Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Financial Accounting > CH 9 > Flashcards

CH 9 Flashcards

1
Q

Why do companies require financial opitions

A

to create growth for company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Define debt financing

A

obtaining additional funding from lenders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

define equity financing

A

obtaining addiction funding from stockholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

define capital structure

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How do you determine a company’s capital structure

A

balance sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

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

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

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

A

a. bonds
b. notes
c. leases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

are bonds the most common form of corporate debt

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

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

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is most popular method of financing

A

leasing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Does the borrower of a bond have to pay interest

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

are bonds very different from notes payable?

A

no, they are similar, mostly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Define private placement

A

Sale of debt securities directed to a single investor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

company’s’ cost of borrowing bonds expensive?

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Define bond indenture

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Are most bonds secured

A

no, only unsecured

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Define unsecured bonds

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Does sinking fund set aside money to pay for term bonds

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Define sinking fund

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are most commonly used bonds

A

term bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

When do you redeem bonds

A

when the market value is lower than company’s interest rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Define callable

A

A bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Define call price

A

stated in teh bond contract and usually exceeds the bond’s face amount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What does call price do for a bond

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Who benefits from convertible bonds

A

a. borrower

b. lender

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Define convertible bonds

A

A bond feature that allows the lender ( or investor) to convert each bond into specified number of shares of common stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

How do you convert a bond into 20 shares of common stock

A

convertible bond = 1000
20 shares
so, 1000/20 = 50 per share

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Say the price of 20 shares is 60 ( original 50). What is the new cost of bond?

A

20*60= 1200

33
Q

Are bonds pay interest every quarter

A

a. no, half a year

b. ex=100000.071/2

34
Q

How do you price a bond

A

Represents the true interest rate used by investors to value a bond

35
Q

Define stated interest rate

A

The rate quoted in the bond contract used to calculate the cash payments

36
Q

How do you calculate market interest rate each period of a bond

A

Market interest rate = .07
semiannual periods = 2
.07/2

37
Q

How do you calculate periods to maturity

A

total years before maturity= 10
periods each year = 2
=10*2=20

38
Q

How do you use present value tables for pricing bonds

A

identify

market interest rate = i
year until maternity = n

39
Q

Define default risk

A

The risk that a company will be unable to pay the bond’s face amount or interest payments as it becomes due

40
Q

When a company cannot pay their interest payments, the investors want…..

A

higher market interest rate, so they pay a lower bond issue price

41
Q

What does “ issued at 93,2” mean for bonds

A

face price of 93200

42
Q

Define discount

A

a bond’s issue price is below the face amount

43
Q

Define premium

A

a bond’s issue price is above the face amount

44
Q

Define carrying value

A

The balance in the bonds payable account which equals the face value of bond payable minus the discount or face value plus premium

45
Q

How do you journalize bonds issued at face value

A

a. (dr) cash
b. (cr) Bonds payable
c. (issue bonds at face value)

46
Q

How do you journalize bond for payment of semiannual interest

A

a. ( Dr) interest expense
b. (CR) cash
c. (pay semiannual interest)

47
Q

How do you journalize a discount for bonds

A

a. (DR) Cash
b. (CR) bond payable ( carrying value)
c. (issue bonds at a discount)

48
Q

Define net method

A

preferred method of reporting to IFRS

discount or premium as part of the carrying value of bond pauable

49
Q

Define IFRS

A

International financial reporting standards

50
Q

How do you calculate interest expense

A

Carrying value * market interest rate per period

51
Q

How do you journalize semiannual interest

A

a. (DR) interest expense
b. (CR) bonds payable( difference of cash and interest exp)
c. (CR) cash
d. (pay semiannual interest)

52
Q

When does interest expense increase

A

Carrying value of debt issued at a discount

53
Q

Define Amortization schedule

A

Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments

54
Q

Is the carrying value of bonds payable ,reported on the balance sheet, is worth of bonds.

A

yes

55
Q

How do you journalize premiums

A

a. { DR) interest expense
b. (DR) bonds payable
c. (CR) cash
d. ( pay semiannual interest with premium)

56
Q

Define amortization schedule

A

provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments

57
Q

Define retirement

A

Corporation buys back bonds from investors

58
Q

How do you journalize bonds at maturity

A

a. (DR) bonds payable
b. (CR) Cash
c. ( retire bonds at maturity)

59
Q

Are losses and gains , during early extinguishment of debt, are reported as non-operating items?

A

yes

60
Q

Define installment payment

A

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
Q

Define lease

A

A contractual arrangement by which the lessor provides the leassee the right to use an asset for a specified period of time

62
Q

What are two types of leases

A

a. operating leases

b. capital leases

63
Q

Define operating leases

A

Contract in which lessor owns the asset and the lessee simply uses the asset temporily

64
Q

Define capital leases

A

Contract in which lessee essentially buys as asset and borrows the money through a lease to pay for the asset

65
Q

What are the three benefits of leasing

A

a. improves cash flows up to 100 financing
b. improves the balance sheet by reducing long term debt
c. con lower income taxes

66
Q

Are leases commitments journalized as liabilities?

A

no, only in financial statements

67
Q

Define debt to equity ratio

A

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
Q

Define return on equity

A

net income divided by average stockholder’s equity measures the income generated per dollar of equity

69
Q

Does leverage increase risk

A

Yes

70
Q

Define times interest earned ratio

A

Ratio that compares interest expense with income available to pay those charges

Ni+interest exp+tax exp/interest exp

71
Q

Define secured bonds

A

bonds that are supported by specific assets pledged as collateral

72
Q

Bonds are issued less frequently that than notes

A

no, bonds are issued more frequent

73
Q

Define term bonds

A

bonds that require payment of the full principle amount of the bond at a single maturity date

74
Q

Define Serial bonds

A

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

75
Q

Define market interest rate

A

a. Represents the true interest rate used by investors to value a bond

76
Q

When do bonds equal face amount

A

a. When carrying value equals their face amount

77
Q

Define early extinguishment of debt

A

a. The issuer retires debt before its scheduled maturity date

78
Q

When interest rates go down, bond prices go down?

A

false, bond prices go up

79
Q

How do you journalize a discount when retire a bond

A

a. (DR) bonds payable
b. (DR) loss
c. (CR) cash

Financial Accounting (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions