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Century 21 Accounting – Ch. 18

revenue expenditure
the payment of an operating expense necessary to earn revenue
debt financing
obtaining capital by borrowing money for a period of time
line of credit
a bank loan agreement that provides immediate short-term access to cash
prime interest rate
the interest rate charged to a bank’s most credit worthy customers
interest expense
interest incurred on borrowed funds
non-operating expenses
expenses that are not related to a business’s normal operations
capital expenditures
purchases of plant assets used in the operation of a business
assets pledged to a creditor to guarantee repayment of a loan
a long-term promise to pay a specified amount on a specified date and to pay interest at stated intervals
bond issue
all bonds representing the total amount of a loan
stated interest rate
the interest rate used to calculate periodic interest payments on a bond
equity financing
obtaining capital by issuing additional stock in a corporation
par value
a value assigned to a share of stock
issue date
the date on which a business issues a note, bond, or stock
preferred stock
a class of stock that gives the shareholders preference over common shareholders in dividends along with other rights
cost of capital
the ratio of interest and dividend payments to the proceeds from debt and capital financing
financial leverage
the ability of a business to use borrowed funds to increase its earnings
a line of credit provides a business with immediate access to cash to pay for unexpected emergencies, such as repairs from storm damage
interest rates are often based on the prime interest rate
a line of credit does not have to be repaid as long as the business pays its monthly interest
a business that is unable to pay its account when due may be asked to sign a promissory note
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
the portion of net income not paid as a dividend is an internal source of capital
a loan application should include a business plan describing how the borrowed funds will be used and how they will be repaid
if the borrower is unable to repay the loan, the creditor can take the collateral and sell it to pay off the debt
a portion of the monthly payment on a note payable reduces the outstanding loan principal
bonds generally have extended terms such as 5, 10, or 20 years.
a corporation usually sells its bonds directly to individual investors on a public securities exchange
the face value is the amount to be repaid at the end of the bond term
a corporation makes bond interest payments by writing a single check to its agent who then writes individual checks to bondholders
an advantage of selling stock is that the additional capital becomes a part of a corporation’s permanent capital.
a disadvantage of selling stock is that dividends must be paid to stockholders
a disadvantage of selling stock is that the ownership is spread over more shares and more owners
preferred stock is typically described by referring to the stock’s dividend rate and par value
unpaid dividends on preferred stock may have to be paid before common stockholders receive any dividends
a business should only raise capital if the projected increase in earning exceeds the cost of capital
debt financing is often extended for a term similar to the useful life of the assets purchased
the spreading of the control over the business through the issuance of new stock is known as dilution of control
a business having a high level of debt is said to be highly leveraged
cost accounting
the field of accounting that identifies and measures costs

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