GAAP are guildelines for prep of fin statements and other acct info. important because they provide statments for content and format o fin reports. how earnings and other acct info are measures is imp for determing reliability and usefulness of info.

moral haxards: when person has incentives to behave in ways that can be harmful to others, such as creditors, who have fin take in person' activies.

2.

A. an indep audit guarantees the accurary of fin info

false. indep audit provides reasonable assurance about reliability of audited fin info. auditors rely on info provided bt mgt and on evidence collected from sample of co's trans

B. an auditor does not have to examine all of an audited co's transactions to certify the reliability of the co's fin satments

true. cost of examing all of a co's trans is usually too high. auditos examine a re sample of trans

C. an auditor mustfollow generally accepted auditing standards in performing audit

true. GAAS are procedures that adutiors must follow in pefoming an audit to help ensure the audit has been performed properly

D. an audotr is resp only for period covered by gin statemnts adutied when preparing an audit report

False. the adutior is resp for making sure a co notifies readers of its fin reports of any events occuring between theend of the period overed by the fin statements and the date of the audit report that wouldhave material affect on interp of the fin statements

What is true orfalsse?

3. Dbbie works in sys devlop dep of major c. she heklped develop the co's comp acct system. sometimes fills in for one of op in the acct pay dept. op resp for processing checks to supplies for purchases made by co. debbie created an acct of fictiocious co, just to see if sys could be tricked into writing checks for non existant purch. added data to file and entered phony purch. comp wrote checks. and mailed to PO box debbi opened. written over $80000 in checks to fictional co

Indentify some internal cntrol definciences in the acct sys that have allowed debbie to embezzle $ from her co.

internal control deficiences include access to theacct sys by employee who should not have access. limit on physical access, passwords, and employee id # should have prevented debbie from gaining access to the sys. debbies should not have authority to use sysm. definciency was falure to separate sys development from comp op personnel. dbbye able to embezzle funds cause she understood the comp programs that created actfiles. comp op normally dont have enough knowledge to sys to manipulate it in this manner. deficiency was failure of system to verify transactions orcompare amt from one part of sys to another. use of seq # pruchase orders should make it hard for employee to create fictious data without ststem idenfiying problem

The Sporting Goods Depot borrowed $106,000 via 3-year, 8% note payable. The note is to be repaid in three equal year-end installments. How much interest expense will the firm incur for the first year of the note? $8,480

Mondo Cano Enterprises., borrowed $100,000 from a bank at 12% annual interest and arranged to repay it over two years with monthly payments. How much is the payment? $4,707

What is the amount of each periodic payment that a worker must make at the end of each period for eight periods to accumulate a savings account of $100,000 by the end of the eighth period to help pay his retirement, assuming the bank pays 5% interest? $10,472

The Gold Ore Mining Company is contemplating purchase of new equipment. The machinery is expected to generate increased sales of $50,000 per year over its 5 year life. Excluding the cost of the machinery, additional costs are expected to be $15,000 per year. If the firm requires a minimum 12% return on its investment, what is the maximum price the company can pay for this equipment? $126,167

The present value of an amount is the value of that amount on a particular date prior to the time the amount is paid or received.

Question 6 (1 point)

Manny is buying a vacation home. Manny makes a down payment of $45,000 and borrows the remainder of the cost to complete the purchase. Manny's mortgage requires him to pay $12,500 per period for 20 periods at an interest rate of 12%. What is the approximate present value of the amount borrowed? $93,368

Question 7 (1 point)

The futurevalue of an amount is the value of that amount at a later date.

George has five years to save for his freshman year tuition of $15,000, how much money must George deposit into a 6% savings account every year? $2,661

An annuity in which amounts are paid or received at the end of each fiscal period is a(n) ordinary annuit

Determining the regular deposits necessary to have $40,000 in five years involves which of the following concepts? future value of an annuity

present value: amt is value of that amount on particular date prior to the time the amount is paid or received

issues that require portion of the bonds to be repaid each yr. issued by govs. co can repurchase its own debt if enough cash, reduce liab. or replace(refinance). refinance becomes attractive when the gen level of interest rates if the eco goes down. co can issue new debt at lowerrate of int than existing debt

some bonds require bondholders to resell the bonds to issuing co at specific dates and prices if issuers choose to repurchase bonds. callable bonds: co can reqcquie after bonds have been outstanding for a specific period. may realize a gain or loss.

