Question

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

Impact on balance sheet, income statement & cash flow statement are as folows :

1. Impact on Balance Sheet

If financing is through debt, then it will result in increase in liablity.

If financing is through equity, then amount will be shown in owners fund.

In both the cases asset side will also increase ( in cash or current/ fixed asset)

2. Impact on Income statement

If financing is through debt, then there will be interest expense which will save tax. And it is compulsory to pay interest on debt.

If financing is through equity, then dividend will be paid to equity holder. Dividend is paid out of after tax profit. Paying equity dividend is not compulsory.

3. Impact on Cash flow statement

If financing is through debt, then it will be shown in Cash flow from financing activities.

If financing is through equity, then also it will be shown in Cash flow from financing activities.

- Venture can raise capital from any of the source, by deteremining the cost of capital and which minimize the cost to start up.