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Questions and Answers
What is the primary purpose of obtaining financial resources for a business?
What is the primary purpose of obtaining financial resources for a business?
Which of the following is NOT a form of obtaining financial resources?
Which of the following is NOT a form of obtaining financial resources?
What disadvantage is associated with equity financing?
What disadvantage is associated with equity financing?
How do stock companies primarily raise additional funds?
How do stock companies primarily raise additional funds?
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What is a key characteristic of debt financing?
What is a key characteristic of debt financing?
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Why are standard accounting rules important when issuing additional ownership shares?
Why are standard accounting rules important when issuing additional ownership shares?
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What does the activity of stock markets typically involve?
What does the activity of stock markets typically involve?
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Which factor does NOT influence the allocation of financial resources for a business?
Which factor does NOT influence the allocation of financial resources for a business?
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What is meant by 'uniformity over time' in accounting?
What is meant by 'uniformity over time' in accounting?
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What do dispositive requirements in accounting entail?
What do dispositive requirements in accounting entail?
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Which accounting standard requires the same principles to be used for bookkeeping across years?
Which accounting standard requires the same principles to be used for bookkeeping across years?
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What does the double-entry system of accounting represent?
What does the double-entry system of accounting represent?
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What is the purpose of the income statement?
What is the purpose of the income statement?
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What are disclosure requirements designed to do?
What are disclosure requirements designed to do?
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The going-concern assumption in accounting implies what?
The going-concern assumption in accounting implies what?
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What does the balance sheet illustrate?
What does the balance sheet illustrate?
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What is the main function of the statement of cash flow?
What is the main function of the statement of cash flow?
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Which of the following is not one of the four main accounting standards required?
Which of the following is not one of the four main accounting standards required?
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What is a key feature of a promissory note?
What is a key feature of a promissory note?
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Which statement is correct regarding bills of exchange?
Which statement is correct regarding bills of exchange?
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What is one of the key elements required for a valid promissory note?
What is one of the key elements required for a valid promissory note?
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What governs the use of bills of exchange in international trade?
What governs the use of bills of exchange in international trade?
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In which year was the Uniform Law on Bills of Exchange and Promissory Notes created?
In which year was the Uniform Law on Bills of Exchange and Promissory Notes created?
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What does 'method uniformity' refer to in accounting practices?
What does 'method uniformity' refer to in accounting practices?
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The Convention on International Bills of Exchange and Promissory Notes does not apply to which type of document?
The Convention on International Bills of Exchange and Promissory Notes does not apply to which type of document?
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Who is generally credited with the development of double-entry bookkeeping?
Who is generally credited with the development of double-entry bookkeeping?
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Which of the following attributes is NOT required for a promissory note?
Which of the following attributes is NOT required for a promissory note?
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What does the term 'negotiable' imply in the context of a promissory note?
What does the term 'negotiable' imply in the context of a promissory note?
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Which legal framework facilitated the modernization of accounting practices over the years?
Which legal framework facilitated the modernization of accounting practices over the years?
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Which of the following is NOT a key element of a promissory note?
Which of the following is NOT a key element of a promissory note?
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When was the Convention on the Assignment of Receivables in International Trade finalized?
When was the Convention on the Assignment of Receivables in International Trade finalized?
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What distinguishes long-term debt instruments from short-term ones?
What distinguishes long-term debt instruments from short-term ones?
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What is a key feature of bearer form bonds?
What is a key feature of bearer form bonds?
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How can small companies use accounts receivable for financing?
How can small companies use accounts receivable for financing?
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What must a company do when it uses accounts receivable as collateral?
What must a company do when it uses accounts receivable as collateral?
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What does an acceptance guarantee?
What does an acceptance guarantee?
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What is a disadvantage of using secured transactions?
What is a disadvantage of using secured transactions?
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What role do venture capital companies typically fulfill?
What role do venture capital companies typically fulfill?
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What does the term 'factoring' refer to?
What does the term 'factoring' refer to?
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What determines the priority of a security interest?
What determines the priority of a security interest?
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What happens when a company sells its accounts receivable to a bank?