*a gain increases net income, loss decreases it. terms gai nand loss are commonly used instead of revenue and epense for items that are not a primary part of a co's op activities.gains and losses fro mthe repurchase of debt are treated a extraordinary items.

if co issued 20000 of 5 yr bonds. the 20000 is the amt the co will pay creditors at end of 5 yr period.:maturity or face value. annual itnerest is stated rate of interest. bonds are sold to yield a return. so if return of 9% that is effective rate of interest. determined by amt creditors are willing to pay for bonds and affects amt of cash the co receives from its bonds pay from sold. a co may set the stated int rate paid on debt it issues at any level it wishes. discounts: crefitor discounts amt of leoan (reduces the amt of the loan) by an amt suffiecient to provide an 8% return. PV of bonds=PV of annuity+PV of single amt

observe that theeffectivve rate of interst (9%) is used to determine the int factor for the bonds cause the effective rate of int (95) is used to determine the int factor for the PV. co gets less than maturity value for bonds cause theefective rate of int on the bonds is higher than the stated rate. effective rate is higher than stated rate, bonds sell at discount. sell at maturity level, sell at par. sell at premium when more than maturity level. difference between the cash paid and the int expense is added to bonds payable when bonds issued at discount. trans recorded by issuer of debt can be used for trans involving the pruchasers of thedebt.when the effectie rate of inrest n debt is less than the stated rate, debt is said to be issued at a premium. borrower receives MOre for the bonds when tthey are so9ld than the maturity level of bonds, bodns sell more than 100% of par. premium REDUCES int expense on debteach period. portion of amt paid by borrower each period is reayment of amt borrowed, in add to payment of interest. amt of principal amortized each period is subtraacted from beg of period present value to calc the end of period value in the amortization table

corps fin statements and accompanying notes provide much useful info. help readers calc amt od debt a co has outstanding and they also indicatechanges in debt and int rates on debt, int expense during given fiscal period and current and future cash flows assc w/ existing debt and interest payment. int exp based on eff rate of interest is reported each yr on the income statement. amount of int paid is reported each yr on statement of cash flows as part of op act. if indirect format of the statement is used, intest paid may ot appear as a separate 9tem on thstatement of cash flows.

fin act

existing condition that may result in an ecoeffect if a future event occurs. GAAP require cos to report contigencies that could result in future obligations

for most, current obligation doesnt exist. some future event occurs, however, obligation might result. other involve eviro costs and litigations. gov regulation have made co liabile for costs assc w. environmental cleanup. if contigency prob will result in a loss, and the amt of the loss can be reasonably estimated, it should be included as a libility on a co's balance sheet. b amt of expected loss is recognized o nthe income statement in computin net income

involve agreements to purchase or sell something in future. leased assets are common form of commitment. leases call capital lesases are fin arrangements and are examined in the next section. operating leases to obtain machines, equip and other reases are recorded as expenses in period which assets are used. liabilites not recorded for operating leases

determine amt of lease obligation:

PVA=A*IF. other trans assc w/ lease payments are amortization (like in repayment of loan)

liabilities are obligations that a co has a legal repsonbility to meet. claims against co enforceable by law. proifit is value created from selling g&s during a period in excess of costs of resources consumed dring that period. corp oweners equity refered to a stockholders or sharehodlers quity because owenrs share stock

cos often repurchase stock to distribute to employees as part as emp stock ownership to provide bonus

corps issue sares of stock in exchange for stock (or prop)common stock or cpatial stock represents the owenrship rights of invetors in a corp.

us corps must be charted by state:legal right granted by a state that permits a corp to exist. makes corp a legal entity limits corps act to protect owenrs and other who cotnract with corp. most share of common stock are issued with a par value because states often require that corp stock have a par value:stock is value assgnied to each share by a corp in its corp charter. state may require that a corp maintain an amt of equity equal to or greather than the par value of stock. if dont require the n no par stock

paid in capital in excess of par value: amkt in excess of the stock pat value receibed by a corp from sale of stock caleld paid in capial, contributed cap in excess of par, proceeeds in excess of par value, addt paid in cap, surplus and premium oncapital stock. stated value: for no part stock. appears on balance sheet in place of par value. isued shares are shares that have been sold by corp to invstors. outstanding syhares are shares currently held by investors

retained earnings

profit reinvested in a corp. also is referred to by avariety of nakes such as reinvested earningsng investors a portion of the amt they contributed to the co when they purchased the co’s stock.

net income added to retained earnings, dividends subtracted. net loss would be subtracted. difference between contributed capital and retained earnings:retained earnings come from profits that could be used to pay dividends to stockholders. dividends paid from retained earnings are a return to stockholders from a company’s earnings. dividends excess of retained earnings are paid, return oF contributed capital. co is repay

1.Assume that instead of issuing its debt to yield an effective rate of9%. mom's cookie co issued thedebt to yield an effective rate of 7%

A. calc th e present value of bonds at time they are issued

present value of bonds = PV of annuity (interest) + PV of maturity value

PV=1600*4.10020(from table) +20000*.71299 (table)

PV=6560+14260=20820

B.Prepare a amortization table

05 20820 1457 1600 1457-1600=(143) 20820-143=20677

06 20677 1447 “ (153) 20525

07 20525 1437 “ (163) 20362

08 20362 1425 “ (175) 20187

09 20187 1413 “ (187) 20000

total 7180 8000 (820)

C. record transactions for mom;s cookie co for the first and fifth years

journal effect on acct equation

1/1/05 cash 20820 +20820

bonds pending 20820 +20820

31/12/05interest exp 1457 -1457

bondspayable 143 -143

cash 1600 -1600

journal effect on acct equation

31.12.09INT EXP 1413 -1413

bonds payable 187 -187

cash 1600 -1600

31.12.09bonds payable 20000 -20000

cash 20000 -20000

2. bovine co, began operations in jan 2004. it issued 100000 shares of $1 per value common stock. the stock sold $5 per share. the co’s charter permits to issue 250000 shares of stock. in 2005, the co repurchased 8000 shares of stock at a cost of $7 per share. bovine’s net income and cash dividend payments have been as follows.

04 (60000) 0

05 140000 50000

06 220000 100000

Draft the stockholder’s equity section of bovine’s balance sheet for the year’s ended dec 31, 2006 and 2005.

common stock $1 oar value 250000 shares

authorized 100000 shares issued 100000 100000

paid in capital in excess of par value 400000 400000

retained earnings 150000 30000

treasury stock 8000 shares at cost (56000) 0

total stockholders equity 594000 530000

3. stockholder’s equity

common stock .10$ par value

1000000 shares authorizes

700000 shares issued 70000

paid in capital in excess od par value 810240

retained earnings 356812

treasury stock (30000 shares at cost) (42296)

total stockholder’s equity 1194756

common stock paid-in cap R.E T.S total

12.31.03 65000 747196 306201 (33941) 1084456

net income 92611 92611

dividends (42000) (42000)

stock purchased (8355) (8355)

stock issued 5000 63044 68044

12.31.04 70000 810240 356812 (42296) 1194756

a. what was lasco’s total contributed capital for 2004?

cont cap=880240=70000common stock+810240 paid in cap in excess of par value

b. how many shares of common stock were outstandinf at the end of 2004?

shares outstandings=670000=700000isssued-30000 treasury shares

c.what dollar amt of treasury stock did co hold at end of 04?

treasury stock=42296

d. what dollar amt of stock did co repurchase during 04? how much did it issue?

stock repurchased=8335; stock issued=68044

e. what was the amt of dividends paid in 04?

dividends paid=42000

f.how much net cash flow came from fin act assc with stockholder’s equity during 04, excluding the effect of net income? what were the sources of that cash flow?

paid for dividends (42000)

purchase of stock (8355)

net cash flow 17689

g.how much net income came from fin act assc with stockholders equity during the current year?

net income from fin act-$0 fin act do not creat net income

obj 4: explain trans affecting stockholders’ equity anddescribe ho these trans are reported in a co’s fin statements .describes events that changed the amt of stockholder’s equity during a fiscal period. all statements list events that changed stockholder’s equity during the past fiscal year. most corps report this info for the most recent three fiscal yrs. some report asschedule in notes section of their fin reports

summarizes equity trans for a fiscal period.

issue new shares increase increase

earn net income

incur net loss inc or decrease

pay dividends decrease

repurchase stock decrease

*an increase in treasury stock decreases stockholder’s equity*

when a treasury stock is sold at a price higher than its cost, incremental amt is added to paid-in capital. treausry stock is sold at a price less than cost, amt is deducted fro paid in capital. cash flow effects result from trans affecting cash duringthe fiscal period. all result from fin act and either increase (stock issued) or decrease (payment of dividends and repurchase of stock) cash. cash flows assc with net income, which increases reatained earnings, are reported as part of oper act on statement of cash flows

paid only in shares outstanding. not paid on shares held in treasury, or co does not pay to self

daye of declaration: important. date on which a corp board of directors annonces tha a dividend will be paid.

date of record: date used to determinbe those owners who will receive the dividend. all owners on date of record receive the dividend

date of payment: on which the dividends are mailed to those receiving dividends.

dividends reported dri fiscal periods on statement of stockholders equity at a reduction in retained earnings. statement of cash flows for that period amt not always the same. co may declare a dividend near the end of its fiscal yr ut not pay the dividend until the following fiscal yr. dividends declared but not paid are reported as acurrent liab, div payable

each current stockholder normally has a right to purchase a portion of new shares = to % of shares he already owned. rightto maintain same % of ownersip when new shares are issued: preemptive right of stockholders. prevents mgt from diluting the control and wealth of current owners by selling new shares to someone other than new owners. can be sold to others if original receipient does not want to purcase the new shares

shares of stock distributed by a co to its current stockholders w/o charge to the stockholders. effect: to increase the number of shares of stock a co has outstanding ad number held by each stockholder. increase is in proportion to number that stockholders owned before distribution

unlike cash dividends, stock dividends do not decrease a co’s cash. no cash is paid out. amt of stock dividend is subtracted from retained earnings and added to cont cap. total amt of stockholders equitydoes not change. amt trans to mkt price of stock at time dividend is declared.

stock split: issued by ciro, issues a multiple of the number of shares of stock outstadinf before the spilt. does not change a co’s total stockholders equity. co will reuce the par value of common stock in proportion to the size of stock split. if par value is $1 per share before a 2-1 split, par value will be .50$ per share after the split. if co does not reduce par value amt equal to par value of the add stock is transfere from retained earnings to contributed cap. mkt value of cp stock adjusts to stock split.

some co issue more than one clas of stock. usually have different coting and dividend rights. descrbes why the diff classes of stock issued by co. preferred stock: higher claim on dividends and assets than than common stock. less risky as an investment than common stock more risky than bonds or other debt investments

more protection against loss: good, able to sel shares for trade of common stock. bad, abd they get higher percentage than others. less risk than others. co does bad prefered gets bigger size of profits. good can exchange for common stock. paid in capital excess of par value is not reported. issued at or has no par value. liquidation sale (dividend rate) reported. amt stockholders wouldreceive for each share if co were to liquidate, assuming cash were availablr after creditors had been [aid to pay full liquidation value. preferred stockholders receive stated dividends rate, while dividends to common stock depend on co’s profitability. if unprofitable might even skip dividends for a yr. often cumulative. dividends not paid to preferred in past years pad in current yr. paid quarterly on both stocks. results in cash flow and redction of retained earnings. NOT AN EXPENSE. distribution of profits. preferred paid before common dividends net income avaiable forcommon stockholders is net income minus dividends on preferred stock.

redeemable preferred stock. repurchased at particular time by issuing co, few years after issued. fixed life, no voting rights, not included as part of stockholder’s equity. separate item between liabilities and equity on bal. hseet/

convertible securities: stocks that can be converted to common stock. # sold set at time convertible securities added. convertible and preferred attract investors who want greater protection but want chance to share in co’s earnings if succesful. convertibles pay lower rate of int and lwer dividend.

*in foreign corp has stock listed on usstock exchange, then normally issues annual fin statements that conform with us gaap. co’s may issue different annual reprot to stockholders in their own countries using dif acct rules.*

each nation sets its own acct and reporting rules. not alwayssafe to assume that the amt in a co’sstatements are the same as those in a us co. in some countries, common stock known as share capital. share premium might be paid in capital in excess of par value.

might be observed by some cos.

rights topurchase shares of a co’s stock at specified price. granted to emp and mgt as part of compensation. receive options to purchase 10000 on 2.1.04. options permit to buy $50 per share on 2.1.05 emp profit from using their options. incentative to be prod and help co’s stock price increase. co sometimes may sponser employees stock plant. shares given when emp earn them.

minority interest. portion of subsidiary co’s equity owned by shareholder’s other than parent corp. if parent co has 80% of SC stock. SC reports total stockholders equity of 2mil for 2004. noncontrolling interest (20%*2mil) is 400000. parent co reports this amt as noncontrolling int on bal sheet. some report this as stockholder’s equity, others as portion of total equity of corps byutside interest. liability, claim by outside interest against portion of corps resources. separate category between liab and equity

transfers part of retained earnings balance to a restricted retained earnings acct. cannot be distributed as dividends. new acct title might be retained earnings. rare among us co but sometimes are found in fin statements of foreign co

made by multinational corp. multinationals are cos that operate in both foreign and domestic markets some are made in foreign currency. when preparing fin statements in the us, translate to dollar. process of converting fin resutls of op in foreign currenct into us dollars for fin reporting purp. translation adjustment is the gain or loss that results when operations of a co’s foreign subsidiaries are translated to dollar for reporting consolidated fin statements. may result in gains or losses depending on whether dollar has gained or lost value relatice to other countries. reported in stockholder’s equity section of the bal sheet as oart of other comprehensive income. gains added in computing total stockholders equity and losses are deduct

Review

1. liab result from contractual relationship with lenders, suppliers, customers, employees, gov, and other parties

2. these attributes of a liab are 1.present resp to repay (trans resources) at some future time 2.binding nature of the agreement (to return resources) and 3.occurrence of the original trans of value at some time in past

3.debt obligations invlude notes and bonds payable

a. debt recorded at present value

b. principal repaid and interest are recorded over the life of the debt

c amortization table is useful for determining amt recorded and reported for debt obligations

4.other obligations include constigencies and commitments including leases

a.contingencies are possbiel future events that may result in obligations

b. commitments are agreements to use or acquoire resourcesn the future

c. capital leases are fin agreements that result in a company recording assets and liab for the present value of the future lease payments

5.stockholder’s equity includes contributed cap and retained earnings

a. cont cap inc the par (stated) value of stock plus paid in cap in excess of par value. stock has no par or stated value the enture amt of cont cao is reported as common or cap stock

b. stock repurchased by a corp from its stockholders is reported on the bal sheet as treasury stock

6.transactions affecting stockholders equity include paying cash dividends, isuing stock repurchasing stock and those trans involving its own stock

a.effects of these trans are summarized in the statements of stockholders equity i

b. co cant create income through trans involving its own stock

c.main stockholders equity trans that affect cash flow are the issuance or repurchase of stock and the payment of cash dividends

d. stock dividends increase number of shares outsanding but do not change the total equity balance and do not affect cash

7.corps may issue preferred stock in addition to common stock. preferred stock had a higher claim to dividends and assets than ommon stock. some preferred stock and some bonds that areissued are convertivle this feature permit’s the purchaser to exchange the securities of the ocmmon stock

8. amt reported in the fin statements of foreign corp aoften are determined using rules that are different from thos used I the US. terms used in these reports akso may differ from those ued in the US

0.some co engage in special fin arrangements or act that affect their fin statements

a.co sometimes grants employees or manager stock options tghat permit them to purchase co’s stock at specified price

b. non controlling intrnes is the portion of a parent co’s subsidiary that isnot owned by the parent

c.appropritation oif retained earnings separates a portion of retained earnings ps that it cant be used to pay dividends

d.foreign currenct adjustment is gain or loss that results when co translates foreignop into us dollars for fin reporting purp

gains/losses

for non income things

Terms related to bonds

adjust rate:

.05=($5+100/100)-1

(105/100)-1

1.08=(5+100/x) 1.08x=105

x=105/1.08 x=97.22 investment of 97.22

if invest at 97.22 got back 5% . if earning 8% rate investment double check: 97.22+(.08) 97.22=105

97.22+7.78=105 dif is 7.78=8% return

cash 19222

discount on B/p 778

BP 20000 discount on BP and BP both grouped as liabiulity 2 acct for 1 bond

Beginning of period book value *eff rate is interest expense

interest expense=PV beginning of year * real interest rate

interest expense 1730

liability grows havent paid part of interest

Bonds Payable 130

Cash(face *nom) 1600

sell at discount int exp bigger that what you pay premium bigger

premium bigger

then you debit bonds payable if discount sell. say you sell at 500 caah is 1600 put 1000 in bonds debit.

use debit disc amt

int exp 1730

disc 130

cash 1600 not have to balance it out

if sued even if won put as liability

commitments have gaurantees, fxed price. what happens if commit to buy for $2/ton, product drops to 1.20. losses measured. liability.

important to access what you'll get from co in future. loan debit asset credit loans payable to bank same w/ lease.

contributed cap

comon stock