Intermediate Accounting Final Exam
Assets are things that a company owns and are sometimes referred to as the resources of the company. A resource with economic value that an individual corporation or country owns or controls with the expectation that it will provide future benefit.
A fixed asset is a long term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. Examples could include buildings, real estate, equipment, and furniture.
Historical cost is a measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. The historical cost method is used for assets in the U.S. under GAAP (not all assets are held at historical cost). The historical cost principal states that an asset should be reported at its cos tat the time of the exchange transaction and should include all costs necessary to get the asset in place and ready for use. It measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and should not anticipate gains and losses but should recognize gains and losses only when the asset is sold
An exchange has commercial substance if the future cash flows change as a result of the transaction. That is if the two parties economic positions change, the transaction has commercial substance.
Is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
A company's asset that is worth less on the market than the value listed on the company's balance sheet. this will result in a write-down of that same asset account to the stated market price
Often called wasting assets, include petroleum, minerals, and timber. They have two main features: 1) complete removal of the asset, and 2)Replacement of the asset only by and act of nature. Depletion is the process of allocating the cost of natural resources.
The allocation of the cost of intangible assets in a systematic way is called amortization.
Goodwill can often arise when one company is purchased by another company. In an acquisition, the amount paid for the company over book value usually accounts for the target firm's intangible assets.
Planned search or critical investigation aimed at discovery of new knowledge.
translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
A liability has three essential features:
1) it is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services
2) It is an unavoidable obligation
3) The transaction or other event creating the obligation has already occurred
An obligation whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities. Examples would include Accounts Payable, Notes Payable, Current Maturities of Long Term Debt, Dividend Payable, Unearned Revenues
An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.
Long Term Debt
Consists of probable 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. Examples are bonds payable, long term notes payable, mortgages payable, pension liabilities, and lease liability
The bond contract that represents a promise to pay (1) a sum of money at maturity date plus (2) periodic interest at a specified rate on the maturity amount. The purpose is to borrow when the amount of capital needed is too large for one lender to supply.
Par value, principle amount, or maturity value. The nominal value or dollar value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate, for bonds, it is the amount paid to the holder at maturity.
Selling price. In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt, and depending on the terms of the bond, is obliged to pay them interest (coupon rate) and/or to repay the principal at a later date, termed the maturity.
Coupon or nominal rate. The return on investment that is expressed as a per-year percentage, and that does not account for compounding that occurs throughout the year. The effective annual interest rate on the other hand, does account for intra-year compounding that can occur on a daily, monthly, or quarterly basis.
Effective yield or market rate. An investments annual rate of interest when compounding occurs more than once a year.
Additional Paid-In Capital
A value that is often included in the contributed surplus account in the shareholders' equity section of a company's balance sheet. The account represent the excess paid by an investor over the par-value price of a stock issue. Additional paid-in-capital can arise from issuing either preferred or common stock.
A value that, instead of being par value, is assigned to a corporation's stock for accounting purposes. Stated value has no relation to market price.
The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. This figure is usually listed in the capital accounts section of the balance sheet.
Issued shares is a term of law and finance for the quantity of shares of a corporation, which have been allocated (allotted) and are subsequently held by shareholders. The act of creating new issued shares is called issuance, allocation or allotment. Allotment, in simplicity, is the creation of shares and their transfer to a subscriber.
Shares outstanding are all the shares of a corporation or financial asset that have been authorized, issued and purchased by investors and are held by them.
The portion of shares that a company keeps in their own treasury. Treasury stock may have come from a repurchase or buyback from shareholders; or it may have never been issued to the public in the first place. These shares don't pay dividends, have no voting rights, and should not be included in shares outstanding calculations.
A type of preferred stock with a provision that stipulates that if any dividends have been omitted in the past, they must be paid out to preferred shareholders first, before common shareholders can receive dividends.
A type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends receive as well as an additional dividend based on some predetermined condition.
Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date.
A type of preferred stock in which the issuer has the right to call in or redeem the stock at a preset price after a defined date.
Redeemable preferred stock, also known as callable preferred stock, refers to a type of stock or share that is subject to being returned to the issuing organization on or after a specific date at a certain price and retire it.
Bonds which can be converted into other corporate securities are called convertible bonds
Convertible Preferred Stock
Convertible preferred stock includes an option for the holder to convert preferred shares into a fixed number of common shares
Only common stock; no potentially dilutive securities.
Potentially dilutive securities present.
Means the ability to influence the EPS in a downward direction.
Companies will not report diluted EPS if the securities in their capital structure are antidilutive.
Diluted Earnings Per Share
Diluted EPS includes the effect of all potential dilutive common shares that were outstanding during the period.
Fair Value Accounting
Fair value accounting is a financial reporting approach in which companies are required or permitted to measure and report on an ongoing basis certain assets and liabilities (generally financial instruments) at estimates of the prices they would receive if they were to sell the assets or would pay if they were to be relieved of the liabilities.
Fair Value Option
1. The estimated value of all assets and liabilities of an acquired company used to consolidate the financial statements of both companies.
2. In the futures market, fair value is the equilibrium price for a futures contract. This is equal to the spot price after taking into account compounded interest (and dividends lost because the investor owns the futures contract rather than the physical stocks) over a certain period of time.
Classify a debt security as held-to-maturity only if it has both
• the positive intent and
• the ability to hold securities to maturity.
Companies report available-for-sale securities at fair value, with unrealized holding gains and losses reported as part of comprehensive income (equity). Any discount or premium is amortized.