Accounting Exam 3 Flashcards

Current Liabilities

• Accounts Payable, Wages Payable, and Interest Payable are examples of current liabilities; Bonds Payable is typically classified as a long-term liability.
• Current liabilities encompass various short-term obligations including notes payable, taxes payable, and the current portion of long-term liabilities.

Sales Transactions

• When a company sells merchandise for $600 cash in a state with a 6% sales tax, the total cash collected amounts to $636 ($600 + $36 sales tax).

Bonds Payable

• Bonds payable are recorded on the balance sheet as long-term liabilities, distinguishing them from current liabilities.
• A bond's discount occurs when its issue price is less than its face value, while a premium arises when the issue price exceeds face value.
• Amortizing the bond discount results in reduced bond interest expense; conversely, amortizing a premium increases bond interest expense.

Business Structures

• Corporations provide limited liability protection to their owners from lawsuits, unlike sole proprietorships and general partnerships.

Stock Types

• Outstanding stock refers to shares currently held by shareholders, while treasury stock is bought back by the issuing company.
• Authorized stock represents the total shares that a corporation is allowed to issue.

Cash Flows

• The purchase of treasury stock is classified as a financing activity on the statement of cash flows.

Dividends

• Declaring a cash dividend increases liabilities and decreases equity, as it creates an obligation to shareholders while reducing retained earnings.

Ratio Analysis Objectives

• The main objectives of ratio analysis include assessing past performance, evaluating future performance prospects, and determining debt repayment capabilities.

Liquidity Ratios

• The Current Ratio is a key measure for assessing a company's liquidity, indicating its ability to cover short-term obligations.

Solvency Ratios

• The Debt to Assets ratio serves as an essential indicator for assessing a company's solvency, reflecting the proportion of assets financed by debt.

Management Effectiveness Ratios

• The Net Margin ratio is utilized to assess the effectiveness of company management, showing the proportion of revenue remaining after all expenses.

Market Position Ratios

• Earnings Per Share (EPS) is a critical metric for evaluating a company's position in the stock market, indicating profitability on a per-share basis.