SB 9
The two types of financing are
equity financing. debt financing.
Which of the following financial ratios provides information about the income generated per dollar of assets?
Return on assets
The debt to equity ratios for three otherwise comparable companies are as follows: Adams: 1.5; Flagler: 1.8; Roberts: 1.4. The risk of bankruptcy appears to be lowest for:
Roberts
The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by
interest expense
A common reason for redeeming a bond prior to its maturity date is that
market interest rates decreased.
Most bonds issued today are ______.
unsecured
has grown into the most popular method of external financing of corporate assets in America.
Leasing
bonds are supported by a specific asset the issuer pledges as collateral.
Secured
Corporate bonds most often pay interest
Semiannually
Which of the following are common characteristics or provisions of bonds?
secured or unsecured term or serial convertible callable
Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as
term bonds
A corporation that wishes to borrow from the general public rather than a bank will issue
bonds
Convertible bonds allow the lender to convert each bond into:
common stock
The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.
higher
Callable bonds can be redeemed at the choice of
the bond issuer.
In the U.S., the most popular method for financing corporate long-term assets is:
leasing
Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:
long-term liabilities
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
secured
During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?
The balance is $48,880. Reason: $50,000 - (5,120 - 4,000 interest)
The return on assets measures the amount of _____ generated for each dollar of assets.
income
True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.
False
The ratio that provides an indication to creditors of how much greater net income is than interest expense is called the
times interest earned ratio
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.
True or false: The times interest earned formula is net income divided by interest expense.
False
Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?
Interest expense based on the beginning period carrying value and the effective rate of the loan The cash paid each payment period The decrease in the carrying value of the note The carrying value of the note at the end of the period
Which of the following provides the clearest indication of an organization's ability to pay current and future interest.
high earnings relative to interest expense
XYZ Company has a 10 year installment note requiring $5,000 to be paid within the current year and $45,000 to be paid over the remaining 9 years. How is this installment note reported in the balance sheet of XYZ Company?
$5,000 current note payable; $45,000 long-term note payable
In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:
Debt
Which of the following are correct regarding bonds?
They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount.
Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:
a lease asset a lease payable
At the beginning of a lease period, the lessee records
a lease asset and lease payable for the present value of the lease payments.
Periodic payments on installment notes typically include
a portion that reflects interest. a portion that reduces the outstanding loan balance.
Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:
credit to Notes Payable for $24,000
The higher a company's earnings relative to its interest expense, the more likely it is that it will be able to pay its
current and future interest payments.
Smith Company enters into a lease agreement with Rent-All Corp. The present value of the lease payments is equal to $25,000. Smith records:
debit lease asset $25,000 credit lease payable $25,000
A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:
lease
is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.
lease
A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)
lease.
Improved cash flows is a common advantage of acquiring equipment through
leasing
Which of the following are the most common types of bonds?
Unsecured
On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:
$13,000 Reason: $4,000 + $9,000
Which of the following is true regarding a debenture bond?
It is secured by the faith and credit standing of the issuer.
Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a(n)
debenture or unsecured bond
Western Company enters into a lease agreement with ABC Rents. The present value of the lease payments is equal to $50,000. Western records:
debit lease asset $50,000; credit lease payable $50,000
Loans requiring periodic payments of interest and principle are referred to as
installment notes
On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to
interest expense for $4,000. notes payable for $1,120.
In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:
long-term debt
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n)
private placement
Which of the following are possible benefits of leasing an asset rather than purchasing an asset?
Lower periodic payments on the asset Improvement in cash flows Protection against declining asset value
bonds are retired when the bondholder exchanges them for the issuing company's stock.
Convertible
The journal entry to recognize the signing of an installment notes payable includes:
Credit Notes Payable Debit Cash
The times interest earned ratio provides an indication of
how many times greater earnings are than interest expense.
At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:
$8,600 Reason: $10,000 - $(2,000 - (10,000 x .06) = $8,600
Identify two ratios commonly used to assess a company's financial risk.
Times interest earned ratio Debt to equity ratio
In a private placement of bonds, bonds may be sold to
a single large investor.
A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n)
bond
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of
financial risk
You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0
Company D
financing refers to borrowing money from creditors.
Debt
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
False
bonds require payment of the full principle amount of the bond at the end of the loan term.
Term
Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal
The carrying value of the note at the end of the period Interest expense based on the beginning period carrying value and the effective rate of the loan The cash paid each payment period The decrease in the carrying value of the note
Which of the following are typically shown in an amortization schedule related to an installment notes payable?
The carrying value of the note at the end of the period The carrying value of the note at the beginning of the period The cash paid each payment period