some or all of the book value of an asset is not recoverable

131.

In which of the three activity categories of a statement of cash flows would each of the following items appear? Is it a cash inflow or outflow: Cash collection on loans. In which of the three activity categories of a statement of cash flows would each of the following items appear? Is it a cash inflow or outflow: Cash dividends paid In which of the three activity categories of a statement of cash flows would each of the following items appear? Is it a cash inflow or outflow: Cash dividends received In which of the three activity categories of a statement of cash flows would each of the following items appear? Is it a cash inflow or outflow: Cash interest paid. In which of the three activity categories of a statement of cash flows would each of the following items appear? Is it a cash inflow or outflow: Cash interest received In which of the three activity categories of a statement of cash flows would each of the following items appear? Is it a cash inflow or outflow: Cash proceeds from issuing stock. In which of the three activity categories of a statement of cash flows would each of the following items appear? Is it a cash inflow or outflow: Cash purchase of equipment In which of the three activity categories of a statement of cash flows would each of the following items appear? Is it a cash inflow or outflow: Cash receipts from customers Income Statement Effects - Bonds Issued at a Premium

Investing; inflow

132.

Financing; outflow

133.

Operating (direct method, not shown separately under indirect method); inflow Operating (direct method, not shown separately under indirect method); outflow. Operating (direct method, not shown separately under indirect method); inflow. Financing; inflow.

136.

137.

134.

130.

Investing; outflow

135.

Operating (direct method, not shown separately under indirect method); inflow The amount of interest reported on the income statement is always equal to the Bond Payable net of discount or premium at the beginning of the period multiplied the market rate at time of issue. Interest = Beginning Net Bond Payable x Market Rate at Issuance A Bond premium yields a reduction in interest expense on the income statement. no foreseeable limit on the time asset is expected to provide cash flows; all must be periodically evaluated for impairment Cash flow from an investing activity.

76.

52.

Indefinate Life Intangibles Indicate whether the cash flow relates to an operating activity, an investing activity, or a financing activity: Acquisition of plant assets for cash. Indicate whether the cash flow relates to an operating activity, an investing activity, or a financing activity: Bonds payable issued for cash. Indicate whether the cash flow relates to an operating activity, an investing activity, or a financing activity: Cash receipts from customers for services rendered. Indicate whether the cash flow relates to an operating activity, an investing activity, or a financing activity: Payment of cash dividends declared in previous year. Indicate whether the cash flow relates to an operating activity, an investing activity, or a financing activity: Payment of income taxes. Indicate whether the cash flow relates to an operating activity, an investing activity, or a financing activity: Purchase of short-term investments (not cash equivalents) for cash.

143.

145.

Cash flow from a financing activity.

141.

Cash flow from an operating activity.

146.

Cash flow from a financing activity

144.

Cash flow from an operating activity.

147.

Cash flow from an investing activity.

142.

Indicate whether the cash flow relates to an operating activity, an investing activity, or a financing activity: Sale of long-term investments for cash. Intangible Assets

Cash flow from an investing activity.

49.

no physical existance, not financial instruments; recorded at fair value of consideration or value received, includes costs to make ready for use Generally expensed; only capitalize direct cots incurred in obtaining the intangible, such as legal fees (COGS/Ave. Inventory), remember 365/inventory turnover = # days items remain in inventory Last In First Out; assumes company always sells the most recent items purchased; ending inventory contains the oldest items purchased if using LIFO for tax purpose, must also use LIFO for financial reporting purposes When inventory levels valued at older proces are sold and those older prices flow through COGS; can distort reported income (unrealistically low COGS and high net income) amortize to expense over expected useful life, reflect pattern of use, if not use straight-line Tangible and Intangible - PP&E, Natural Resources, Trademarks, Patents, Goodwill Tangible PP&E Natural Resources Intangible Trademarks Goodwill Patents

50.

Internally Created Intangibles Inventory Turnover LIFO

13.

32.

30.

LIFO Conformity Rule LIFO Liquidation

27.

51.

Limited Life Intangibles Long Term Assets Long Term Assets (LTA)

43.

95.

54.

Long Term Liabilities

probably future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer rule for writing down the recorded value of inventory whos market value has declined below cost. Cost in historical costand market refers to current cost to replace 1. direct material costs 2. direct labor costs 3.manufacturing overhead costs The market rate is the interest rate that investors expect to earn on the investment for this debt security. This rate is used to price the bond issue. This rate fluctuates based on supply and demand in the market. 1.aquisition cost 2. freight charges 3.sales taxes and insurance 4.labor & other costs due to processing at time of sale (Cash Flow from Operations / Ave. Current Liabilities) When a bond is issued at Par, the Market Rate (drives investment yield) and Coupon Rate (drives interest payments) are identical. (Sales Revenue/Ave. Fixed Assets) (market price per share / annual earnings)realtionship between a firms financial performance and the firms stock price

26.

