Century 21 Accounting – Ch. 18

question

revenue expenditure
answer

the payment of an operating expense necessary to earn revenue
question

debt financing
answer

obtaining capital by borrowing money for a period of time
question

line of credit
answer

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

prime interest rate
answer

the interest rate charged to a bank’s most credit worthy customers
question

interest expense
answer

interest incurred on borrowed funds
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non-operating expenses
answer

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

purchases of plant assets used in the operation of a business
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collateral
answer

assets pledged to a creditor to guarantee repayment of a loan
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bond
answer

a long-term promise to pay a specified amount on a specified date and to pay interest at stated intervals
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bond issue
answer

all bonds representing the total amount of a loan
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stated interest rate
answer

the interest rate used to calculate periodic interest payments on a bond
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equity financing
answer

obtaining capital by issuing additional stock in a corporation
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par value
answer

a value assigned to a share of stock
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issue date
answer

the date on which a business issues a note, bond, or stock
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preferred stock
answer

a class of stock that gives the shareholders preference over common shareholders in dividends along with other rights
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cost of capital
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the ratio of interest and dividend payments to the proceeds from debt and capital financing
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financial leverage
answer

the ability of a business to use borrowed funds to increase its earnings
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true
answer

a line of credit provides a business with immediate access to cash to pay for unexpected emergencies, such as repairs from storm damage
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true
answer

interest rates are often based on the prime interest rate
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false
answer

a line of credit does not have to be repaid as long as the business pays its monthly interest
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true
answer

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

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

the portion of net income not paid as a dividend is an internal source of capital
question

true
answer

a loan application should include a business plan describing how the borrowed funds will be used and how they will be repaid
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true
answer

if the borrower is unable to repay the loan, the creditor can take the collateral and sell it to pay off the debt
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true
answer

a portion of the monthly payment on a note payable reduces the outstanding loan principal
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true
answer

bonds generally have extended terms such as 5, 10, or 20 years.
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false
answer

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

the face value is the amount to be repaid at the end of the bond term
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true
answer

a corporation makes bond interest payments by writing a single check to its agent who then writes individual checks to bondholders
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true
answer

an advantage of selling stock is that the additional capital becomes a part of a corporation’s permanent capital.
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false
answer

a disadvantage of selling stock is that dividends must be paid to stockholders
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true
answer

a disadvantage of selling stock is that the ownership is spread over more shares and more owners
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true
answer

preferred stock is typically described by referring to the stock’s dividend rate and par value
question

true
answer

unpaid dividends on preferred stock may have to be paid before common stockholders receive any dividends
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true
answer

a business should only raise capital if the projected increase in earning exceeds the cost of capital
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true
answer

debt financing is often extended for a term similar to the useful life of the assets purchased
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true
answer

the spreading of the control over the business through the issuance of new stock is known as dilution of control
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true
answer

a business having a high level of debt is said to be highly leveraged
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cost accounting
answer

the field of accounting that identifies and measures costs

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