Terms
The payment of an operating expense necessary to earn revenue is called:
Revenue Expenditure
When a company borrows money for a period of time (maybe seasonal work), this is known as:
Debt financing
When a company purchases plant assets to use for the operation of the business, this is known as:
Capital Expenditures
The ratio of interest and dividend pymts to the proceeds from debt and capital financing is known as:
Cost of Capital
What is it called when a corporation obtains capital by issuing stock?
Equity financing
Expenses that are not related to a business's normal operations are called:
Identify which 2 accounts are affected and how:
Drawing on a line of credit.
Cash - Debit
Line of Credit - Credit
Identify which 2 accounts are affected and how?
Signing a Long-Term Note Payable
Cash - Debit
Long-term Notes Payable - Credit
The ability of a business to use borrowed funds to increase its earnings is known as:
Financial Leverage
Identify the disadvantage of issuing stock:
Purchases of plant assets used in the operation of a business are called:
Identify which 3 accounts are affected and how?
Signing a promissory note for extension of time.
Accounts Payable - Debit
Company that you are extending note - Debit
Notes Payable - Credit
Identify which 3 accounts are affected and how?
Making a Monthly Payment on a Long-Term Note Payable
Long-Term Notes Payable - Debit
Interest Expense - Debit
Cash - Credit
Identify 3 options available to a business to raise capital:
1. Lines of Credit
2. Notes Payable
3. Bonds
4. Common Stock
5. Preferred Stock
Identify the 2 accounts affected and how?
Issuing capital stock
Cash - Debit
Capital Stock - Credit
Equity financing
Paying Principal and Interest on a Promissory Note
Notes Payable - Debit
Interest Expense - Debit
Cash - Credit
Identify which 2 accounts are affected and how?
Bonds Payable - Credit
Identify 3 factors that a business should consider in deciding how to raise capital:
1. Interest rates
2. Impact on earnings
3. Repayment terms
4. Ownership control
5. Debt ratio
Identify the 2 accounts affected and how:
Issuing Stock in Excess of Par Value
Cash - Debit
Paid-in Capital in Excess of Par-Common
The ability of a business to use borrowed funds to increase its earnings is called:
Financial Leverage
Where is interest expense listed in a chart of accounts?
Section - Other Expenses
Identify which 2 accounts are affected and how?
Paying Interest on Bonds
Interest Expense - Debit
Cash - Credit
How can you describe a business as having a high level of debt?
Highly leveraged or over-leveraged
Identify which 2 accounts are affected and how:
Issuing Preferred Stock at Par Value
Cash - Debit
Capital Stock-Preferred - Credit