Current LiabilitiesObligations expected to require the use of current assets or the creation of other current liabilities to satisfy the obligation. On the balance sheet. Ignore present value, report at face value.
Contingent LiabilitiesFuture payments/receipts that are contingent on some future e...
ACG 5026 Final Exam Questions and
Correct Answers
Current Liabilities✅Obligations expected to require the use of current assets or the
creation of other current liabilities to satisfy the obligation. On the balance sheet. Ignore
present value, report at face value.
Contingent Liabilities✅Future payments/receipts that are contingent on some future
event or activity in order to know the exact amount. Ex: warranties, coupons, lawsuits.
Reported on the balance sheet under a "provisions" account. If there is a high
probability for a loss that is NOT estimable we disclose it, if it is estimable, we accrue it.
Deferred Income Taxes✅Generated by the discrepancy between income and
expenses for taxation (specified by IRS) and financial reporting (specified by GAAP).
Ex: firms will use DDB for tax purposes and SL for financial reporting purposes. The
difference is either a tax liability or benefit.
Pensions✅Sum of money paid to retired or disabled employees. Usually determined
by the number of years of service.
Defined contribution plan--> Debit to ________ expense and credit to cash.
Defined benefit plan (SS, must be predicted)--> debit to ________ expense and credit
to ________ liability.
Operating Lease✅pure rental agreement where the lessor maintains all ownership
responsibilities. Requires a debit to rent expense and is associated with Off-Balance
Sheet Financing
Capital Lease✅Risks and benefits of ownership have effectively transferred to the
lessee. Becomes a liability on the balance sheet and requires a debit to interest
expense + depreciation expense
Debt Characteristics✅-formal legal contract
-fixed maturity date
-fixed periodic payments
-security in case of default
-no voice in management decisions
-interest expense is tax deductible
, -voting right (common stock)
-dividends are not tax deductible
-double taxation (corporate & dividend income)
Stock Split✅When a company buys back outstanding shares (old) that are overvalued
on the market and sells back (authorized stock, new) double the # of shares that they
bought at par value. This forces the market price to drop to half of its value (split). The #
of outstanding shares doubles and the price (market and par) is split in half. (same
pizza, more slices)
Authorized stock✅shares that are available to issue (sell) to investors. AKA your
company's value that is not used to generate funds--> Retained Earnings.
Outstanding stock✅shares that are issued or sold to investors from the available
number of authorized shares
Stock dividend✅Additional shares are issued to shareholders (usually expressed as a
% of outstanding shares) rather than a cash payout. Companies may decide to
distribute this type of dividend to shareholders if the company has little or no liquid cash
supply (aka they can't give a cash payout).
Accounting effects- simply and exchange of $$ between pockets. Debit to RE and
Credit to CS. A 100% stock dividend is equivalent to a 2 for 1 stock split- the # of
outstanding shares doubles (as given to shareholders) and the price is cut in half
because a stock dividend signals liquidity problems to the market, driving the price
down.
Earnings Per Share (EPS)✅NI / # shares outstanding
Other Comprehensive Income (OCI)✅includes certain direct equity adjustments
(revenues & expenses/gains & losses) that are not part of the current income statement,
but which may have an eventual effect on income. It is not included with net income, but
is shown below net income on the I/S, because the gains/losses have not been realized,
meaning nothing was actually bought or sold to be considered income. Simply the
outcome (pos./neg.) of adjusting for changes in market valuation. Shown on I/S to signal
growth/increasing value, aka the potential for greater income.
Liability✅Probable future sacrifice of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities in
the future as a result of past transactions or events
Determinable Current Liabilities✅Accounts payable, short-term debts, dividends
payable, unearned revenue, income taxes, etc.
Accrued Liabilities✅accrue expense and liability at the end of the current period, and
usually pay sometime during the next year. Each transaction includes a debit to
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