Long-Term Assets
(1) What is the difference between a tangible and an intangible asset? Name an example of each.
(2) Which one is affected by amortization and which is affected by depreciation?
(1) Tangible - physical in nature (ex. land/land improvements, buildings, equipment, natural resources), intangible - contract-based (ex. patents, trademarks, copyrights, franchises, goodwill)
(2) tangible - depreciation; intangible - amortization (note: must have definite useful life - excludes land and goodwill)
How do we calculate interest?
Principal * rate * (# months/12)
During the year, a company borrows cash by issuing a 2-year installment note. What do we record when the note is issued?
Debit Cash; Credit Notes Payable
________ are shares issued and repurchased by the company.
treasury stock
This type of analysis expresses each item in a financial statement as a percentage of the same base amount measured in the same period.
vertical analysis
(1) How do we calculate the book value of an asset?
(2) What should book value equal at the end of the asset's service life?
(1) Book value = original cost - accumulated depreciation
(2) residual/salvage value
True/False: Besides signing long-term notes or issuing bonds, leasing is another way companies can acquire an asset.
True
What effect does each payment on an installment note payable have on notes payable and interest expense?
a portion of the payment reduces each account
(1) What type of account is treasury stock?
(2) What is its effect on stockholders' equity?
(3) True/False: Dividends are issued on treasury stock.
(1) contra-equity (debit balance)
(2) decreases total stockholders' equity
(3) False
This type of analysis examines trends in financial statement data for a single company over time.
horizontal analysis
(1) What is the difference between accumulated depreciation and depreciation expense?
(2) What type of account is accumulated depreciation?
(1) Accumulated depreciation is the sum of all depreciation expense adjustments since the asset was acquired by the company
(2) contra-asset
What is the difference between a regular note payable, an installment note, and a bond?
Regular note payable - monthly interest payments, principal repaid at maturity
Installment notes - periodic payments w/ portion towards principal & portion towards interest
Bonds - usually semiannual interest payments, principal repaid at maturity
Which income statement account does periodic payments on an installment note affect?
interest expense
(authorized stock / issued stock) are shares available to sell (issued + unissued), while (authorized stock / issued stock) are shares actually sold (outstanding + treasury).
authorized; issued
_______ refers to having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts.
liquidity
(1) If we dispose of an asset for more than its book value, we record a (gain / loss).
(2) If we dispose of an asset for less than its book value, we record a (gain / loss).
(1) gain; (2) loss
True/False: The current portion of long-term debt is debt that will be paid within one year from the balance sheet date.
True
How would a 2-year installment note be reported in the balance sheet?
a portion is current and a portion is long-term (whichever is less than one year is current, whichever is longer than one year is long-term)
Name an advantage of common stock and preferred stock.
Common stock - voting rights
Preferred stock - first claim to assets if company dissolves, first priority to receive dividends if declared
________ refers to a company’s ability to pay its current and long-term obligations
solvency
Name three methods of disposing of an asset.
A __________ is an uncertain situation that could potentially result in a loss depending on the outcome of a future event.
What are the two requirements that must be met in order to record a journal entry for it?
contingent liability; loss must be probable and reasonably estimable
What is the difference between debt and equity financing?
debt financing - involves liabilities (loans/notes payable - creditors)
equity financing - involves equity/stock (common/preferred - investors)
We record a journal entry to debit Dividends and credit Dividends Payable on the date a company ________ dividends.
declares
(conservative / aggressive) accounting practices result in lower net income, lower assets, and higher liabilities, while (conservative / aggressive) accounting practices result in higher net income, higher assets, and lower liabilities.
conservative; aggressive