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Financial Accounting Test 4 Review Questions with 100% Correct Answers

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Financial Accounting Test 4 Review Questions with 100% Correct Answers Chapter 10 - What is the difference between classification of a note as short term or long term? - Short-term notes mature within one year or one operating cycle, whichever is longer. Long-term notes payable are used to sa...

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  • September 26, 2024
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Financial Accounting Test 4 Review

Questions with 100% Correct Answers


Chapter 10 - ✔✔

What is the difference between classification of a note as short term or long

term? - ✔✔Short-term notes mature within one year or one operating cycle,

whichever is longer. Long-term notes payable are used to satisfy financing

periods that range from two to five years; i.e., notes that do not mature

within one year or one operating cycle, whichever is longer, are classified

as long-term.

At the beginning of year 1, B Co. has a note payable of $72,000 that calls

for an annual payment of $16,246, which includes both principal and

interest. If the interest rate is 8 percent, what is the amount of interest

expense in year 1 and in year 2? What is the balance of the note at the end

of year 2? - ✔✔Interest expense in year 1 and 2 is $5,760 and $4,921

respectively. The principal balance at the end of year 2 is $50,189

What is the purpose of a line of credit for a business? Why would a

company choose to obtain a line of credit instead of issuing bonds? - ✔✔A

,line of credit is a prepared amount of credit that is available to a business to

use as needed. It eliminates the need to get loan approval each time the

company needs some additional cash. When using a line of credit, money

can be borrowed one day and paid back the next or used for some

respecified period. A line of credit is generally used for short-term financing

where it is not practical to issue bonds.

What are the primary sources of debt financing for most large companies? -

✔✔A business may need to borrow funds for a short period of time or a

longer period. Most short-term financing is in the form of loans from

financial institutions. However, when a business needs large sums of

money, one financial institution may not be able to meet the needs of the

business. A company can obtain long-term permanent financing through

the issuance of bonds.

What are some advantages of issuing bonds versus borrowing from a

bank? - ✔✔One of the primary advantages of bond financing is that the

company can usually obtain larger amounts of money over a longer term.

By going directly to the public, the company may also be able to obtain

lower financing costs.

What are some disadvantages of issuing bonds? - ✔✔One of the primary

disadvantages of a bond issue is the restrictions that may be placed on

, management. These restrictions are called debt covenants and may restrict

some actions of management, e.g., there may be a restriction on the

amount of dividends that can be paid.

Why can a company usually issue bonds at a lower interest rate than the

company would pay if the funds were borrowed from a bank? - ✔✔One

reason that a company may be able to borrow money more cheaply if

bonds are issued rather than borrowing the money from a financial

institution is the way financial institutions make their money. Banks receive

money from customer through investments in checking or savings accounts

for which the bank must pay these customers interest. The bank then uses

these funds to make loans to other customers. The difference in the

amount paid to depositors and the amount received from loan customers is

called a spread. The spread is the amount the bank uses to pay operating

expenses and then to make a profit. Bonds are sold directly to the public,

thereby avoiding the spread. However, the risk to the bondholder is greater,

so the interest rate that must be paid is generally higher than for savings

accounts.

What effect does income tax have on the cost of borrowing funds for a

business? - ✔✔Tax rules seem to encourage borrowing (debt financing)

over stockholder financing (equity financing) because interest paid on debt

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