Questions and Answers
What is the primary purpose of depreciation in business transactions?
To provide for recovery of capital invested in physical property
What is the definition of value in a commercial sense?
The present worth of all future amounts that are to be received through ownership of a particular property
What is the market value of a property?
The amount which a willing buyer will pay to a willing seller for the property
What is the primary difference between preferred stock and common stock?
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What is the book value of a property?
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What do stockholders receive as their share from the profit of the firm?
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What is the salvage or scrap value of a property?
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What is the definition of fair value of a property?
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What is a major factor that influences the present value of a common stock?
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What type of investors typically invest in common stocks?
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What is the primary purpose of a corporation issuing bonds?
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What is the interest on a bond usually paid?
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What is a coupon bond?
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What is the primary difference between a bond and a common stock?
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What is the term for the written promise to repay a specific amount of borrowed money in a stated number of years?
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What is the purpose of the Premyo Savings Bonds and Biglang Bahay Bonds issued by the Bangko Sentral ng Pilipinas?
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Study Notes
Depreciation
- Depreciation is used to recover capital invested in physical property and to determine the cost of depreciation for producing products or services.
- Depreciation refers to the decline in value of physical property due to wear, tear, or time passage.
Value Definitions
- Value: present worth of all future amounts received through property ownership.
- Market value: amount a willing buyer pays to a willing seller, where both have equal advantage and no compulsion.
- Fair value: value determined by a disinterested third party to establish a fair price for both seller and buyer.
- Utility or use value: value of a property to the owner as an operating unit.
- Book value: worth of a property as shown on accounting records.
- Salvage or scrap/resale value: price obtained from selling property as second-hand.
Stocks
- Stocks are evidences of ownership in a corporation with no maturity and no fixed income.
- Stockholders receive dividends as their share of the firm's profit.
- Stocks can be classified into two:
- Preferred Stocks: have a fixed dividend rate, priority over common stock in asset distribution, and a preferential rate.
- Common Stocks: present value influenced by expected dividends, earnings, estimated future value, and investors' required rate of return.
Bonds
- Bonds are long-term instruments promising a fixed income in the form of interest.
- Bonds are written promises to repay a specific amount of borrowed money with a certain rate of interest on the par value.
- Value of bonds is determined by rate of interest, time of interest payment, amount and time of payment, and required rate of return.
- Examples of bonds include Premyo Savings Bonds and Biglang Bahay Bonds issued by the Bangko Sentral ng Pilipinas.
- Bonds carry interest, normally paid semiannually at a fixed rate.
- Coupon bonds have attached coupons, each calling for payment on a fixed date.
- Each bond issue is distinguished by a particular name, including the corporation issuing it, the rate of interest, and the date of maturity.
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