Chapter 9
Name 3 tangible assets and 3 intangible assets.
Tangible Assets: Cash, Merchandise Inventory, Equipment, Buildings, etc.
Intangible Assets: Licenses, Copyright, Trademarks, etc.
What is 1 advantage, and disadvantage of a corporation?
Advantages: Can raise more money, continious life, easy transfer of corporate ownership, no mutual agency among stockholders/corporation, Stockholders have limited liability
Disadvantages: Ownership and management is separated. Corporate earnings may be subject to double taxation. Government regulation is expensive. Start-up costs are higher than other business forms.
What is the difference between direct and indirect cash flow methods?
Indirect Method: Starts with accrual income and adjusts to net cash. It also uses account relationships to determine changes in cash.
Direct Method: Restates the income in terms of cash. Also shows actual cash receipts and cash payments.
What are Bonds?
Bonds payable are long-term debts issued
to multiple lenders called bondholders,
usually in increments of $1,000 per bond.
A machine that costs $410,000 has an estimated residual value of $64,000 and an estimated useful life of four years. Calculate the depreciation expense using the straight-line method.
($410,000 - $64,000)/4 = $86,500
What is the difference between cumulative and noncumulative preferred stock?
Cumulative preferred stock is preferred stock whose owners must receive passed dividends plus the current year dividends while noncumulative preferred stock's owners do not receive passed dividends, ONLY the current year dividends.
What are the cash flows from the 3 activities for a healthy company?
Net Cash Flow from Operating Activities is positive (cash is being generated)
Net Cash Flow from Investing Activities is negative (means investing in new assets)
Net Cash Flow from Financing Activities is positive (a lot of stock being issued as opposed to borrowing)
What is the Face Value and when must it be paid back by?
The face value is the amount a borrower
must pay back to the bondholders on the
maturity date.
CH 9 - In 2020, ABC Firm had a net sales revenue of $23,240. Their total assets were $16,940 and $17,120 in 2020 and 2019 respectively. Calculate the Asset Turnover Ratio.
Avg. Total Assets = ($16,940 + $17,120)/2 = $17,030
Asset Turnover Ratio = $23,240/$17,030 = 1.36
If Authorized Shares = 400,000 and Unissued Shares = 265,000 shares, calculate Issued shares.
Issued Shares = 400,000 - 265,000 = 135,000 shares.
Identify whether the following transactions are Operating, Investing, or Financing activities.
Cash paid for salaries and wages (payable)
Cash paid to purchase new equipment
Cash received from issuing common stock to owners
Cash provided by borrowing from a bank
Cash used to purchased merchandise inventory
1. Operating
2. Investing
3. Financing
4. Financing
5. Operating
What does it mean when a bond is issued at a discount or at a premium?
A discount on bonds payable occurs when
the issue price is less than face value.
A premium on bonds payable occurs when
the issue price is above face value.
A machine that costs $466,000 has an estimated residual value of $82,000 and an estimated useful life of four years. Calculate the depreciation expense for Year 2 using the double-declining-balance method.
Year 1: ($466,000 - 0) x 2 x (1/4) = $233,000
Year 2: ($466,000 - $233,000) x 2 x (1/4) = $116,500
ABC Firm has 1,000 outstanding shares of 6%, $50 par value cumulative preferred stock. Last year, the company did not pay any cash dividends. How much did ABC Firm pay in Preferred Dividends?
Current Dividends = 1,000 x 6% x $50 = $3,000
Passed Dividends = 1,000 x 6% x $50 = $3,000
Total Preferred Dividends = $6,000
Beginning Cash Balance is $70,000. Calculate the Net Cash and find the Ending Cash Balance.
Net Cash Provided by Operating Activities = $96,000
Net Cash Used for Investing Activities = $182,000
Net Cash Provided by Financing Activities = $154,000
Net Cash = $96,000 - $182,000 + $154,000 = $68,000
Ending Cash Balance = $70,000 + $68,000 = $138,000
For 2020, ABC Firm reported total liabilities of $9,214 and total equity of $5,967. Calculate their Debt-to-Equity Ratio.
Debt-to-Equity Ratio = 1.54
ABC Firm is selling equipment that is past its useful life. The equipment cost $19,800 and has accumulated depreciation of $17,450. ABC Firm sells the plant asset for $2,100. Calculate the book value of the asset being sold. Then, calculate the Gain or Loss on the sale.
Book Value = $19,800 - $17,450 = $2,350
Gain (Loss) = $2,100 - $2,350 = - $250
ABC Firm has 1,400,000 shares issued and outstanding of $1 par common stock. The market value is $36 per share. ABC Firm effects a 2-for-1 stock split. What will happen to the number of shares? What about the par and market values?
# of Shares: 2,800,000 Shares
Par Value: $0.50
Market Value: $18
The Income Statement for ABC Firm reports $112 million of Net Income. Calculate the Net Cash Flow from Operating Activities.
Depreciation Expense of $28 million
Increase in Accounts Receivable of $100 million
Decrease in Merchandise Inventory of $105 million
Increase in Accounts Payable of $34 million
Net Cash Flow from Operating Activities = $112 + $28 - $100 + $105 + $34 = $179 million
If the Bond’s Stated Interest Rate is greater than the Market Interest Rate, is the bond issued at face value, at a discount or at a premium?
If Bond’s Stated Interest Rate > Market Interest Rate, the bond is issued at a premium.