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CH 9 Flashcards

1
Q

Why do companies require financial opitions

A

to create growth for company

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2
Q

Define debt financing

A

obtaining additional funding from lenders

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3
Q

define equity financing

A

obtaining addiction funding from stockholders

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4
Q

define capital structure

A

the mixtures of liabilities and stockholder’s equity in a business

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5
Q

How do you determine a company’s capital structure

A

balance sheet

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6
Q

why would a company choose to borrow money rather than issue additional stock in the company

A

a. taxes
b. interest expense incurred when borrowing money is tax deductible whereas dividends paid to stockholders are not deductible

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7
Q

debt financing’s advantage is that interest on borrowed funds can be tax deductible?

A

yes

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8
Q

What are three primary sources of long term debt that companies rely on

A

a. bonds
b. notes
c. leases

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9
Q

are bonds the most common form of corporate debt

A

yes

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10
Q

Do medium and large corporations often choose to borrow cash by issuing bonds

A

yes

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11
Q

What is most popular method of financing

A

leasing

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12
Q

Define a bond

A

a. A formal debt instrument that obligates the borrower to repay a stated amount referred to as the principal or face amount at a specified maturity date.

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13
Q

Does the borrower of a bond have to pay interest

A

yes

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14
Q

are bonds very different from notes payable?

A

no, they are similar, mostly

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15
Q

Define private placement

A

Sale of debt securities directed to a single investor

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16
Q

Why do some companies issue bonds rather than borrow money directly from a band

A

a. bypass bank

b. bonds have a lower interest rate

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17
Q

company’s’ cost of borrowing bonds expensive?

A

yes

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18
Q

When a bond is issued, does it break down a large debt into manageable parts

A

yes, is practical for investors to pay interest

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19
Q

Define bond indenture

A

A contract between a firm issuing bonds and the corporation or individual who purchase the bonds

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20
Q

Are most bonds secured

A

no, only unsecured

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21
Q

Define unsecured bonds

A

Bonds that require payment of the full principal amount of the bond at a single maturity date

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22
Q

Does sinking fund set aside money to pay for term bonds

A

yes

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23
Q

Define sinking fund

A

bonds that require payment of the principal amount of the bond over a series of maturity dates

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24
Q

What are most commonly used bonds

A

term bonds

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25
When do you redeem bonds
when the market value is lower than company's interest rate.
26
Define callable
A bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price
27
Define call price
stated in teh bond contract and usually exceeds the bond's face amount
28
What does call price do for a bond
Protects the price of the bond by having the borrower repurchase the high interest rate of the bond at a fixed price and issue new bonds at the new, lower interest rate.
29
Who benefits from convertible bonds
a. borrower | b. lender
30
Define convertible bonds
A bond feature that allows the lender ( or investor) to convert each bond into specified number of shares of common stock
31
How do you convert a bond into 20 shares of common stock
convertible bond = 1000 20 shares so, 1000/20 = 50 per share
32
Say the price of 20 shares is 60 ( original 50). What is the new cost of bond?
20*60= 1200
33
Are bonds pay interest every quarter
a. no, half a year | b. ex=100000*.07*1/2
34
How do you price a bond
Represents the true interest rate used by investors to value a bond
35
Define stated interest rate
The rate quoted in the bond contract used to calculate the cash payments
36
How do you calculate market interest rate each period of a bond
Market interest rate = .07 semiannual periods = 2 .07/2
37
How do you calculate periods to maturity
total years before maturity= 10 periods each year = 2 =10*2=20
38
How do you use present value tables for pricing bonds
identify market interest rate = i year until maternity = n
39
Define default risk
The risk that a company will be unable to pay the bond's face amount or interest payments as it becomes due
40
When a company cannot pay their interest payments, the investors want.....
higher market interest rate, so they pay a lower bond issue price
41
What does " issued at 93,2" mean for bonds
face price of 93200
42
Define discount
a bond's issue price is below the face amount
43
Define premium
a bond's issue price is above the face amount
44
Define carrying value
The balance in the bonds payable account which equals the face value of bond payable minus the discount or face value plus premium
45
How do you journalize bonds issued at face value
a. (dr) cash b. (cr) Bonds payable c. (issue bonds at face value)
46
How do you journalize bond for payment of semiannual interest
a. ( Dr) interest expense b. (CR) cash c. (pay semiannual interest)
47
How do you journalize a discount for bonds
a. (DR) Cash b. (CR) bond payable ( carrying value) c. (issue bonds at a discount)
48
Define net method
preferred method of reporting to IFRS discount or premium as part of the carrying value of bond pauable
49
Define IFRS
International financial reporting standards
50
How do you calculate interest expense
Carrying value * market interest rate per period
51
How do you journalize semiannual interest
a. (DR) interest expense b. (CR) bonds payable( difference of cash and interest exp) c. (CR) cash d. (pay semiannual interest)
52
When does interest expense increase
Carrying value of debt issued at a discount
53
Define Amortization schedule
Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments
54
Is the carrying value of bonds payable ,reported on the balance sheet, is worth of bonds.
yes
55
How do you journalize premiums
a. { DR) interest expense b. (DR) bonds payable c. (CR) cash d. ( pay semiannual interest with premium)
56
Define amortization schedule
provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments
57
Define retirement
Corporation buys back bonds from investors
58
How do you journalize bonds at maturity
a. (DR) bonds payable b. (CR) Cash c. ( retire bonds at maturity)
59
Are losses and gains , during early extinguishment of debt, are reported as non-operating items?
yes
60
Define installment payment
includes both an amount that represents interest and an amount that represents interest and an amount that represents a reduction of the outstanding balance
61
Define lease
A contractual arrangement by which the lessor provides the leassee the right to use an asset for a specified period of time
62
What are two types of leases
a. operating leases | b. capital leases
63
Define operating leases
Contract in which lessor owns the asset and the lessee simply uses the asset temporily
64
Define capital leases
Contract in which lessee essentially buys as asset and borrows the money through a lease to pay for the asset
65
What are the three benefits of leasing
a. improves cash flows up to 100 financing b. improves the balance sheet by reducing long term debt c. con lower income taxes
66
Are leases commitments journalized as liabilities?
no, only in financial statements
67
Define debt to equity ratio
total liabilities divided by total stockholders' equity; measures a company's risk more debt; risk increases. Except for stockholder's equity from excessing borrowing
68
Define return on equity
net income divided by average stockholder's equity measures the income generated per dollar of equity
69
Does leverage increase risk
Yes
70
Define times interest earned ratio
Ratio that compares interest expense with income available to pay those charges Ni+interest exp+tax exp/interest exp
71
Define secured bonds
bonds that are supported by specific assets pledged as collateral
72
Bonds are issued less frequently that than notes
no, bonds are issued more frequent
73
Define term bonds
bonds that require payment of the full principle amount of the bond at a single maturity date
74
Define Serial bonds
a. Bonds that require payment of the principal amount of the bond over a series of maturity dates.
75
Define market interest rate
a. Represents the true interest rate used by investors to value a bond
76
When do bonds equal face amount
a. When carrying value equals their face amount
77
Define early extinguishment of debt
a. The issuer retires debt before its scheduled maturity date
78
When interest rates go down, bond prices go down?
false, bond prices go up
79
How do you journalize a discount when retire a bond
a. (DR) bonds payable b. (DR) loss c. (CR) cash

Financial Accounting (11 decks)

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