Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

When computing a divisional weighted average cost of capital (WACC), a proxy value is typically needed for which of the following?

The division's prepaid expenses

The division's cost of equity

The division's accumulated depreciation

The division's historical net income

Previous problemNext problem

Verified step by step guidance

Understand the concept of Weighted Average Cost of Capital (WACC): WACC is the average rate of return a company is expected to pay its investors (both equity and debt holders) for using their capital. It is calculated using the formula:

WACC = (E / V) Re + (D / V) Rd (1 - T)

, where E is equity, D is debt, V is total value (E + D), Re is cost of equity, Rd is cost of debt, and T is tax rate.

Recognize the importance of the cost of equity in WACC: The cost of equity represents the return required by equity investors, which is a critical component of WACC. It is typically estimated using models like the Capital Asset Pricing Model (CAPM).

Identify the need for a proxy value: When calculating divisional WACC, divisions may not have direct market data for their cost of equity. A proxy value is needed to estimate the division's cost of equity, often based on comparable companies or industry averages.

Eliminate irrelevant options: Prepaid expenses, accumulated depreciation, and historical net income are accounting figures that do not directly influence the calculation of WACC. They are not used as proxies for cost of equity.

Conclude that the correct proxy value needed is for the division's cost of equity, as it is a key input in the WACC formula and often requires estimation when direct data is unavailable.