Question

Your boss has a question about the types of financing on the balance sheet; specifically, the equity. He wants to know how you came up with your result. What is the process you are going to tell him?  

Elaborate and write about the importance of:

·         Equity and its sources  

·         How a firm’s common equity is reported on a balance sheet  

·         How the earnings before taxes and net income are calculated for the income statement  

·         How earnings per share and dividends per share are calculated  

Answer 1

Equity: Equity is the corpus that company owes to the promoters of the company.components of equity are

• share holders equity
• paid in capital
• retained earnings
• treasury stock

common Equity of the firm is reported as the share holder's equity on the equity and liabilities side of the balance sheet

Earnings before taxes are also called as the opertaional income of the company after computing the interest and depreciation. and net income of the company is the income calculated after all the deductions like interest, depreciation & amortization and taxes. if a company is having debt in there balance then it needs to pay the financing interest for the respective year if the company generated profits. loss making companies need not to pay the taxes but are supposed to pay the interest costs. depreciation & amortization depends on the type of the company, if a company is capital intensive and operational costs in nature then depreciation is charged.

Earnings per share is calculated by dividing the net earnings of the company to the total number of out standing shares. EPS can be neagative if the company is in negative earning or loss making in nature. Dividends per share is calculated by the dividend payout for the respective year to the total number of outstanding share. dividends providing for a financial is not obligatory to the company.