FA2 Signature Assignment

This Signature Assignment tests students’ understanding and application of the six core learning
objectives of Financial Accounting 2 (FA2), which as per the Course Syllabus are:

1. Demonstrate an understanding of the impact of Sarbanes-Oxley on internal controls; specifically

to understand the importance of bank reconciliations and the associated reporting of cash and
cash equivalents.
2. Demonstrate the ability to describe different receivables (monies owed); understand how to
allocate potential write-downs of monies owed for bad and doubtful debts; understand balance
sheet reporting for different receivables.
3. Be able to classify and account for different assets within a business; understand and be able to
differentiate between the varieties of depreciation method available to businesses.
4. Describe current liabilities; long-term liabilities and notes payable; understand payroll accounting
and associated record-keeping.
5. Demonstrate an understanding of different business entities and the advantages and
disadvantages of each.
6. Understand different classes of stockholders within a company and related accounting.
Demonstrate an understanding of the importance of Earnings per Share (EPS).

Available points: 10 points per objective, so 60 points in total which represents 12.4% of total grade.

OBJECTIVE 1 (see top of this document for the CONTEXT of this Objective)

A. Why was the Sarbanes-Oxley Act introduced and who is it meant to protect?
     
• The Sarbanes-Oxley Act was introduced in 2002 which is legislation passed by the U.S Congress to
protect shareholders and the general public firms from accounting errors and fraudulent
practices in firms and to improve the accuracy of corporate disclosures.

B. Which companies must comply with Sarbanes-Oxley Act?

     
• Companies that are publicly traded and private companies with over 500 employees.

C. Why should a company conduct Bank reconciliations?

     
• To reconcile your accounts, compare your internal record of transactions and balances to your
monthly bank statement. Verify each transaction individually, making sure the amounts match
perfectly, and note any differences that need more investigation.

D. Name three items a company will need to look for (and why) when reviewing their Bank
Statement?
  
• The three items that a company will look for are - Cash Balance, Notes Receivables and NSF checks

E. If the Bank notifies a company of an NSF check will the company debit or credit their bank
account and why?
• The bank will debit the money from the companies account and credit to their account.     

OBJECTIVE 2 (see top of this document for the CONTEXT of this Objective)

A. What is the difference between a Note Receivable and an Accounts Receivable? How are the both
treated on the Balance Sheet? How may they differ on the Balance Sheet?
 Accounts receivables result from the sale of goods and services on credit. They are normally
collected within a short period of time (30 - 60 days) and are classified as current assets on the
balance sheet.

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Notes receivables can also result from the sale of goods - generally when the amount owed is due in
more than 60 days. Notes can also be used to settle accounts receivables. Notes are formal written
agreements of credit. When collection is expected to be in less than one year, they are classified as
current assets on the balance sheet.

Other receivables result from non-sale transactions (interest, taxes, amounts due from employees).
They are generally reported separately on the balance sheet. If collection is expected in less than
one year, the are classified as current assets. If not, they are classified as investments.
 

B. What are the two methods of accounting for doubtful debts? Which is used for which type of
business – large or small? What is similar in both methods? What is different in both methods?
     
The first method is the direct write-off method. Under this method, bad debt expense is recorded only when an
account is deemed uncollectible. This method is most often used by small companies and those with few
receivables.
The second method is the allowance method. Under this method, bad debt expense is recorded by estimating bad
debts at the end of the accounting period. Companies that have a large amount of receivables are required to use
this method under generally accepted accounting principles

OBJECTIVE 3 (see top of this document for the CONTEXT of this Objective)

A. What is the difference between a Fixed Asset and a Current Asset? Which ones are depreciated?
  Current assets can be converted into cash is less than one year. Current assets are used for
running the business and paying operational expenses. As a result, short-term assets like current
assets are liquid meaning they can be easily converted into cash.
Fixed assets are long-term assets used by a company in producing its goods and services. Fixed assets
have a useful life greater than one year. Fixed assets are listed on the balance sheet as property,
plant, and equipment . Fixed assets are also called tangible assets, meaning they have physical
properties or can be touched.    

B. What is the difference between a Capital Expenditure and a Revenue Expenditure?

     Capital expenditures are for fixed assets, which are expected to be productive assets for a
long period of time. Revenue expenditures are for costs that are related to
specific revenue transactions or operating periods, such as the cost of goods sold or repairs and
maintenance expense.

     

C. If an item had to be treated as Revenue Expenditure, greater tax would be paid than if it was
treated as Capital Expenditure. Explain if this statement is true or false and explain your answer.
     False, Unlike Capital expenditures revenue expenses can be fully tax-deducted in the same
year the expense occur.

D. What are the three different types of methods to account for depreciate? What are the
differences?
Three most common methods to account account for depreciating are:
1. Straight Line : Straight-line depreciation is a very common, and the simplest, method of
calculating depreciation expense. In straight-line depreciation, the expense amount is the same
every year over the useful life of the asset.
Depreciation Formula for the Straight Line Method:
Depreciation Expense = (Cost – Salvage value) / Useful life

2. Double Declining : double-declining-balance depreciation results in a larger amount expensed in

the earlier years as opposed to the later years of an asset’s useful life. The method reflects the
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fact that assets are typically more productive in their early years than in their later years – also,
the practical fact that any asset (think of buying a car) loses more of its value in the first few
years of its use. With the double-declining-balance method, the depreciation factor is 2x that of
the straight line expense method.
Depreciation formula for the double-declining balance method:
Periodic Depreciation Expense = Beginning book value x Rate of depreciation
3. Units of production : The units-of-production depreciation method depreciates assets based on
the total number of hours used or the total number of units to be produced by using the asset,
over its useful life.
The formula for the units-of-production method:
Depreciation Expense = (Number of units produced / Life in number of units) x (Cost – Salvage
value)  

