Internal Control & Cash
What is the purpose of internal control?
Safeguard assets, ensure reliable reporting, promote efficiency, and enforce policies.
A bond’s stated (coupon) rate is used to calculate what?
The cash interest payments to bondholders.
What is treasury stock?
A corporation’s own stock it repurchased; a contra-equity account
Which ratio measures short-term liquidity?
Current ratio or quick ratio.
What is the time value of money?
A dollar today is worth more than a dollar in the future.
What is a “bank reconciliation”?
A schedule correcting differences between the bank balance and the company’s book balance.
A bond issued at 98 is issued at a ______.
Discount (because the market rate > stated rate).
Do stock dividends change total stockholders’ equity?
No — they only shift amounts between accounts.
What does the debt-to-equity ratio assess?
The degree of financial leverage or risk.
What is an annuity?
Equal payments made at equal time intervals.
Give one example of a preventive internal control.
Segregation of duties, authorization requirements, or physical safeguards.
How do you calculate the interest expense each period under the effective interest method?
Carrying value × market (effective) interest rate.
What is the effect of issuing stock above par?
Increase common stock (par) + increase APIC for the excess.
How do you calculate return on equity (ROE)?
Net income ÷ average stockholders’ equity.
The present value of a future amount ______ as the interest rate increases.
Decreases.
A bank statement shows $500 interest earned. What is the journal entry?
Dr Cash 500; Cr Interest Revenue 500
What impact does amortizing a discount have on carrying value?
It increases carrying value toward face value over time.
Preferred stock often provides two advantages. Name one.
Dividend preference or liquidation preference.
What is horizontal analysis used for?
Evaluating trends over time.
If interest is compounded semiannually, what adjustment must be made?
Divide the annual rate by 2 and multiply periods by 2.
Define “cash equivalents.”
Short-term, highly liquid investments with maturities of ≤3 months.
For a lease, what is the “right-of-use asset”?
The asset recorded by the lessee representing their right to use the leased property.
How does a large stock dividend (25%+) affect equity?
Transfers par value of the new shares from retained earnings to common stock.
What does the price-earnings ratio (P/E) indicate?
How much investors are willing to pay per dollar of earnings.
In a PV calculation, what does “N” represent?
Number of periods.