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Capital structure analysis

Question:

Discuss about the Financial Statements Of Debt and Equity.

This report has been prepared over the financial statements of a company to analyze and investigate the debt and equity position of the company. In this report, capital structure of a company has been analyzed and further the pros and cons of the capital structure of the company has been described on the basis of their debt and equity position. Further, the accounting concept has been analyzed and according to the position of the company, matching concept has been analyzed and it has been found that how this concept is helping the company to accumulate and manage the materiality concept. More, the advantages and the disadvantages of the matching principle have been investigated in the concern of the company to manage and administer the position and the performance of the company.

Capital structure of the company has been analyzed trough investing over the performance and the position of the organization. Capital structure is the point where the debt and equity of an organization are evaluated and the relations of both the sources are identified. It is the process which depicts the user about the ideal ratio of the debt and equity.

According to the given case, the debt of the company is Euro 28024 in 2014 and Euro 28576 in 2013. Further, the equity of the company is Euro 55959 and Euro 53659 in 2014 and 2013 respectively. Through these calculations, it has been around that the comapny has raised its funds 33% though the debt and 67% through the equity. According to it, it is required for the company to manage and identify the position and maintain the funds of the company through the market position (Kaplan and Atkinson, 2015).

Capital structure

2014

2013

Weight

Total debt

28024

28576

0.33

Total Equity

55959

53659

0.67

83983


The above given table depict about the debt position and equity position of the company. The debt equity ratio of the company is 1:2 which an ideal ratio is. This ratio depict that the company has just double amount of total debts that means it is quite easy for the company to manage the risk factor as whenever the debt holder would ask for the money, comapny could repay them through the equity and it is also cost saving ratio (Lumby and Jones, 2007).

Due to the fact that no matter what position company is facing, it becomes mandatory for the company to pay the fixed interest to the debt holders whereas in equity funds, comapny is only required to pay the dividends to the equity holders when comapny has made some profits. Through this analysis, it has been found that the current position of the debt and equity of the company is perfect (Moles, Parrino  and Kidwekk, 2011). Comapny is not required to pay any extra cost for the funds as the same time, the risk and return factor of the company has also been managed. The current debt and equity position is an ideal position for the industry which would help the organization at every level of the decision making, cost reducing, profit enhancing etc.

Debt and equity position of the company

Further, a literature review study has been done over the advantages and disadvantages of capital structure of the company in context of debt and equity. Through this report, it has been found that the current position of the debt and equity of the company is perfect as according to the study of Ward (2012), at this level company is required to pay very less interest to the debt holders. Further, the current capital structure makes it more obvious for the company to enhance and diversify the activities and operations into various new markets with less associated risk.

According to the study of Weaver, Weston and Weaver, (2001), it has been analyzed that the debt of an organization must be lower with the equity of the company so that the associated risk of the organization could be lesser as well as it also reduce the level of the cost consumption of the company. The current capital structure makes the company more independent as the equity amount is the amount of the owners which is not required to pay by the comapny again and thus the loan position of the company is very lower (Zimmerman and Yahya-Zadeh, 2011).


Further, it has also been studied that the current position of the equity is bit higher and thus the ownership of the comapny has been diluted and according to the Crosson and Needles, (2013), this state makes it difficult for the organization to make a better and quick decision about the betterment of the organization. According to the Crowther, (2007), the current position of the debt is lower but still the company has to repay the entire amount back to the debt holders along with the interest and it would enhance the cost of the company.

More, it has been found that the company is required to pay some % of the total profit of the equity holders by the name of the dividend. It becomes a pressure over the organization to take a decision about the retained earnings and the dividend. According to the study of the Daft and Samson, (2014), if the business takes off than the organization is required to share a part of the total earnings with the equity holders. Further, Davis and Davis, (2011) has depicted into his study that with the time, the expectations of the equity holder enhances and thus it becomes a pressure over the business to pay more dividends to the equity holders to retain them and attract more investors towards the business.

Pros and cons of current capital structure

Thus through this study, it has been found that the debt and equity management is a crucial and complicated task for an organization as at this stage, it is contradictory for the managers and the business to identify the best level of the debt and equity and set them in the business to make more profits and reduce the level of the risk in the business.

Through the study over the financial statement of this company, it has been found that this company uses the accrual method and rather than waiting for the cash collection of a transaction, it records the transaction when it has taken place. According to the given case, it has been found that there are various accounts receivable as well as accounts payable which have taken place but still the cash payment has not been done for that.

Through the analysis, it has been found that this company uses the matching concept to manage and record the transaction into the books of the company. Matching concept express that the accounting and recording of the financial information must not been done according to the cash basis rather than it must be done according to the accrual basis to manage the position of the company and to reach over a good conclusion (Moles, Parrino and Kidwekk, 2011).

