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ACC1012 week 6 summary
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ACC1012 week 6 summary notes. business accounting
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Week 6Introduction to Published Financial Statements &
Introduction to Corporate Governance
By the end of this week, you should be able to:
Understand the business decisions
Classify organisations and understand the different types of organisations
List the main users of the financial statements
Understand the main purpose of preparing financial statements
Understand what financial reporting and integrated reporting is
Understand what an audit is and what auditors do
Understand what corporate governance is
Understand why we need corporate governance
The four fundamental business decisions are
Investing
Financing,
Operating and
Distribution decisions
This week we will be focusing on the first three decisions (investing, financing
and operating). When individuals look at the published financial statements of
a company, they are able to gather an understanding over the business
decisions made by management. Therefore, being able to understand these
decisions and what they entail is vital when preparing or analysing an entity’s
financial statements.
FINANCING DECISION
, The financing decision relates to where the funds for the business
are to be obtained.
When looking at a business, there are two sources of funding:
equity and debt.
Equity funding is an internal source of financing which refers to the
share capital or retained earnings) of the business.
Using equity financing would involve:
- Issuing shares in the business in exchange for ownership in the
business. These include ordinary shares and preference shares,
amongst others.
- Using the owners’ equity (when the owner makes a contribution in
the form of cash or assets)
- Making use of the accumulated profits in the business (retained
earnings)
Debt funding refers to the external sources of funding.
This involves the use of loans, debentures or bonds for example.
What we need to remember about debt funding is that there will be
principal repayments (of the capital portion of the debt) as well as interest
repayments (nothing in life is free!).
The most important difference between equity financing and debt
financing is that when making use of debt financing there is no exchange
of ownership (think about it, the bank does not get shares in the business
when you take out a loan with them).
Debt also comes in the form of other instruments such as debentures or
bonds. These essentially work the same as a loan. The only difference is
that the payments are called ‘coupon payments’ and these are paid in set
regular intervals (e.g. once or twice a year), a lump-sum at the end (e.g.
R120 000 in 5 years’ time), or a combination of both.
SHARE CAPITAL
Earlier we mentioned that an option for financing is the issue of equity. A
company can raise equity by issuing shares, which can:
1. Have voting rights attached to them, but no fixed dividend (ordinary
shares)
2. Have no voting rights attached to them, but shareholders are entitled
to a fixed dividend annually (preference shares)
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