Wednesday, July 31, 2013

Valuation of Bonds

Bonds generally provide for periodic fixed interest payments at a contract rate of interest. At issuance, or thereafter, the market rate of interest for the particular type of bond may be above, the same, or below the contract rate. If the market rate exceeds the contract rate, the book value will be less than the maturity value.  The difference (discount) will make up for the contract rate being below the market rate.
Conversely, when the contract rate exceeds the market rate, the bond will sell for more than maturity value to bring the effective rate to the market rate.  This difference (premium) will make up for the contract rate being above the market rate.  When the contract rate equals the market rate, the bond will sell for the maturity value.

The market value of a bond is equal to the maturity value and interest payments discounted to the present.  Finally, when solving bond problems, candidates must be careful when determining the number of months to use in the calculation of interest and discount/premium amortization.  For example, candidates frequently look at a bond issue with an interest date of September 1 and count 3 months to December 31. This error is easy to make because candidates focus only on the fact that September is the ninth month instead of also noting whether the date is at the beginning or end of the month.

The issue price of bonds is equal to the present value (PV) of the maturity value plus the PV of the interest annuity.  The PV must be computed using the yield rate.  The computation is

Amount   PV Factor   PV
$1,000,000 × .386 = $386,000
80,000 × 6.145 = 491,600
Total issue price       $877,600

The interest amount above ($80,000) is the principal ($1,000,000) times the stated rate (8%).
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Monday, July 29, 2013

A client wants to know how many years it would take before..

the accumulated cash flows from an investment exceed the initial investment, without taking the time value  of money into account. Which of the following financial models should be used?

  • Net present value
  • Time value of money
  • Payback period
  • Internal rate of return

Answer: Payback Period

The requirement is to identify the term that describes a method that measures the number of years it takes to recoup an initial investment without considering the time value of money. This answer is correct because the definition describes the payback period.

Under Frost free conditions

The requirement is to determine what the probability of frost must be for Ball to be indifferent to spending $20,000 for frost protection.  In other words, you must find the point at which the cost of the frost protection equals the expected value of the loss from frost damage.  The table below summarizes the possible outcomes.

Market value
Market value
Market value
Market value

The difference between the market value of protected and unprotected strawberries if a frost were to occur is $100,000.  Since we want to determine the probability of a frost when the expected value of the loss from frost damage is $20,000, this probability can be calculated as follows:

Loss from
of frost
=Expected value
of the loss
  P=          .200

Thursday, July 11, 2013

What is process reengineering?

Process Reengineering is a critical evaluation and major resign of existing processes to achieve breakthrough improvements in performance.

Wednesday, June 19, 2013

An overall description of a database

...Including the names of data elements, their characteristics, and their relationship to one another, would be defined by using a:

Answer: Data Definition Language (DDL) 

Used to define a database, including creating, altering, and deleting tables and establishing various constraints.

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Saturday, June 1, 2013

Which of the following techniques...

Question: Which of the following techniques consistently gives the best answer when evaluating investment projects that are mutually exclusive?
  • The payback method
  • The internal rate of return
  • Net present value
  • The accounting rate of return

Answer: Net Present Value

The net present value consistently provides the best solutions even when considering mutually exclusive projects.
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Keller Company has implemented...

Question: Keller Company has implemented an enterprise risk management system and has responded to a particular risk by adding internal controls. Such a response is characterized by COSO's Enterprise Risk Management Framework as:

  • Acceptance
  • Avoidance
  • Reduction
  • Sharing

Answer: Reduction
Reduction involves reducing the likelihood or impact by implementing controls or managing the risk.

Question: Which of the following committees of the board...

  • Which of the following committees of the board of directors generally has the responsibility of overseeing CEO succession?

Answer: The nominating/corporate governance committee

  • The nominating/corporate governance committee is responsible for overseeing CEO succession.

Monday, May 27, 2013

Accounting Standards Setting Process

The accounting standards setting process are the steps and rules controlled by the Financial Accounting Standards Board. The board engages the users of the financial statements as the investors and the creditors so as to create an understanding of their perspectives in relation to the intended standards. The users are then informed and educated on the proposed standards as their argument on possible effects on the financial reporting is considered. The collaborative involvement of these participants in the due process is mainly to input critiques and diverse opinions in the standard setting process to increase the validity of the standards setting process.

Accounting Standards: True 

Friday, March 22, 2013

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Monday, January 21, 2013

What tools can be used for financial statement analysis? What do these tools tell you about financial performance? What kinds of business decisions can be made using these tools?

Please use an example from your accounting experiences if possible.
Financial statement analysis is a process of finding a company’s’ strengths and weaknesses by analyzing the company’s’ balance sheet and profit and loss statement. An analysis is used to make investment and credit decisions, asses cash-flow prospects, report enterprise resources, claims to those resources, and changes in them, to report economic resources, obligations, and owners’ equity, to report enterprise performances and earnings, to evaluate liquidity, solvency and flow of funds, to evaluate management stewardship and performance, and to explain and interpret financial information. The tools that can be used for financial statement analysis are financial ratios. Financial ratios evaluate the relationship between financial statement elements and are most useful when compared to previous years’ results, competitor company results, industry averages, or benchmarks. The ROA ratio measures the percentage return on the asset employed by a company, and the ROA can be broken down into two components: the profit margin ratio and the asset turnover ratio. A company can improve its return on assets ration by increasing its PMR and/or ATR. Profitability ratios measure the results of the company’s’ business operations overall performance and the strength of the firm. When analyzing a company’s’ financial rations; it can be determined whether that company has a high or low ROA due to a larger or smaller turnover ratio. Analyzing two companies side by side can determine which come has the higher profit margin ration and can decide which of the two companies to invest in or merge with.

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What is Generally Accepted Accounting Principles (GAAP)? How does GAAP affect financial reporting? How does GAAP need to change to accommodate today’s dynamic business environment?

The Generally Accepted Accounting Principles is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. It is a common set of principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards set by policy boards, it is the commonly accepted ways of reporting and recording accounting information (investopedia). GAAP affects financial reporting by setting the standards that accounts must follow when preparing financial statements. GAAP sets the standards for revenue recognition, outstanding share measurements, and balance sheet reporting. GAAP sets the guidelines for companies whether they use either the cash basis accounting or accrual based accounting methods for reporting their financial statements. GAAP determines what transactions are recognized within the assets, liabilities, and equity accounts. GAAP needs to change to accommodate today’s dynamic business environment by allowing international accounting and financial standards to converge with its standards. GAAP is designed solely for the US and the IFRS is a globally accepted set of guidelines. In order for GAAP to keep up with changing business it must become globally accepted. There is a need for globally accepted principles and the FASB Accounting Standards Codification system may be the way to accomplish this goal.

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What is the FASB Codification System? What is the purpose of the FASB Codification System? How can it be used to make better accounting decisions?

The FASB Accounting Standards Codification is an advanced application that allows users to access the authoritative content, perform research, and submit feedback ( The purpose of the FASB Codification system is to make the accounting standards easier to find and navigate through by using one online database under a mutual referencing system. The US accounting standards may be converged with IFRS in the future and the FASB Accounting Standards Codification systems is making a path for convergence to take place. The Codification system organizes the accounting laws and accounting principles and gives accounting professionals easier access to these laws and principles.  Implementation of the FASB Accounting Standards codification system reduces the amount of time that is used to search for accounting topics and we, as accounting professionals can complete our work faster and work more efficiently. The purpose of the FASB Codification was to reorganize all existing U.S. accounting and reporting standards issued by the FASB and other related private-sector standard setters into one authoritative body of literature, which will ease research of accounting literature and reduce the risk of noncompliance. The FASB Accounting Standards Codification System can be used to make better accounting decisions by giving accounting professionals a better organized format that is easier to understand than the structure of GAAP and also user friendly. The Codification system with have real-time updates that will help to prevent the risks of noncompliance.

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Tuesday, January 8, 2013

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