Chapter 03 - Analyzing Financing Activities
3-1
Chapter 3
Analyzing Financing Activities
REVIEW
Business
activities
are
financed
through
either
liabilities
or
equity.
Liabilities
are
obligations
requiring
payment
of
money,
rendering
of
future
services,
or
dispensing
of
specific
assets.
They
are
claims
against
a
company's
present
and
future
assets
and
resources.
Such
claims
are
usually
senior
to
holders
of
equity
securities.
Liabilities
include
current
obligations,
long-term
debt,
capital
leases,
and
deferred
credits.
This
chapter
also
considers
securities
straddling
the
line
separating
liabilities
from
equity.
Equity refers to claims of owners to the net assets of a company. While claims of owners
are junior to creditors, they are residual claims to all assets once claims of creditors are
satisfied. Equity investors are exposed to the maximum risk associated with a business,
but are entitled to all residual rewards associated with it. Our analysis must recognize the
claims
of
both
creditors
and
equity
investors,
and
their
relationship,
when
analyzing
financing activities. This chapter describes business financing and how this is reported
to
external
users.
We
describe
two
major
sources
of
financing
鈥?/p>
credit
and
equity
鈥?/p>
and
the accounting underlying reports of these activities. We also consider off-balance-sheet
financing, including Special Purpose Entities (SPEs), the relevance of book values, and
liabilities
"at
the
edge"
of
equity.
Techniques
of
analysis
exploiting
our
accounting
knowledge are described.