Acca205 exam 2

1. 1Two key sources of long-term funds are:

   1. Athe issuance of long term debt
   2. Bthe issuance of capital stock
   3. Ca key decision for management is determining whether or not to rely on stockholders equity (retained earnings and capital stock)
2. 2Because long term debt requires payment on the maturity date and periodic payments of interest. A companies best option is to issue common stock rather than long term debt.

   1. ATrue
   2. BFalse
3. 3One of the advantages of the issuing long term debt rather than common stock is its advantage of financial leverage (trading on equity): This term is defined as,

   1. AIf a corporation earns more from the funds it raises
      by incurring long-term debt than it pays in interest on the debt, the
      excess will increase its earnings for the stockholders. This concept is called
      financial leverage,
   2. BThe interest on debt is tax-deductible, whereas dividends on
      common stock are not.
   3. CNo loss of stockholder control. When a corporation issues long-term
      debt, common stockholders do not relinquish any of their control over the
      company because bondholders and other creditors do not have voting rights.
4. 4management issues related to long term debt

   1. AA bond is a security that represents money borrowed from the investing public.
   2. BLong-term debt is used to finance assets and business activities, such as research
      and development, that will produce income in future years.
   3. CThe advantages of issuing long-term debt are that common stockholders do not relinquish any control, interest on debt is tax-deductible, and financial leverage can increase earnings.
   4. DThe management issues related to long-term debt are whether to take on long-term debt, how much
      debt to carry, and what types of debt to incur.

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Accounting FINALS Quiz on Acca205 exam 2 , created by J C on 24/03/2017.

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J C

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