Accounting 3

Executive Airways borrowed $10 million on September 1, 2012, for one year at a 6% interest rate. The interest expense for the year ended December 31, 2012, can be calculated by multiplying the borrowed amount by the interest rate. Therefore, the interest expense is $10 million x 6% = $600,000.

The current ratio is a financial ratio that measures a company's ability to pay off its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. This ratio indicates the liquidity and short-term financial health of a company. A higher current ratio suggests that a company is more capable of meeting its short-term obligations. Therefore, the correct answer is "current assets divided by current liabilities."

The correct answer is "Net cash flows from operating activities divided by average total assets." This is because cash return on assets measures the cash generated from operating activities relative to the average total assets. It provides insight into how efficiently a company is utilizing its assets to generate cash. By dividing the net cash flows from operating activities by the average total assets, we can determine the cash return on assets.

The purchase of inventory for cash is classified as an operating activity in the statement of cash flows because it represents a transaction directly related to the company's primary operations. Inventory is a key component of the company's business and its purchase is necessary for the production or sale of goods. Therefore, it is considered an operating activity as it reflects the cash inflows and outflows directly associated with the company's core operations.

Liabilities represent probable future sacrifices of benefits because they are obligations or debts that a company owes to external parties. These obligations can be settled by transferring assets, providing services, or other similar actions, which may result in sacrificing future economic benefits. Therefore, liabilities are not always payable in cash and not all liabilities are reported as current in the balance sheet.

FICA taxes, which stands for Federal Insurance Contributions Act taxes, are paid by both the employee and the employer. These taxes are used to fund Social Security and Medicare programs. The employee and the employer each contribute a portion of the FICA taxes, with the employee's portion being deducted from their wages and the employer matching that contribution. This makes FICA taxes unique compared to the other options listed, as the others are typically paid solely by either the employee or the employer.

Common shareholders usually do not have the right to participate in the day-to-day operations of a company. This responsibility is typically reserved for the board of directors and the management team. However, common shareholders do have the rights to share in the distribution of assets, elect the board of directors, and receive dividends when declared.

The correct order from the largest number of shares to the smallest number of shares is authorized, issued, and outstanding. "Authorized" refers to the maximum number of shares a company is allowed to issue. "Issued" represents the number of shares that have been actually issued by the company. "Outstanding" refers to the number of shares that are currently held by shareholders. Therefore, the correct order is authorized (largest), issued, and outstanding (smallest).

The payment of dividends is classified as a financing activity because it involves the distribution of profits to the shareholders of a company. It represents a cash outflow for the company and is considered a return of capital to the owners. Financing activities in the statement of cash flows include activities related to obtaining or repaying capital, such as issuing or repurchasing shares, paying dividends, or taking out or repaying loans.

A liability represents a probable, future sacrifice of economic benefits and arises from present obligations to other entities. It also results from past transactions or events. However, it does not necessarily have to be payable in cash. Liabilities can be settled through the transfer of other assets, the provision of services, or the issuance of equity instruments.

Operating activities refer to the day-to-day activities of a business that generate revenue and incur expenses. These activities can be identified by analyzing income statement information, as well as changes in current asset and current liability accounts. Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable and accrued expenses. By examining the changes in these accounts, we can determine the cash flows from operating activities, which are crucial in assessing a company's financial performance.

The purchase of an intangible asset is an example of a cash outflow from an investing activity because it involves the expenditure of cash to acquire an intangible asset, such as patents, copyrights, or trademarks. This type of expenditure is considered an investment because it is expected to generate future economic benefits for the company. Other options listed, such as payment of interest, payment of cash dividends, and purchase of treasury stock, are not examples of cash outflows from investing activities but rather financing or operating activities.

The receipt of cash from the issuance of common stock is an example of a cash inflow from a financing activity because it represents funds received by a company from investors in exchange for ownership shares. This transaction is classified as a financing activity because it involves raising capital by issuing equity securities.

Big Sky should report this litigation as a liability for $500,000 with disclosure of the range because it is probable that they will settle the lawsuit within that range. The estimated amount of $500,000 falls within the range of $500,000 to $700,000, and all amounts in the range are considered equally likely. Therefore, reporting the liability at the lower end of the range is appropriate.

