The Importance of Long-Term Debt, Equity, and Cash Flow in Financial Reporting

The Importance of Long-Term Debt, Equity, and Cash Flow in Financial Reporting

Explain the Importance of the Company Having Long-term Debt on its Balance Sheet

Long-term liabilities like notes payable and bonds payable may provide insight into a company’s financial planning and structure. Debts with a one-year duration or longer are referred to as notes payable, and they are typically utilized to support long-term resources or endeavors. Bonds payable represent an additional category of liabilities. The company issues these bonds to investors who agree to borrow money in exchange for a fixed principal and interest payment made at predetermined intervals over a predetermined period. The accounting of long-term debts on the balance sheet has a significant impact on the flow of financial statements. Long-term liabilities, like bonds, can be utilized on the asset side of the balance sheet to buy fixed assets, such as property, plant, and equipment. These assets may be able to provide income and help the business grow (Levy et al., 2023). Regarding liability, it takes the long term into consideration, illustrating the company’s legal obligation to return the borrowed cash over a protracted period.

On the contrary, long-term debt also affects the financial ratios of the business, including the interest coverage ratio and the debt-to-equity ratio. The internal and external capital structures of the business, as well as the credit and financial risk associated with its debts, can all be evaluated with the help of these ratios. Thus, it could be possible to strategically use long-term debt to fund long-term projects and other investments, thereby increasing the utilization of the asset base and enhancing the company’s overall performance and competitiveness in the market.

Explain the Alternative Accounting Methods for Situations Relating to Long-Term Liabilities and Equity

Due to the fluctuation of market rates, credit risk, and the duration until maturity, bonds are typically traded at a price that is either higher or lower than their face value. Suppose a bond is issued at a premium. In that case, the premium will be written off over the bond’s life using either the effective interest method or the straight-line method, and the company will record a higher liability than cash received. In contrast, if a bond is sold at a discount, the discount is written off using the same procedures, and the company would record a lower amount as the liability than the cash received. Depending on which approach is used, interest expense may be allocated differently over the bond’s life, which affects the income statement of the company. Essentially, this is true for both the straight-line and effective interest methods of interest expense.

Explain the Importance of the Company Having Equity on its Balance Sheet

Equity is a crucial component of a company’s balance sheet and is made up of common stock, additional paid-in capital, and retained earnings. The majority of companies obtain common stock through an offer to buy or through the issuance of stock to current and prospective investors. A shareholder’s right to vote and have an interest in the assets and profits of the company is demonstrated by the common stock. The excess amount of money received by the business over the par value of the common stock is displayed in the additional paid-in-capital account. This account is important because it represents the company’s capacity to issue shares at a price higher than the stated par value, which could be utilized, among other things, to finance investments in growth.

Dividends, or the amount of a company’s earnings distributed to shareholders, have an impact on income and equity statements. Dividends are paid out by the company and are included in the statement of retained earnings; they lower the equity of the business. Keep in mind that on the balance sheet, the payment of dividends is represented by a decrease in cash and an equal decrease in retained earnings. Dividends paid to shareholders are included in the entity’s profit distribution rather than being listed as an expense on the income statement. A vital component that needs to be properly managed if a company is to succeed on its balance sheet is its equity. The company’s equity, or net worth, serves as a buffer against the majority of the risks related to its liabilities. It offers the business flexibility and communicates to creditors, investors, and other stakeholders the company’s long-term viability.

Importance of Cash Flow in the Overall Financial Health of the Organization

It is worth noting that cash flow is the life cycle of any organization and thus is very critical to assess the financial viability of any business conduct. Although profitability is significant, it is cash flow that defines the organization’s capacities to fulfil its financial obligations, invest in new and attractive ventures, and continue to operate. Surplus implies that through the production and delivery of goods and services, an organization is able to generate enough cash to cover its expenses and debts and still carry out further investment in its activities. On the other hand, negative cash flows can be indicative of a problem with liquidity. Hence, you are not able to meet your short-term requirements, putting a strain on the organization’s workings properly. Sophisticated cash flow analysis will reveal efficiencies in the working of an organization, the appropriateness of working capital management and the viability of an organization’s business model (Olayinka, 2022). It enables one to look for areas that may require additional cash. Also, it helps management make decisions when it comes to resource distribution, proper cost-cutting, and proper investment. Thus, managing cash flow effectively is the key to financial health, stability, and a better future because this level provides the organization with resources to survive in times of economic crisis, earn extra money during better times, and become one of the leaders in the market.

Explain how Cash Flow Data Connects to the Income Statement and Balance Sheet Components

Operating cash flow figures are important between the link between the figures in the income statement and the balance sheet. The income statement provides information on the revenues, expenses, and profits or losses of the company for a given period, and the balance sheet gives information on the assets, debts, and owners’ stakes in the company at a given timespan. The cash flow statement is used to reconcile the net income or loss reported in the income statement with the actual amount of cash generated or used in operations for the period. Essentially, this explains the amount of cash that was received from or used for operating, investing and financing the company’s activities. Some balance sheet items that are updated to reflect the operating activities are the accounts receivable, inventory, and accounts payable, among others. In the same way that fluctuations in current assets and liabilities are reported under the income statement, so are changes in long-term assets and liabilities reported under the investing and financing sections. Notably, this linking of the three financial statements offers a clear picture of the financial performance and position of an organization.

