Financing Activities Flashcards
What are the two primary ways of raising outside funds for corporations?
1) borrowing money (debt financing) and 2) issuing (selling) shares (equity financing) in exchange for cash.
A corporation can borrow money in a variety of ways, what are two ways?
Take out a loan at a bank or borrow money from other lenders. These are called lenders or creditors which are persons or companies a corporation owes money to.
What are liabilities?
Amounts owed to lenders and creditors-in the form of debt and other obligations.
What is an operating line of credit?
It’s a pre-arranged bank loan for a maximum amount that allows a company to draw more money than there is on hand.
Google: An operating line of credit works much like a credit card. It’s an approved amount that is borrowed against as needed, and interest is charged on only the portion used
What is bank indebtedness?
A liability that comes from when a company uses its operating line of credit to cover cash shortfalls and overdraws it’s bank account.
Loan Payable AKA?
Note payable
What are 3 examples of long-term debt securities?
Mortgages payable, bonds payable and finance lease obligations.
A corporation can also obtain financing by selling shares of ownership to investors. Define common shares. And what are payments to shareholders called?
Common shares describes the amount paid by investors for shares of ownership in a company. Common shares are just one class or type of share capital that a company can issue.
Payments to shareholders are called dividends.
The claims of lenders and creditors differ from those of shareholders. Explain the difference of claim between lenders, creditors and shareholders.
Lenders: You are one of the lenders if you loan money to a company. In loaning money, you specify a repayment schedule; for ex, payment at the end of each month. In addition, interest is normally added to the amount due or overdue.
Creditor: As a creditor, you have a legal right to be paid at the agreed time. In the event of nonpayment, you may force the company to sell assets to pay its debts.
Shareholders: have no claim to corporate resources until the claims of lenders and creditors are satisfied. If you buy a company’s shares instead of loaning it money, you have no legal right to expect any payments until all of its lenders and creditors are paid. Also, once shares are issued, the company has no obligation to buy them back, whereas debt obligations must be repaid.
Many companies pay shareholders a return on their investment on a regular basis as long as?
As long as there is enough cash to cover required payments to lenders and creditors.
Financing activities involve what?
Involve borrowing (or repaying) long-term debt from (to) lenders and issuing shares or distributing dividends to shareholders.