Convertible bonds provide potential benefits to both the investor and the issuer. For the investor, convertible bonds offer the opportunity to convert the bond into a predetermined number of shares of the issuer's common stock. This allows the investor to participate in any potential increase in the issuer's stock price. For the issuer, convertible bonds provide a way to raise capital at a lower interest rate compared to traditional bonds, as investors are willing to accept a lower rate in exchange for the conversion feature. Additionally, the issuer benefits from the potential increase in the stock price, which can improve the company's financial position.

Bonds issued at a premium have a stated interest rate that is greater than the market interest rate. This means that the bond is offering a higher interest rate than what is currently available in the market, making it more attractive to investors. As a result, the bond is sold at a price higher than its face value, or par value. The premium represents the difference between the price paid for the bond and its par value.

The statement of cash flows using the direct method reports cash inflows and outflows from operating activities. Depreciation expense, however, is a non-cash expense that represents the allocation of the cost of an asset over its useful life. Since it does not involve the actual flow of cash, it is not reported in the statement of cash flows using the direct method.

An operating lease is simply a rental because it allows the lessee to use and benefit from an asset for a specified period of time without transferring ownership rights. The lessor retains ownership of the asset and is responsible for maintenance and other costs associated with the asset. The lessee pays regular rental payments for the use of the asset. This type of lease is commonly used for short-term or non-essential assets, where the lessee does not want to take on the risks and responsibilities of ownership.

Accounts payable is not considered a common long-term debt because it refers to the short-term debts owed by a company to its suppliers for goods or services received. These debts are typically paid within a short period, usually within 30-90 days. On the other hand, bonds payable, notes payable, and leases payable are all examples of long-term debts that are typically repaid over a longer period, often several years.

Bonds issued at a discount means that they are sold for a price lower than their face value. This is because the market interest rate is higher than the bond's coupon rate. Investors are willing to buy these bonds at a discount because they will receive the full face value at maturity, allowing them to earn a higher yield. Therefore, the correct answer is "Issued below face value."

Retained earnings represent the accumulated profits of a company that have not been distributed to shareholders as dividends. When retained earnings increase, it means that the company has generated more profits and has chosen to retain a portion of those profits instead of distributing them. This increase in retained earnings directly increases the stockholders' equity, as it represents the shareholders' claim on the company's assets. Therefore, the correct answer is that retained earnings increase stockholders' equity.

When treasury stock is purchased, it represents shares of a company's own stock that have been bought back from shareholders. This decreases the number of outstanding shares and reduces the total shareholders' equity. Therefore, the correct answer is "Decrease".

Cash dividends are recorded on the declaration date, payment date, and record date. The record date is the date on which the company determines the shareholders who are eligible to receive the dividend. Therefore, the correct answer is "Record date" because entries for cash dividends are not recorded on this date.

The debt to equity ratio is the best measure of financial leverage because it compares a company's total debt to its total equity. This ratio indicates the proportion of a company's funding that comes from debt versus equity. A higher debt to equity ratio suggests that a company is relying more on debt to finance its operations, which increases its financial leverage. This can be risky as it means the company has a higher level of debt that needs to be serviced, which can put strain on its financial stability. Therefore, the debt to equity ratio is a key indicator of a company's financial leverage.

Owning a corporation offers several advantages, such as limited liability, the ability to raise capital, and lack of mutual agency. However, one disadvantage is the additional taxes that corporations have to pay. Unlike other business structures, corporations are subject to double taxation, where the corporation itself is taxed on its profits, and then shareholders are also taxed on any dividends they receive. This additional tax burden is not considered an advantage of owning a corporation.

A stock dividend is a distribution of additional shares to existing shareholders, usually expressed as a percentage. When a stock dividend is issued, it does not change the total stockholders' equity. While the number of shares increases, the proportional ownership of each shareholder remains the same. Therefore, the value of the shares held by each shareholder remains unchanged, resulting in no effect on the total stockholders' equity.

The correct answer is the statement of stockholders' equity. This statement summarizes the changes in the balance in each stockholders' equity account over a period of time. It provides information on the beginning balance, any additional investments or withdrawals, net income or loss, and any other changes in equity. The stockholders' equity section reported on the balance sheet only provides the ending balance in each equity account at a specific point in time, but it does not show the changes that occurred during the period.

An increase in accounts payable represents an increase in liabilities owed by the company. This increase is not a cash outflow but rather a source of cash for the company, as it indicates that the company has received goods or services but has not yet paid for them. Therefore, it is added back to net income in the operating activities section of the statement of cash flows under the indirect method. This adjustment is necessary to reconcile net income with the actual cash flows generated by the company's operations.

