Question

Your best friend knows that you are currently taking an accounting class, and he comes to you for some advice. He is interested in using his savings to purchase stock in a public corporation. He downloaded the annual report for two retail companies. He has the following questions about the two retail companies:

• What is typically included in each statement?
• Why do the statements appear in the following order?
  • Income Statement
  • Retained Earnings Statement
  • Balance Sheet
  • Cash Flow Statement
  • What is the definition of debt and equity (what are some examples of liability accounts and equity accounts)?
  • What are two examples of debt transactions for a retail corporation?
  • What are two examples of equity transactions for a retail corporation?
  • What are some reasons why a corporation would obtain cash from borrowed funds from a bank versus cash from selling stock to shareholders?

Thank you beforehand and have a great rest of your day.

(this is all one answer, please answer them all or don't answer at all)

Answer 1

Annual report contents

· Chairman speech and Directors’ Report - Management discussion and analysis report

· Annual audited financial statements- Income statement, Statement Retained Earnings , Balance sheet, Cash flow statement and notes to accounts with all schedules

· Auditor’s report giving an opinion

· Report on Corporate Governance

The statement is prepared in order due to the following reasons

The net income of income statement is added to Retained earnings and dividend is deducted to arrive at closing balance of Retained earnings. The retained earnings are part of Balance sheet in stockholders’ equity. Hence it flows in the order.

Income statement is prepared on accrual basis. The cash flow statement is additional requirement which is prepared on cash basis and shows movements of cash during the year

Debt refers to the borrowing by the firm and is part of liability. It is an obligation which should be repaid as per the terms and conditions of agreement. It can be through notes payable or bonds issued in the market.

Equity refers to the capital which is raised by the firm. It can be preferred stock or common stock

Debt transactions:

· Issue of bonds payable

· Borrowing though short term and long term notes payable

Equity transactions

· Bonus issue and rights issue

· Payment of dividend

A firm would prefer borrowed funds over selling cash for cash to stockholders due to following reasons:

· The cost of debt is tax deductible for income tax purpose

· It lowers weighted average cost of capital

· It helps in improving return on equity

· It gives advantage of leverage