Question

Please answer it without plagiarism.

If you need $750,000 to start a venture, reasoning between financing the $750,000 through debt vs equity.
What would be the impact on the balance sheet, income statement, and cash flow statement?

Answer 1

If one will finance using debt then there will be higher return on equity due to less use of equity but there is chances that if the start up make losses than the debt will increase the loss futher because of the payment of interest on debt. If one will use equity then the return on equity will be low but at the same time if the firm will make loss then there will be no extra presuure to pay interest and losses will not be increased.

Impact of debt and equity on different financial statements:

1. Balance sheet:

In case of debt liability will increases.

In case of equity financing shareholders fund will increases.

Whether debt or equity financing asset will be increases with the same amount.

2. Income statement:

In case of debt financing startup has to pay interest expenses which will save some tax but at the same time this interest need to be paid.

In case of equity financing there is no extra component in income statement until and unless company decided to pay dividend which is generally post tax and given from the net income.

3. Cash flow statement:

In case of both equity or debt financing it is acounted in cash flow from financing activities.