What happens when a company sells its accounts receivable to a bank?
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What does unsecured debt involve?
What does unsecured debt involve?
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What must be done for secured transactions to be valid?
What must be done for secured transactions to be valid?
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Which type of bond typically offers a registered form?
Which type of bond typically offers a registered form?
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Which of the following financing methods is NOT associated with commercial papers?
Which of the following financing methods is NOT associated with commercial papers?
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Study Notes
Business Financing
- Businesses require financing to operate, covering expenses like supplies, equipment, salaries, taxes, and dividends.
- Financing decisions depend on factors like business type, purpose, and complexity.
- Financing methods include bank loans, stock issuance, bonds, accounts receivable sales, and security interests.
Stocks and Bonds
- Equity Financing: New investors become owners, diluting original ownership. It's easier for stock companies to raise capital through stock issuance. Dividends are paid at the board's discretion. Strict rules regarding disclosure of financial status are necessary.
- Debt Financing: Borrowing money, obligating interest and timely repayment.
- Bonds: Long-term debt instruments; used by large companies, supervised by government agencies. Registered(named) or bearer (anonymous) bonds, secured (with collateral) or unsecured. Issuing companies determine maturity and interest rates.
Accounts Receivable and Security Interests
- Small Companies: Utilize accounts receivable, which are amounts owed to the company.
- Accounts Receivable Financing:
- Collateral for Loans: Accounts receivable can be used to secure bank loans, but the loan amount is often less than the receivable value due to risk. Public notice is required.
- Selling Receivables: Companies can sell accounts receivable to banks for immediate cash. Account holders are notified to pay the bank, not the company.
- Security Interests: Movable property used as collateral for bank loans, protecting both parties. Registration at a central registry affects priority among creditors.
- Alternative Short-Term Financing:
- Factoring/Forfaiting: Banks guarantee payment of promissory notes issued by buyers in international trade. Reduced risk for sellers, but bank purchases at a discount.
- Acceptances: Promises by drawees to honour drafts/bills of exchange at maturity. Banks (bank acceptances) or merchants (trade acceptances) can provide financing.
- Venture Capital/Leasing: Sources of funding; laws vary regarding these institutions. Venture capital provides equity/debt financing for other companies, while leasing finances equipment acquisition.
Commercial Papers Financing
- Promissory Note: Written payment instrument with an unconditional promise to pay a specific amount at a specific time.
- Bill of Exchange: Written payment instrument directing a drawee to pay a payee. A check is a common example.
- International Rules: Lex Mercatoria (early international commercial law), Uniform Laws (Bills, Promissory Notes, Checks), and UNCITRAL Convention on International Bills/Notes. 2001 Convention on Receivables Assignment is also relevant.
- Negotiable Instruments: Promissory notes often used as currency; for transferability, it must be written, payable to order/bearer, state "promissory note", place, and time of payment, date/unconditional promise/definite sum/demand/maturity. Signature is also needed.
Accounting Rules
- Businesses need accurate financial information. Accounting rules vary by country, but some core principles are universal.
- Importance of Uniformity: Uniformity in format (chart of accounts), method (recording unsold goods), and temporal consistency (over time) are important but often debated.
- Regulatory Requirements:
- Dispositive Requirements: Regulations restricting actions (e.g., dividend payments) based on financial conditions.
- Disclosure Requirements: Obligation to report financial status regularly. Increasing report details with company size and stock trading.
- Key Accounting Standards:
- Double-Entry System: Assets = Liabilities + Equity.
- Objectivity: Accurate transaction recording.
- Going-Concern Assumption: Businesses will continue operating.
- Inter-Period Consistency: Uniform application of accounting principles over time.
- Accounting Documents: Balance sheet (snapshot of financial condition), income statement (profit/loss during a period), statement of cash flow, and statement of owner's equity. Additional information regarding depreciation, inventory valuation may be given.
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Description
Test your knowledge on business financing methods and instruments. This quiz covers essential topics such as equity financing, debt financing, and the role of stocks and bonds in business operations. Challenge yourself to understand the nuances of financing decisions and methods.
