Chapter 18

Question 1

The payment of an operating expense necessary to earn revenue

Answer 1

Revenue expenditure

Question 2

Obtaining capital by borrowing money for a period of time

Answer 2

Debt financing

Question 3

A bank loan agreement that provides immediate short-term access to cash

Answer 3

Line of credit

Question 4

Interest rate charged to the banks most credit worthy customers

Answer 4

Prime interest rate

Question 5

Interest incurred on borrowed funds

Answer 5

Interest Expense

Question 6

expenses that are not related to a business’s normal operations

Answer 6

Non-operating expenses

Question 7

Purchases of plant assets used in the operation of the business

Answer 7

Capital expenditures

Question 8

Assets pled to a creditor to guarantee repayment of the loan

Answer 8

Collateral

Question 9

A long-term promise to pay a specified amount on a specified date to pay interest as stated intervals

Answer 9

Bond

Question 10

All bonds representing the total amount of the loan

Answer 10

Bond issue

Question 11

The interest-rate used to calculate periodic interest payments on a bond

Answer 11

Stated interest rate

Question 12

Obtaining capital buy issuing additional stock in a corporation

Answer 12

Equity financing

Question 13

A value assigned to a share of stock

Answer 13

Par value

Question 14

The date on which a business issued a note bond or stock

Answer 14

Issue date

Question 15

A. Class of stock that gives the share holders preference over common share holders in dividends along with other rights

Answer 15

Preferred stock

Question 16

The ratio of interest and dividend payments to the proceeds from debt and capital financing

Answer 16

Cost of capital

Question 17

The ability of a business to use borrowed funds to increase its earnings

Answer 17

Financial leverage

Question 18

A line of credit provide a business immediate access to cash to pay for unexpected emergencies such as repairs from storm damage

Answer 18

True

Question 19

Interest rates are often based on the prime interest rate

Answer 19

True

Question 20

A line of credit does not have to be paid as long as the business pays monthly interest

Answer 20

False

Question 21

A business that is unable to pay its account when due may be asked to sign a promissory note

Answer 21

True

Question 22

A business should sign for an extension of time on an account payable rather than borrow funds against a line of credit or obtain a loan

Answer 22

False

Question 23

The Portion of net income not paid as a dividend is an internal source of capital

Answer 23

True

Question 24

A loan application should I clue a business plan describing how the borrowed funds will be used and how the will be repaid

Answer 24

True

Question 25

Of the borrow is unable to repay the loan the creditor can take the collateral and sell it pay off the debt

Answer 25

True

Question 26

A portion of the monthly payment on a note payable reused the outstanding loan principal

Answer 26

True

Question 27

Bonds generally have extended terms such as 5 10 or 20 years

Answer 27

True

Question 28

A corporation usually sells its bonds directly to individual investors on a public securities exchange

Answer 28

True

Question 29

The race value is the amount to be repaid at the end of the bond term

Answer 29

True

Question 30

A corporation makes bond interest payments by writing a single file check to its agent who then writes individual checks to the bond holders

Answer 30

True

Question 31

An advantage of selling stock is that the addition capital becomes part of a corporations permanent capital

Answer 31

True

Question 32

A disadvantage of selling stock of that the dividends must be paid to the stockholders

Answer 32

False

Question 33

A disadvantage of selling stock is that the ownership is spread over more shores and more owners

Answer 33

True

Question 34

Preferred stock is typically described by referring to the stocks dividend rate and par value

Answer 34

True

Question 35

Unpaid dividends on preferred stock may have to be paid before common stockholders receive any dividends

Answer 35

True

Question 36

A business should only raise capital if the projected increase in earnings exceeds the cost of capital

Answer 36

True

Question 37

Debt financing is often extended for a term similar to the useful life of the assets purchased

Answer 37

True

Question 38

The spreading of the control over the business through the issuance of new stock is known as loss of control

Answer 38

False

Question 39

A business having a high level of debt is said to be highly leveraged

Answer 39

True

Question 40

Drew cash on line of credit

Answer 40

CR journal
Debit cash
Credit line of credit

Question 41

Signed s note to start company for an extension of time on its account payable

Answer 41

G journal
Debit acts pay and acts pay stark
Credit long term notes pay

Question 42

Paid cash for the maturity value of a note

Answer 42

Cp journal
Debit interest expense and long term notes pay
Credit cash

Question 43

Singed a bank note

Answer 43

CR
debit cash
Credit long term notes pay

Question 44

Paid cash for monthly loan payment

Answer 44

CP
Debit long term notes pay and interest expense
Credit cash

Question 45

Issued bondsy

Answer 45

CR
Debit cash
Credit bonds pay

Question 46

Paid cash for interest on bonds

Answer 46

CP
Debit interest expense
Credit cash

Question 47

Sold common stock at par value

Answer 47

CR
Debit cash
Credit capital stock common

Question 48

Sold common stock at above its par value

Answer 48

CR
Debit cash
Credit capital stock common and paid in capital in excess of par common

Question 49

Sold preferred stock at par value

Answer 49

CR
Debit cash
Credit capital stock preferred