According to the study of the Davis and Davis (2011), matching principle is the best principle to record the financial transaction into the books of an organization. Crosson and Needles, (2013) depict into his study that the matching principle makes it easy for the organization, managers as well as the users of the accounting report to analyze the position of the company. Regardless, in cash basis accounting recording, it becomes though for the organization to evaluate the position of the company.

Through the study over the financial reports in the given case, it has been found that the entire transaction has been recorded into the income statement by the company to manage and evaluate the better position of the company and further, for making it clear about the transaction, the amount which has not been received into the cash or which has not been paid by the company has been shown into the balance sheet of the company.

According to the study of the Horngren, (2009), the accounting concept which has been used by the company could be evaluated and analyzed through the financial reports of the company. Such as, in the given reports, the total revenues has been given Euro 74,686 and at the same time, it has been mentioned into the balance sheet of the company that Euro 21,558 has still not been received by the company and it would most probably received by the company in the next month.

Advantages and disadvantages of capital structure in context of debt and equity

The study of Ward (2012) depict that the matching accounting principle make it more easy for the comapny to achieve the targets as the real position of the company could easily be achieved and a better result could be got. Further, Damodaran (2011) depict that for managing the position and the extra amount which has not been received but which has been shown into the books could be written off through the books by making the adjusting entries.

Further, a literature review study has been done over the advantages and disadvantages of matching accounting principle of the company in context of accrual methods. Through this report, it has been found that currently, this company is using the matching accounting principle to record the financial information of the business and maintain the position and performance of the company. Horngren (2009) depict that matching concept is based over the concept that recording must be done of every transaction at the time they take place and through the given case, this company uses the accrual method and rather than waiting for the cash collection of a transaction, it records the transaction when it has taken place.

According to the study of the Davies and Crawford, (2011), matching principle is the best principle to record the financial transaction into the books of an organization. Garrison, Noreen, Brewer and McGowan, (2010) depict into his study that the matching principle makes it easy for the organization, managers as well as the users of the accounting report to analyze the position of the company. Regardless, in cash basis accounting recording, it becomes though for the organization to evaluate the position of the company (Hoque, 2002).

According to the study of Bromwich and Bhimani, (2005), it has been analyzed that the matching concept works on the point that the correlation must be there among all the transaction and all the transaction must be matched. This becomes the matching concept more reliable and further, this study depict that the users could evaluate the entire given information in their own way and make a better decision about the investment into the company (Damodaran, 2011).

Further, through the study of the various analyst, it has been found that there are few drawbacks of the matching concept which makes this principle bit doubtful and due to which, some financial managers do not like to choose this principle while making the financial reports (Needles, Powers and Crosson, 2013). According to Bierman, (2010), inflation rate makes an impact over the prices and thus a distortion sneaks into the uses of the matching principle. Deegan, (2013) depict that matching concept depict that entire transactions must be recorded whether the cash has been collected or not and for matching theses values, adjusting entries must be done but after a periods of time, the worth of the amount altered and thus it makes an impact over the performance and the position of the company.

Matching concept analysis

Thus through this study, it has been found that the matching principle is an beneficial principle which helps the manager of the organization to maintain all the activities into the accounting books as well as it also helps the company and the stakeholders of the company to evaluate the right position of the company. This concept also evaluates the right position of the profit.  

Conclusion:

To conclude, debt and equity management is a crucial and complicated task for an organization as at this stage, it is contradictory for the managers and the business to identify the best level of the debt and equity and set them in the business to make more profits and reduce the level of the risk in the business. As well as, matching principle helps the manager of an organization to maintain entire operations into the books so that it could help the stakeholder of the company to evaluate the right position of the company.

References:

Bierman, H., 2010. An introduction to accounting and managerial finance: a merger of equals. World Scientific.

Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima publishing.

Crosson, S. V. and Needles, B. E., 2013, Managerial Accounting, 10thedn.,Cengage Learning, USA.

Crowther, D., 2007, Managing Finance, Routledge, Burlington.

Daft, R. L.and Samson, D., 2014, Fundamentals of management: Asia Pacific edition PDF, 5thedn.,Cengage Learning, Australia.

Damodaran, A, 2011, Applied corporate finance,3rd edition, John Wiley and sons, USA

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Davis, C. E.and Davis, E., 2011, Managerial accounting, John Wiley & Sons, USA.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.

Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control. Cengage Learning.

Hoque, Z., 2002. Strategic management accounting. Spiro Press.

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Lumby,S and Jones,C,.2007, Corporate finance theory and practice, 7th edition, Thomson, London

Moles, P. Parrino, R and Kidwekk, D,.2011, Corporate finance, European edition, John Wiley andsons, United Kingdom

Needles, B., Powers, M. and Crosson, S., 2013. Financial and managerial accounting. Nelson Education.

Ward, K., 2012. Strategic management accounting. Routledge.

Weaver, S.C., Weston, J.F. and Weaver, S., 2001. Finance and accounting for nonfinancial managers. New York: McGraw-Hill.

Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259

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