ACG 3103 Final: Exam 3 study guide whitworth

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maroongiraffe300

25 Aug 2016

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Fv=principal x (1 + interest rate) number of periods. A stream of consistent , same money amount payments across time. Rent payments are an annuity, mortgage payment is an annuity. The money taken our of my paycheck for retirement is an annuity. Short term: recorded at face value less allowance. Long-term: record at present value of cash expected to be collected. Perpetual inventory system: purchases of merchandise are debited in inventory, freight-in is debited to inventory. Purchase returns and allowances and purchase discounts are credited to inventory: cost of goods sold is debited and inventory is credited for each sale. 4. subsidiary records show quantity and cost of each type of inventory on hand. Provides a continuous record of inventory and cogs. Periodic inventory: purchases in inventory are debited to purchases, ending inventory determined by physical count. Used to adjust for cost of goods sold.

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Just yesterday I posted a key question as to why the statelottery might hypothetically offer you an upfront lump-sum paymentof $50 million or an ongoing annuity of a $5 million check eachyear for 20 years (totaling $100 million in checks). Remember thatthis was just my simplified hypothetical example. A few peopleattempted the answer to this further above, but here's what'sreally going on...it has to do with Net Present Value (NPV). It'sbecause future-year dollars are worth less, and the further you gointo the future, the less those dollars are worth in terms oftoday's dollars. And that is why, when financial analysts look at adecision involving multi-year cash flows, they will use discountfactors to convert all of the future-year dollars to present value(i.e., this year's dollars) and add them up to yield the NPV of allof the amounts to put a final answer in terms of today's value.Where do these discount factors come from? They're derived from thereciprocal of the famous compound interest formula, but you justneed to go and look at two tables in your textbook in Chapter 12,Appendix 12A, Table A (present value of $1 due in n periods) andTable B (present value of an annuity of $1 per period). Class, Icannot stress to you enough how widely-used this concept is, andthe importance of understanding how these discount factors areapplied to solve for net present value (NPV) and a related metric,internal rate of return (IRR). You will likely need to read, andreread, Chapter 12 and closely walk through some textbook exampleswhere each year's cash flows are multiplied by the appropriatediscount factor to convert all of that money into this year'sdollars (present value). We are surrounded by this financialanalysis methodology when faced with a decision on a lotterypayout, a retirement payout (lump sum versus annuity), and many ofour states and cities right now are dealing with issues relating tothe calculation of NPV in assessing whether they currently haveenough money in the appropriate accounts to meet the futureretirement payment obligations they've made to their publicemployees. This is an economic issue that has been on the brink ofexploding for a long time (don't take my word for it, it's beendiscussed in multiple articles in the NY Times, Wall StreetJournal, The Economist), but I'm not going to add all of that intothis discussion here. Let's learn to walk before we try to run.Would you like to see how the lottery payouts I described would bemultiplied by each year's financial discount factor? Just take alook at my attached Excel workbook, and note that there are threetabs: the first assumed a 0% cost of capital (no financialdiscounting done), the second assumed a 5% cost of capital, and thethird sheet inserted a 10% cost of capital. You'll see how thesedifferent interest rates changed the discount factor multipliersand ultimately changed the NPV of each alternative (the value ofthe lump sum or the annuity, all shown in present value). Also,this example just shows money moving one way (i.e., to the state,it's cash out of their pocket...to the lottery winner, it's cashinto their pocket). In many NPV and IRR examples, money will moveboth ways over multiple years...cash flows that are expenses orinvestments are outflows and are shown as negative, while revenuesor other incoming money are inflows and are shown as positive.Please look closely at my attached Excel workbook (all three tabs)and also walk through all of the examples in the chapter showinghow to do NPV and IRR problems. There are also examples in the textof simpler metrics including payback period and accounting rate ofreturn. It's typically very hard stuff for students to master. Now,for those of you who've looked at the chapter examples, maybeyou've figured this out already:

1. What is the key difference between Tables A and B in Chapter12, Appendix 12A, and how and when are each of them used in ananalysis?

2. What do we mean by âYear 0â in a financial analysis? Whatvalue do we use for the discount factor or multiplier for the cashflow in Year 0 of a financial analysis?

Case No. 1 Kang Company, a manufacturer of ballet shoes, isexperiencing a period of sustained growth. In an effort to expandits production capacity to meet increased demand for its product,the company recently made several acquisitions of plant andequipment. Rob Joffery, a newly hired fixed-asset accountant,requested Danny Nolte, Kangâs controller, review the followingtransactions. Transaction 1: On June 1, 2015, Kang Companypurchased equipment from Wynadot Corporation. Kang Issued aHK$28,000, 4-year, zero-interest-bearing note to Wynadot for thenew equipment. Kang will pay off the note in four equalinstallments due at the end of each of the next four years. At thedate of the transaction, the prevailing market rate of interest forobligations of this nature was 10%. Freight costs of HK$425 andinstallation costs of HK$500 were incurred in completing thistransaction. The appropriate factors for the time value of money ata 10% rate of interest are given below. Future value of HK$1 for 4periods: 1.46 Future value of an ordinary annuity for 4 periods:4.64 Present value of HK$1 for 4 periods: 0.68 Present value of anordinary annuity for 4 periods: 3.17 Transaction 2: On December 1,2015, Kang Company purchased several assets of Yakima Shoes Inc., asmall shoe manufacturer, whose owner was retiring. The purchaseamounted to HK$220,000 and included the assets listed below. Kangengaged the services of Tennyson Appraisal Inc., an independentappraiser, to determine the fair values of the assets which arepresented below. Yakima book value Fair value Inventory HK$ 60,000HK$ 50,000 Land 40,000 80,000 Buildings 70,000 120,000 HK$ 170,000HK$ 250,000 During its fiscal year ended May 31, 2016, Kangincurred HK$8,000 interest expense in connection with the financingof these assets. Transaction 3: On March 1, 2016, Kang Companyexchanged a number of used trucks plus cash for vacant landadjacent to its plant site. The exchange has commercial substance.Kang intends to use the land for parking lot. The trucks havecombined book value of HK$35,000, as Kang had recorded HK$20,000 ofaccumulated depreciation against those assets. Kangâs purchasingagent, who has had previous dealings in the second-hand market,indicated that the trucks had a fair value of HK$46,000 at the timeof the transaction. In addition to the trucks, Kang paid HK$19,000cash for the land. Instructions (a) Plant assets such as land,buildings, and equipment receive special accounting treatment.Describe the major characteristics of these assets. (b) For each ofthe three transactions described above, determine the value atwhich Kang Company should record the acquired assets. Support yourcalculations with an explanation of the underlying rationale. (c)The books of the Kang Company show the following additionaltransactions for the fiscal year ended May 31, 2016. 1. Acquisitionof a building for speculative purposes. 2. Purchase of a two-yearinsurance policy covering plant equipment. 3. Purchase of therights for the exclusive use of a process used in the manufactureof ballet shoes. For each of the transactions, indicate whether theasset should be classified as a plant asset. If it is a plantasset, explain why it is. If it is not a plant asset, explain whynot, and identify the proper classification.

7. The future value of equal semi-annual payments of $500 at 8%compounded semiannually for 4 years is HINT: FV of Annuity of $1The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $ 868 b. $9,320 c. $2,000 d. $4,607

8. What is the correct classification of the account: Discounton Notes Payable?

a. a revenue b. a contra liability c. an asset d. an expense

9. If the annual interest is 12%, but the compounding is donequarterly, then the interest rate is 3% per period.

a. True b. False

10. A convertible bond is one where a. the issuer can convertfrom

a fixed interest rate to a floating one. b. the issuer canconvert it from long-term to short-term. c. the issuer can retirethe bond before its specified due date. d. the holder can convertthe bond into common stock at a future time.

11. Which of the following statements regarding serial bonds istrue?

a.They are likely to be issued by food companies.

b. They have shorter lives than term bonds.

c.They are strongly backed by the issuer's collateral.

d. The bonds do not all mature on the same date.

12. Bonds are a popular source of financing because

a.bond interest expense is deductible for tax purposes, whiledividends paid on stock are not.

b. financial analysts tend to downgrade a company that hasraised large amounts of cash by frequent issues of stock.

c. a company having cash flow problems can postpone payment ofinterest to bondholders.

d. the bondholders can always convert their bonds into stock ifthey choose.

13. When determining the amount of interest to be paid on abond, which of the following information is not necessary?

a.The face amount of the bonds

b. The selling price of the bonds

c.The face rate of interest on the bonds

d. The length of the interest period, annually or semiannually14. Which of the following statements is correct?

a.Bonds are issued at a price that reflects the stated rate ofinterest on the day the bond is purchased.

b. If the face rate of interest on a bond is not equal to themarket rate of interest, then the company desiring to issue thebonds must reprint its bond certificates.

c.The actual issue price of a bond represents the present valueof all future cash flows related to the bond.

d. The market rate of interest has no bearing on the sellingprice of the bonds.

15. Endeavor Company issued 20-year bonds with a coupon rate of6% when the market rate of interest was 9%. This means that thebonds were issued

a.at a premium. b. at a discount. c.at the face value. d. withan additional 3 years of interest.

16. Which of the following statements regarding leases isfalse?

a. Lease agreements are a popular form of financing the purchaseof assets because leases do not require a large initial outlay ofcash.

b. Accounting recognizes two types of leases--operating andcapital leases.

c. If a lessor classifies a lease as a capital lease, then thelessee records a lease liability on its balance sheet.

d. If a lease is classified as an operating lease, the lesseerecords a lease liability on its balance sheet.

17. Which of the following accounts would not appear on thebalance sheet of a lessee company recording a capital lease?

a. Accumulated depreciation on the leased asset

b. Lease obligation in the current liability section

c. Lease obligation in the long-term liability section

d. Rent expense on the income statement

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ACG 3103 Final: Exam 3 study guide whitworth

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