Dr. Zulfiqar Hasan
Financing is an important activities of finance. This topic discusses the process of making decision to choose debt financing or equity financing by a business organization. Topic also covers the annual report and its different elements.
A report issued annually by a corporation to its stockholders is called annual report. An annual report is a brief profile on the health of a company.
Items in An Annual Report:
01. Verbal Section
a. A letter/Speech from the chairman on the high points of business in the past year with predictions for the next year.
b. Details Report/Company's philosophy: a section that describes how the company does business.
c. An auditors' letter/Certificate confirming that all of the information provided in the report is accurate and has been certified by independent accountants.
02. Data Section: Financial information:
Income Statement: A company's income statement is a record of its earnings or losses for a given period
Balance sheet: provides a snapshot of a firm’s financial position at one point in time.
Statement of retained earnings: shows how much of the firm’s earnings were retained, rather than paid out as dividends.
Statement of cash flows: reports the impact of a firm’s activities on cash flows over a given period of time.
Process of Financing
Financing means collection of capital for the business organization. Fundamental ways of financing are two:
01. Debt Financing and
02. Equity Financing
Debt financing means borrowing money that is to be repaid over a period of time, usually with interest.
Debt financing can be either short-term (full repayment due in less than one year) or long-term (repayment due over more than one year.
A type of Financing through the selling of a debt instrument is called Debt Financing
Equity financing describes an exchange of money for a share of business ownership. This form of financing allows you to obtain funds without incurring debt; in other words, without having to repay a specific amount of money at any particular time.
The major disadvantage to equity financing is the dilution of your ownership interests and the possible loss of control that may accompany a sharing of ownership with additional investors.
Raising money for company activities by selling common or preferred stock to individual or institutional investors.