References

Levy Yeyati, E., & Sturzenegger, F. (2023). A balance‐sheet approach to fiscal Sustainability. Fiscal Studies, 44(1), 61-84.

Olayinka, A. A. (2022). Financial statement analysis as a tool for investment decisions and assessment of companies’ performance. International Journal of Financial,  Accounting, and Management, 4(1), 49-66.

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Competency

In this project, you will demonstrate your mastery of the following competency:

• Apply accounting principles and methods to long-term liabilities and equity
  

  The Importance of Long-Term Debt, Equity, and Cash Flow in Financial Reporting

• Analyze the inflows and outflows of cash for an organization

Overview

Organizations use debt and equity to be able to fund their operations and purchase necessary property, plant, and equipment for the business. As an organization grows it will become essential for it to gain more capital either from financing or equity arrangements. Professional accountants may encounter varying degrees of debt depending on the companies they work for. Regardless of how much debt a company has, it is important to be able to manage long-term liabilities and equity to avoid insolvency.

As with any financial records, accuracy is key. It is imperative to keep accurate and complete records. You now have the opportunity to correct any errors from the previous Project One Milestone Journal Entries and Ledger Accounts tabs in the Corrected Journal Entries and Corrected Ledger Accounts tabs.

Scenario

You are a professional accountant who is working with an established office supply manufacturer, Sharper! Enterprises Inc., to prepare their financial statements for the current fiscal year. You have been given the accounts and information you need to prepare their financial statements. For this, you will need to use your understanding of the balance sheet accounts for long-term liabilities and equity to report accurate information to the finance department.

For a large company, they would more than likely use a software program to manage their finances. For purposes of this assignment, the information has been provided in Microsoft Excel.

Directions

Using the scenario provided, complete the following in the same Project One Workbook Template you used for Project One Milestone. Use the Chart of Accounts tab in the workbook for account names.

Note: You may choose to complete an assignment using a desktop program instead of SNHU’s virtual desktop (VDI); however, technical support will not be provided by SNHU if you select this option.

Project One Workbook

1. Correct all milestone journal entries and milestone ledger accounts from Project One Milestone using the Corrected Journal Entries and Corrected Ledger Accounts tabs.
2. Highlight the corrected errors in green.
3. Complete the Income Statement, Balance Sheet, Statement of Retained Earnings, Cash Flow Worksheet, Statement of Cash Flows, and Ratios tabs in the same workbook based on the Corrected Journal Entries and Corrected Ledger Accounts tabs.
4. Upload the completed Project One Workbook Template for submission.

Note: If you received a perfect score on the Project One Milestone and do not need to correct any errors, simply note it in the designated section within the Corrected Journal Entries tab. You will receive full points for that specific criterion for this assignment.

Project One Analysis Paper

1. Complete an analysis of the information contained in the completed Project One Workbook Template including your revisions.
2. It will need to be formatted in APA style; specific formatting can be found in the What to Submit section.
3. It will need to address all of the rubric criteria listed below for the Project One analysis paper.

Specifically, you must address the following rubric criteria:

Project One Workbook

1. Correct all errors from the Milestone Journal Entries and Milestone Ledger Accounts tabs and enter the correct information on the Corrected Journal Entries and Corrected Ledger Accounts tab of the workbook. Highlight corrections in green.
2. Prepare the Income Statement, Balance Sheet, and Statement of Retained Earnings tabs accurately and completely in the workbook.
3. Prepare the Cash Flow Worksheet tab accurately and completely in the workbook.
4. Prepare the Statement of Cash Flowstab accurately and completely in the workbook.
5. Identify data variances in long-term liabilities, equity, and cash flows on the Ratios tab.

Project One Analysis Paper

1. Explain the importance of the company having long-term debt on its balance sheet. Include the following details in your response:
   1. Explain the characteristics of notes payable and bonds payable.
   2. Explain how long-term debt impacts the financial statements.
2. Explain the alternative accounting methods for situations relating to long-term liabilities and equity. Include the following details in your response:
   1. Why would a bond sell at a different price than the face amount?
   2. What are the two methods of amortizing premium and discount?
3. Explain the importance of the company having equity on its balance sheet. Consider the following questions to guide your response:
   1. How do companies obtain common stock?
   2. Describe the purpose and structure of additional paid-in capital.
   3. How do dividends paid or dividends payable impact the equity and income statement?
4. Explain the importance of cash flow in the overall financial health of the organization.
5. Explain how cash flow data connects to the income statement and balance sheet components.

If you need writing support, access the Academic Support module of your course.

What to Submit

To complete this project, you must submit the following:

Project One Workbook Template
Submit the Project One Workbook Template with the following tabs completed: Milestone Journal Entries, Corrected Journal Entries, Milestone Ledger Accounts, Corrected Ledger Accounts, Income Statement, Balance Sheet, Statement of Retained Earnings, Cash Flow Worksheet, Statement of Cash Flows, and Ratios. The Income Statement, Balance Sheet, Statement of Retained Earnings, Cash Flow Worksheet, Statement of Cash Flows, and Ratios tabs should be based on the Corrected Journal Entries and Corrected Ledger Accounts tabs.

Project One Analysis Paper
Submit your analysis as a 3- to 4-page Microsoft Word document with double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style.

Supporting Materials

The following resource(s) may help support your work on the project: