question

companies generate cash from their operations, and this cash can be used for what reasons?`

answer

1. investing in current operations 2. investing in temporary investments to earn additional revenues 3. investing in long term investments in stock of other companies for strategic reasons

question

why do companies use cash?

answer

to support the current operating activities of a company

question

to support its current level of operations a company also uses cash to pay?

answer

1. expenses 2. suppliers of merchandise and other assets 3. interest to creditors 4. dividends to stockholders

question

instead of letting excess cash remain idle in a checking account, most companies invest their excess cash in?

answer

temporary investments

question

in doing so, companies invest in securities such as?

answer

1. debt securities 2. equity securities

question

debt securities

answer

notes and bonds that pay interest and have a fixed maturity date

question

equity securities

answer

preferred and common stock that represent ownership in a company and do not have a fixed maturity date

question

these investments are reported where?

answer

current asset section of the balance sheet

question

what is the primary object of investing in temporary investments?

answer

earn interest revenue, receive dividends, and realize gains from increase in the market price of the securities

question

a company may invest cash in the debt or equity of another company as a?

answer

long term investment

question

what do long term investments usually involve?

answer

the purchase of a significant portion of the stock of another company

question

long term investments usually have a strategic purpose such as:

answer

1. reduction of cost-when one company buys another company, the combined company may be able to reduce administrative expenses 2. replacement of management- if the purchased company has been mismanaged, the acquiring company may replace the companies management, improving operations and profits 3. expansion- acquiring company has a complementary product line, territory and customer base 4. integration- acquiring a supplier or consumer

question

the accounting for bond investments includes recording the following:

answer

purchase of bond, interest revenue and sale of bonds

question

homer company purchases $18,000 of US treasury bonds at their face amount on March 17, plus accrued interest for 45 days. the bonds have an interest rate of 6%, payable on July 31 and January 31. Entry to record the purchase of the bond?

answer

Investments- US treasury bond 18,000 interest receivable 135 Cash 18, 135

question

what is the equation to calculate the accrued interest?

answer

18,000*6%*(45/360)=$135

question

record the interest payment for this bond on July 31

answer

Cash 540 Interest Receivable 135 interest revenue 405 Interest receivable account-money that you had to pay to the supplier in the beginning for his already accrued interest

question

the sale of a bond usually results in?

answer

a gain or a loss

question

Homer company sells the treasury bonds for 98 of the face amount. record the sale

answer

Cash 17,640 loss 360 Investment-Treasury Bond 18,000

question

where is the loss on this investment recorded?

answer

other income (loss) section of the income statement

question

investor

answer

the company investing in another company's stock

question

investee

answer

the company who's stock is being purchased

question

what does the percent of the investee's outstanding stock do?

answer

determines the degree of control that the investor has over the investee

question

what happens when the investor purchases less than 20% of the companies stock?

answer

the investor is considered to have no control over the investee. it is assumed that the investor purchased the stock primarily to earn dividends or to realize gains on prices increases of the stock

question

cost method

answer

how you account for investments that are less than 20% of the investee's outstanding stock

question

under the cost method, entries are recored for the following transactions

answer

purchase of stock, receipt of dividends, sale of stock

question

the purchase of stock is recorded at?

answer

its cost, plus any brokerage commissions

question

Bart company purchases 2,000 shares of Lisa company common stock at 49.99 per share plus brokerage free of 200. record the purchase

answer

Investment-Lisa Co. CS 100,000 Cash 100,000

question

on July 31, Bart receives .40 per share in dividends. record this entry

answer

Cash 800 Dividend revenue 800

question

where is dividend revenue recorded?

answer

other income on the income statement

question

Bart sells 1,500 shares of Lisa Co. common stock for 54.50 per share, less a $160 commission. Record this gain

answer

Cash 81,590 Gain 6,590 Investment 75,000

question

where is this gain recorded

answer

other income section of the balance sheet

question

If the supplier purchases 20-50% of the outstanding stock of the investee, it is considered?

answer

investor is considered to have a significant influence over the investee. it is assumed that the investor purchased the stock primarily for strategic reasons

question

how are these accounted for?

answer

using the equity method

question

equity method

answer

stock is recorded initially at its cost, plus any brokerage commissions. investment account is adjusted for the investors share of the net income and dividends of the investee

question

net income

answer

investor records its share of net income of the investee as an increase in the investment account. its share of any net loss is recorded as a decrease in the investment account

question

dividends

answer

the investor's share of cash dividends received from the investee decreases the investment account

question

Simpson Inc purchased 40% interest in Flanders Corporation common stock on Jan 2, for 350,000. Record this purchase

answer

Investment 350,000 Cash 350,000

question

For the year ended Dec 31, Flanders reported a net income of 105,000. Under the equity method, Simpson Co. recorded its share of Flanders net income. Record this

answer

Investment 42,000 Income in FC 42,000 105,000*40%=42,000

question

what would it be if it was a loss and not a gain?

answer

Loss of FC Investment

question

During the year Flanders declared and paid dividends of 45,000. Record Simpson share of the dividends

answer

Cash 18,000 Investment in FC 18,000 45,000*40%

question

under the equity method, the investment account reflects?

answer

the investor's proportional changes in the net book value of the investee. For example, Flanders Co net book value increased 60,000 (105,000-42,000) as a result, Simpson's share of Flanders co net book value increased by 24,000 (60,000*40%)

question

What happens when more than 50% of stock is purchased?

answer

investor is said to have complete control over the investee. said to have purchased for strategic reasons

question

business combination

answer

purchase of more than 50% ownership of the investee's stock

question

parent company

answer

a corporation owning all or a majority of the voting stock of another cooperation

question

subsidiary company

answer

the corporation that is controlled

question

fair value

answer

is the price that would be received to sell an asset or pay off a liability

question

Disadvantages of fair value accounting

answer

1. fair values may not be readily obtainable for some assets or liabilities 2. makes it more difficult to compare companies that use different methods of determining fair values 3. using fair values could result in more fluctuations in accounting reports because fair value normally changes from year to year

question

Fair values effect on the balance sheet

answer

when an asset or liability is recorded at its fair value, any changes in the original cost or period cost must also be reported

question

fair value effects on the income statement

answer

gains and losses recored on the income statement

question

dividend yield

answer

measures the rate of return to the stock holders, based on cash dividends computer for common stock

question

equation for dividend yield

answer

dividends per share/market price per share

Accounting Chapter 13 – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards