Discussion Questions - Assignment Example

Discussion Questions What are the differences among valuation, depreciation, amortization,and depletion? Is it appropriate to calculate depreciation using two different methods? Why?Valuation involves recording assets at the current market price. Depreciation assigns the cost of a tangible asset over its useful life. Amortization involves writing off an intangible asset over the forecasted life on an asset. Depletion is the reduction of an asset on a balance sheet due to the physical reduction of the asset.

It is often used with natural resources like oil.It is appropriate. This is because an equipment may be depreciated for more years in the financial statements but less years in its income tax return.Which depreciation method provides you with the highest depreciation expense in the first year? Why?Straight line method. This is because the depreciation cost of an asset is spread equally over the number of years of its useful life.What types of industries have unearned revenue? Why unearned revenue is considered a liability?

When is the unearned revenue recognized in the financial statements?Those industries where people make prepayment before they use a service. For example, the mobile phone companies that charge before they give a service. It is a liability since it is revenue received yet the service has not been provided. Unearned revenue is recognized as an asset and liability. But when the service has been provided for it is then recognized as an earned revenue.Why do companies issue bonds? Would you rather buy a bond at a discount or a premium rate? Why? What is the determining factor of whether a bond is sold at a discount, face value, or premium?

They issue bond in order to help them obtain a long term finance. I would rather buy the bond at a discount because it will be cheap with a higher interest rate. The determining factor is the interest rate reflected in the market.What is the straight-line method of amortizing discount and premium on bonds payable? Provide an explanation of the process.It is a method that spreads the discount evenly over the periods during which interest is paid. When dealing with bonds payable, it involves crediting interest expense and debiting on bond payable.

It also spreads the premium evenly over the months. The number of months the bind is held is divided by the number of months from the beginning of the tax period to the maturity date. The result is then multiplied by the bond premium, which is a reduced amount each year. This is because of the bond amortization form earlier years which also helps in calculation of the premium each yearHow would you describe the accounting procedures for notes payable and accounts payable?They are both treated as liabilities.

Notes payable are recorded by the company as a liability while the other party, for example a bank, records the entry as notes receivable. Then the company makes another entry, debiting the interest expense and crediting the interest payable. On the other hand for accounts payable the company do not accrue any interest. Therefore the creditors recognize it in their books as accounts receivable and the company credits its accounts payable. Why are companies required to prepare a statement of cash flows?

Why is the statement of cash flows divided into three sections? What does each section tell you about a company’s operations?Statement of cash flows enables a company displays information about the inflows (receipts) and outflows (payments) of cash of a company. It includes information about the income statement, balance sheet and the retained earnings statement. It is divided into three ways that tell us on how the company receives and uses its money.Operating section outlines money received from the daily operations of the company.

On the other hand, the investment activities section outlines the price of investments and non-current assets. In addition, it outlines money received from investment activities. Ultimately, the finance section outlines the liabilities and shareholder’s equity.What are some common ratios used to analyze financial information? Which are the most important? What are some examples of how ratios are used in the decision-making process?The common ration ratios used to analyze financial information are the profitability ratios, efficiency ratios, liquidity ratios and the solvency ratios.

The importance of the ratios depends on the goals of a company. For instance, if a company wants to increase profits then they would use the profitability ratios. Ratios help managers in decision making by providing information that help them evaluate the company. For instance, a low net profit margin indicates that there are high expenses eating up the gross profit. Hence the manager can devise ways to reduce the expenses.Two popular methods of financial statement analysis are horizontal analysis and vertical analysis.

What are the differences between these two methods?Vertical analysis shows the relationship of items in the financial statement of a particular year. For instance, all the items can be shown as a percentage of sales. On the other hand, Horizontal analysis compares items from one period to the next. For instance, the sales of the current year are compared with those of the previous year and a percentage change is developed.What are the differences between the direct and indirect presentation of cash flows?

Why does the Financial Accounting Standards Board allow both methods? Which do you prefer? Why?The direct method show the cash receipts and payments from customers and suppliers and from other sources. On the other hand, indirect method starts from the net income where adjustments for non-cash items and working capital changes are made. FASB allows both methods since they both show the cash inflows and outflows from operations. I prefer the direct method because it shows receipts and payments in detail.

Why must preferred stock dividends be subtracted from net income in computing earnings per share? Why common stock is usually not issued at a price that is less than par value?Preferred stock receives preferential treatment. It should be preference shareholders must be paid before other shareholders are paid. If common stock is issued at a price less than its par value, it would be like offering the share to investors at a lesser value.What three conditions must exist before a cash dividend is paid?

Contrast the effects of a cash dividend and a stock dividend on a corporation’s balance sheet.In order for a company to pay cash dividend it must have earnings or retained earnings. Also it must have adequate cash to pay the dividends. Consequently, the dividend must have been first declared by the board of directors.Cash dividend decreases net assets because of the cash that is used to pay dividends. On the other hand stock dividend does not have any net change on the balance sheet.What is an example of a potentially unethical accounting situation?

Why is the situation unethical? How do ethics affect a company’s financial results?An example of unethical situation would result when someone uses the company’s funds for his own interest. The situation is unethical because the money is to be used by the company in its operations but he chose to use it for personal gain. Bad ethics may lead to the investors, suppliers and lenders to loose trust with the company. In addition, it may result to operational and financial failure of the company.

ReferencesHarrison, W. T., & Horngren, C. T. (2001). Financial accounting. Upper Saddle River, NJ: Prentice Hall.Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2007). Advanced accounting. Boston: McGraw-Hill Irwin.Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2001). Intermediate accounting. New York: Wiley.Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2003). Financial accounting. New York, NY: Wiley.