Question

1. What is the main difference between a bond and a share of stock?

2. What is the advantage of issuing bonds instead of obtaining financing from the company’s owners?

3. What is a bond indenture? What provisions are usually included in it?

4. What are the contract rate and the market rate for bonds?

5. What is the reporting purpose of the statement of cash flows?

6. What are some investing activities reported on the statement of cash flows?

7. What are some financing activities reported on the statement of cash flows?

8. Explain the difference between financial reporting and financial statements.

9. What is the difference between comparative financial statements and common-size comparative statements?

Answer 1

Answers.

1. Share of Stock means share in ownership of the entity whereas a bond is the liability of an entity to be paid in future along with the periodic interest.

2. The main advantage of issuing bond is that interest expense on such bond is deductible expense while computing entity tax liability whereas dividend is not a deductible expense.

3. A bond indenture is a legal and binding agreement between bond issuer and bond holder that specifies the terms and conditions of bond. The face value of bond, interest rate, due date of interest and maturity value of bond is included in bond indenture.

4. Contract rate means interest rate specified in face value of bond whereas market rate means interest rate prevailing with the market with similar risk factor.

5. Cash flow statement Reports cash received or paid from operating, investing and financing activities of an entity.

6. Example of Investing activities are Purchase of Plant and Machinery, Sale of Land, Purchasing of Shares of other Entity, etc

7. Example of Financing activities are Issue of Share Capital, Payment of Interest on Bond/Debentures, etc

8. Financial statements includes preparation of Balance Sheet, Profit and Loss Account, Cash Flow Statements and Notes to account whereas financial reporting is used to provide information for decision making.

9. Comparative financial statements represents financial statements for several years side by side whether in absolute value or percentages or both whereas common size comparative statements are wholly prepared in percentage terms.