Lower of Cost or Market Rule

35.

Manufacturer Product Costs Market (Yield) Rate

56.

36.

Merchandiser Product Costs Operating Cash Flows to Current Liabilities Par value PP&E Turnover Price - Earnings Ratio

6. 59.

12. 2.

37.

Product Costs

costs directly connected with bringing the goods to the buyers place of business and converting such goods to a saleable condition (EBI/Sales Revenue); ability to control expenses relative to sales present financial information in a format that facilitates the analysis and interpretation of a company's performance (Cash + Short Term Securities + Accounts Receivable) (Quick Current Assets / Current Liabilities) calculating relationship of income statement items with balance sheet items; ROE=Income/Eqity; ROA=Income/Assets Gain (loss) = Sale Proceeds - Book Value of Asset

17.

Profit Margin Purpose of Financial Statement Analysis

24.

7.

Quick Current Assets Quick Ratio Ratio Analysis

8.

22.

99.

Record a Gain or Loss Recording Asset Acquisition, Depreciation, and Disposal. On January 2, 2013. Hutton Company acquired a machine for $85,000. In addition to the purchase price, Hutton spent $2,000 for shipping and installation, and $2,500 to calibrate the machine prior to use. The company estimates that the machine has a useful life of five years and residual value of $7,000. a. Prepare journal entries to record the acquisition costs. b. Calculate the annual depreciation expense using straight-line depreciation and prepare a journal entry to record depreciation expense for 2013. c. On December 31, 2016, Hutton sold the machine to another company for $12,000. Prepare the necessary journal entry to record the sale. Recording the Sale of PPE Assets. As part of a renovation of its showroom, O'Keefe Auto Dealership sold furniture and fixtures that were eight years old for $3,500 in cash. The assets had been purchased for $40,000 and had been depreciated using the straight-line method with no residual value and a useful life of ten years. a. Prepare a journal entry to record this transaction. b. Show how the sale of the furniture and fixtures affects the balance sheet and income statement using the financial statement effects template. Reporting Financial Statement Effects of Bond Transactions. Lundholm, Inc., which reports financial statement each December 31, is authorized to issue $500,000 of 9%, 15-year bonds dated May 1, 2013, with interest payments on October 31 and April 30. Assume the bonds are issued at par on May 1, 2013. a. Prepare journal entries to record the bond issuance, payment of the first semiannual period's interest, and retirement of $300,000 of the bonds at 101 on November 1, 2014. b. Post the journal entries from part a to their respective T-accounts. c. Record each of the transactions form part a in the financial statement effects template.

119.

118.

126.

25.

Reporting Inventory Information Repurchasing Bonds

Calculating relationship of income statement items with balance sheet items; ROE=Income/Eqity; ROA=Income/Assets Companies may exercise a call provisions (if in the bond contract), or bonds can be repurchased on the open market by the issuing firm prior to the bond reaching maturity. When a company repurchases the bond, they must book a gain or loss and retire the bond: Gain or Loss on Bond Retirement = Book Value - Repurchase Payment Recorded as regular income. (EBI/Average Total Assets); measures company performance using assets to generate net income independent of how the company financed the assets (Net Income/Ave. Shareholders' Equity); measuers performance of using financing assets to generate net income for common shareholders (Profit Margin x Asset Turnover) (ROE - ROA), remember ROE=ROA+ROFL; the effect of financial leverage on a company's ROE 1. Determined by the difference between the asset's book value and the sale proceeds. a. Sales proceeds in excess of book values create gains b. Sales proceeds less than book values cause losses. ability to meet debt payments including interest and the repayment of principal ((Total Asset Value - Salvage Price)/Useful Life of Asset) FIFO, LIFO, Average cost (weighted average of inventory) (EBIT/Interest Expense) 1.improve your profit margin 2.improve asset turnover **Use ratio analysis to figure out which one an entity may be focused on If the Bond has a face value of $100,000 and the discount is $6,733, then the Transaction is recorded as such: Cash (A) 93,267, Bond Payable (L) 100,000, Bond Discount (XL) -6,733 Cash (A) 107,325, Bond Payable (L) 100,000, Bond Premium (L) 7,325 merchandising business who purchase goods ready to sell; manufacturing business who produce goods that are then sold to merchandisers ((total cost-residual value)/estimated total units of resource available); (units extracted x cost per unit) Operating activities Inflow: Cash received from customers Outflow: Cash paid to suppliers . Investing activities Inflow: Sale of equipment Outflow: Purchase of stocks and bonds Financing activities . Inflow: Issuance of common stock Outflow: Payment of dividends items held for sale; items in process of production or sale; goods used in the production of goods to be sold (raw material goods) 1. Depreciation rate 2. Salvage values used to compute depreciation expense 3. Accumulated depreciation and the net book value of the asset 4. Selling price

77.

