Financial Accounting Test 4 Review Questions with 100% Correct Answers
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Course
Wsp
Institution
Wsp
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...
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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