The correct answer is to debit interest expense and credit interest payable for $4,000. This adjusting entry is necessary to record the interest expense that has accrued but has not yet been paid. The company signed a six-month note payable on November 1, 2012, so by December 31, 2012, two months of interest have accrued. The interest expense is calculated by multiplying the principal amount ($200,000) by the interest rate (12%) and the time period (2/6 or 1/3). Therefore, the interest expense is $8,000, but since only two months have passed, the company only needs to record $4,000 as an adjusting entry.

Preferred stock typically has features such as being convertible, redeemable, and cumulative. However, being secured is not a potential feature of preferred stock. Secured refers to a type of debt that is backed by collateral, whereas preferred stock represents ownership in a company and does not have collateral backing. Therefore, being secured is not a characteristic of preferred stock.

The correct answer is a credit of $5 million to gain on early extinguishment. This is because the market value of the bonds is lower than the carrying value, resulting in a gain on early extinguishment. The gain is recognized when the bonds are retired, and it is credited to the gain on early extinguishment account.

When an intangible asset is sold for cash, it is classified as an investing activity in the statement of cash flows. This is because the sale of an intangible asset represents a disposal of a long-term asset, which falls under the investing section of the statement of cash flows. Investing activities involve the acquisition or sale of long-term assets, such as property, plant, and equipment, as well as intangible assets. This classification helps to provide a clear picture of the cash flows related to the company's investment activities.

When management estimates that the amount of loss from litigation is probable, they should disclose and report it as a liability. This means that they should make it known in the financial statements and also recognize it as an actual liability on the balance sheet. This is because the potential loss is likely to occur and it is important for stakeholders to be aware of this information.

Borrowing cash over five years will increase the current ratio because it will increase the current assets (cash) without affecting the current liabilities. This will result in a higher current ratio, which measures the ability of a company to pay off its short-term obligations. Additionally, borrowing cash will also increase the acid-test ratio because it does not include inventory in its calculation. Since borrowing cash does not affect inventory, it will increase the numerator (current assets) without affecting the denominator (current liabilities + inventory), resulting in a higher acid-test ratio.

Unsecured and term bonds are more common because they do not require any collateral and have a fixed maturity date. Secured bonds, on the other hand, are backed by specific assets or collateral, making them less common. Serial bonds have staggered maturity dates, while term bonds have a single maturity date, making term bonds more prevalent in the market.

The cash paid for interest on bonds payable is calculated by multiplying the face amount of the bonds by the stated interest rate. This is because the stated interest rate is the rate that is agreed upon and stated on the bond, and the face amount is the principal amount of the bond that is to be repaid. Therefore, multiplying these two values will give the cash paid for interest on the bonds.

Return on equity is a financial ratio that measures the profitability of a company by comparing its net income to its average stockholders' equity. This ratio indicates how effectively a company is using its shareholders' investments to generate profits. By dividing the net income by the average stockholders' equity, the calculation takes into account any fluctuations in equity over a period of time, providing a more accurate measure of the company's performance.

When a product or service is delivered to a customer who has previously paid in advance, it creates a liability for the company because they still owe the customer the product or service. Therefore, the delivery is recorded as a debit to the liability account. At the same time, since the company has fulfilled its obligation and earned revenue from the sale, a credit is made to the revenue account. This reflects the increase in the liability and revenue accounts, accurately reflecting the transaction.

The purchase of long-term assets by issuing debt is classified as a noncash activity because it does not involve the actual exchange of cash. Instead, it involves the issuance of debt, which represents a liability for the company. This transaction does not impact the company's cash flow directly, but it does impact its overall financial position and is therefore disclosed in the statement of cash flows as a noncash activity.

When bonds are issued at a premium, it means that the bonds are sold at a price higher than their face value. The carrying value of the bonds represents the total value of the bonds on the balance sheet, which includes the face value of the bonds plus any premium. As the premium decreases over the life of the bonds, the carrying value decreases.

Interest expense is the cost of borrowing and is recorded as an expense on the income statement. When bonds are issued at a premium, the interest expense is reduced because the premium is amortized over the life of the bonds and reduces the effective interest rate. Therefore, both the carrying value and interest expense decrease over the life of the bonds.