20.

Return on Assets Return on Equity ROA = ? X ? ROFL Sale of a Long-Term Asset

21.

18. 10.

85.

5. 44. 39. 3. 15.

Solvency Straight Line Depreciation Three Major Cost Assumptions for Inventory Time Interest Earned To Improve ROA... Transaction - Bonds Issued at a Discount

71.

74. 41.

Transaction - Bonds Issued at a Premium Two Categories of Businesses with Inventory Units of Production Method What are the three major types of activities classified on a statement of cash flows? Give an example of a cash inflow and cash outflow in each classification.

48.

129.

42.

What can be Classified as Inventory What factors determine the gain or loss from the sale of a long-term operating asset?

84.

112.

What is a LIFO reserve? What is meant by an intangible asset with an "indefinite life"? What is the definition of cash equivalents? Give three examples of cash equivalents. What is the difference between the direct method and the indirect method of presenting net cash flow from operating activities? What is the effect of capitalized interest on the income statement in future periods? What is the effect of capitalized interest on the income statement in the period that an asset is constructed? What is the effect of capitalized interest on the income statement in the period that an asset is constructed? What is the proper accounting treatment for research and development costs? What Makes Up the Cost Flow Assumption When Should a Company Record Inventory Which intangible assets can be Amortized? Which period(s)past, present, or futureis affected by a change in an assets estimated useful life?

The "LIFO reserve" is the difference between the cost of inventory determined using the last-in, first-out (LIFO) method and the cost determined using another method (either FIFO or average cost). The useful life is long and cannot be determined with any reasonable degree of accuracy.

88.

128.

Cash equivalents are short-term, highly liquid investments that firms acquire with temporarily idle cash to earn interest on these excess funds. To qualify as a cash equivalent, an investment must (1) be easily convertible into a known cash amount and (2) be close enough to maturity so that its market value is not sensitive to interest rate changes (generally, investments with initial maturities of three months or less). Three examples of cash equivalents are Treasury bills, commercial paper, and money market funds. The direct method presents the net cash flow from operating activities by showing the major categories of operating cash receipts and cash payments (such as cash received from customers, cash paid to employees and suppliers, cash paid for interest, and cash paid for income taxes). The indirect (or reconciliation) method, in contrast, presents the net cash flow from operating activities by applying a series of adjustments to the accrual net income to convert it to a cash basis. An increase in periodic depreciation expense and reduced net income.

139.

81.

116.

Capitalizing interest costs as part of the cost of constructing an asset reduces interest expense, and increases net income during the construction period.

80.

Capitalizing interest costs reduces interest expense, and increases net income during the construction period.

86.

R&D costs must be expensed under GAAP unless they have alternative future uses. Outputs from costs related to R&D activities are uncertain and there are, therefore, no expected cash flows against which to match any future depreciation expense. 1.what prices should be assigned to the goods that have been sold 2.what prices should be assigned to the goods that remain in inventory when it obtains legal title to the good; must consider goods in transit, special arrangements, sales returns Intangible assets that have a useful life that is limited and can be easily estimated can be amortized. Present and future periods are affected by such revisions. Depreciation expense calculated and reported in past periods is not revised.

34.

38.

87.

83.

138.

Why are noncash investing and financing transactions disclosed as supplemental information to a statement of cash flows? Why is it important to disaggregate ROA into profit margin (PM) and asset turnover (AT)? Zero Coupon Bond

Noncash investing and financing transactions are disclosed as supplemental information to a statement of cash flows because a secondary objective of cash flow reporting is to present information about investing and financing activities. Noncash investing and financing transactions, generally, affect future cash flows. Issuing bonds payable to acquire equipment, for example, requires future cash payments for interest and principal on the bonds. On the other hand, converting bonds payable into common stock eliminates future cash payments related to the bonds. Knowledge of these types of events, therefore, should be helpful to users of cash flow data who wish to assess a firm's future cash flows.

105.

Companies must manage both the income statement and the balance sheet in order to maximize ROA.

75.

A bond which has no explicit coupon rate, and is issued at a deep discount. The bond price is the present value of the principle payment at maturity. A 4 year zero coupon bond with a face value of $100,000 and a market rate of 6% would sell for $78,941 with a discount of $21,059.