OBJECTIVE 4 (see top of this document for the CONTEXT of this Objective)

A. What is the difference between a current and long-term liability.

  Current liabilities are defined over the course of a 12-month period, unless the company has
elected a different financial cycle. Current liabilities are found with information on the balance
sheet and income statement. These obligations include notes payable, accounts payable, and
accrued expenses.  
  Long-term liabilities are any debts and payables due at a future date that's at least 12 months
out. This is reflected in the balance sheet. Long-term liabilities include mortgage loans, debentures,
long-term bonds issued to investors, pension obligations and any deferred tax liabilities for the
company.
The reason that current and long-term liabilities are treated differently, is because of the immediate
need a company has for cash. 

B. Which payroll taxes do employers ONLY pay? What is the purpose of these two taxes?
  Employers are subjected to pay the following payroll taxes for amounts paid their employees:
1. FICA TAX : Employers must match the employees’ FICA tax contribution
2.Federal Unemployment Compensation Tax (FUTA):This employer tax provides for temporary
payments to those who become unemployed.
3. State Unemployment Compensation Tax (SUTA): This employer tax provides temporary payments
to those who become unemployed.

C. Social Security Tax and Medicare Tax together are called what? Who sets the rates for these
taxes?
The FICA tax withheld contributes to the following two federal programs:
1. Social security, which provides payments for retirees,
survivors, and disability insurance
2. Medicare, which provides health insurance for senior
citizens
The withholding rates and maximum earnings subjected to often revised by the congress.

D. Which tax is limited meaning there is a maximum amount employees and employers pay?
Social Security Wage Base.
     

OBJECTIVE 5 (see top of this document for the CONTEXT of this Objective)

A. What are the four types of business entity?

1. Sole Proprietorship
2. Limited Liability Company
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3. Corporation
4. Partnership

B. What are the three main advantages that LLC’s have over Proprietorships and Partnerships?
1. A limited liability company is a hybrid business entity that provides members with limited liability
protection from company debts and obligations.
2. Members of an LLC are able to divide company profits in any manner, regardless of ownership in
the company. This flexibility allows an LLC to allocate profits and losses to the greatest tax
benefit of the company’s members. 
3. LLC is costly to form and may not be able to raise capital because it cannot issue stock like a
corporation. This means a LLC may have to rely on the personal assets of its members to fund the
company’s activities.   

C. How is an LLC treated from a tax perspective that’s identical to a Proprietorship and Partnership?

The limited liability company (LLC) is an entity created and governed by state law that has
characteristics of both a corporation and a partnership. Under state laws, LLC owners
generally have the protection from liability that used to be available only to corporate
shareholders. Every state has enacted legislation providing for limited liability companies,
although there are slight variations from state to state.

Federal tax law determines the taxation of a LLC by either:

• a default classification based upon the number of members that the LLC has or
• an election by the LLC to be taxed differently than the default treatment.
Most—but not all—states will honor the federal classification and tax the LLC accordingly.
     

D. If a new partner pays more than the fair market value of a proportion of a business they’re
buying into, who is receiving the “bonus” and why?
1. Existing partners receive a bonus when the ownership interest received by the new partner is less
than the amount paid.
2. In contrast, the new partner receives a bonus when the ownership interest received by the new
Partner is greater than the amount paid.

E. How are assets valued when Partnership/LLC is formed? Why would this method be fair?

Common methods of dividing partnership income are based on:

1.Services of the partners
2.Services and investments of the partners
The method of dividing partnership income is based on the services provided by each partner to the
partnership. These services are often recognized by partner salary allowances. Such allowances
reflect differences in partners’ abilities and time devoted to the partnership. Since partners are not
employees, such allowances are recorded as divisions of net income and are credited to the partners’
capital accounts.

OBJECTIVE 6 (see top of this document for the CONTEXT of this Objective)
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A. What is the difference between Common/Ordinary Stockholders and Preferred Stock Holders?

The two primary classes of paid-in capital are common stock and preferred stock
When only one class of stock is issued, it is called common stock.Each share of common stock has
equal rights. Whereas when a corporation issues one or more classes of stock with various preference
rights, such as a preference to dividends, such a stock is called preferred stock.The dividend rights of
preferred stock are stated either as dollars per share. Preferred stockholders have first rights
to any dividends, and thus, they have a greater chance of receiving dividends than common
stockholders.

   
B. What advantages do the Common/Ordinary Stock Holders have over the Preferred?

Common stock, through capital gains and ordinary dividends, have proven to be a great source of
returns for investors, on average and over time. The other characteristic that benefits the
owners are of ordinary shares: voting rights; gains; and limited liability. 

C. What advantages do the Preferred Stock Holders have over the Common/Ordinary Stockholders?
The chief benefit of preferred shares for investors who hold them is that they get paid dividends
before common shareholders. Among the benefits for companies is a lack of shareholder voting
rights, which is a drawback for investors.   

D. Why does a company buy back its own stock/shares?

     
Treasury stock is stock that a corporation has issued and then reacquired.
A corporation may reacquire (purchase) its own stock for a variety of reasons, including the
following:
1. To provide shares for resale to employees
2. To reissue as bonuses to employees
3. To support the market price of the stock

E. Do all public companies pay dividends? Why do they pay dividends?

     
It is not necessary for all the companies to pay dividends. If they are not paying the dividends then
they are not offering Preferred and Cumulative stock they are only giving out Ordinary stock.