T3 | Introduction | A basic interpretation of the Statement of Comprehensive Income and the Statement of Financial Position | Own vs. borrowed capital Flashcards
What is Triple Reporting?
People
Planet
Profit
Why do we use Triple Reporting?
Net profit should not be the only focus of the business, but rather it should focus on Triple reporting.
To understand the financial performance (Past, Present and Future), it is important to understand the two basic financial statements of a business, namely:
The Statement of Comprehensive Income
The Statement of Financial Position
Equity/Own Capital
Made by the owner of the business.
Borrowed Capital
Aka foreign capital.
In a Sole Trader, how many owners are there?
One owner and he / she will contribute all own capital.
What if someone else gives capital to the business, including the owner?
It will either be in the form of a loan (and therefore borrowed capital) or if the second person is a co-owner of the business, it will no longer be a sole trader, but a Partnership.
What is the minimum and maximum amount of owner capital?
Minimum: 2
Maximum: 20
Each will get pain per %.
What is every person who owns shares in the business is an owner of the business entitled to?
To receive dividends (profits of the business are divided between all the shareholders in proportion to the number of shares held by the shareholder).
Why does the money that the business borrows create a burden (obligation) for the business?
When borrowing money, it is not only the borrowed amount that needs to be repaid but also interest.
What is Borrowed capital is also known as?
Foreign capital, because it does not come from the owner(s).
What is the capital market?
When capital is borrowed and repaid over the long term (longer than one year), it is said that it is borrowed on the capital market.
What is the credit market?
If it has to be repaid over the short term (one year or less).
Factors to consider when deciding between equity and borrowed capital.
- The financing period and the nature of the assets sold.
- Urgency
- Control
- Solvency
The financing period and the nature of the assets sold:
If long-term financing is required, it may be better to use equity.
Long-term assets may need to be financed using equity, but if there is too little equity, it is not a problem to finance long-term assets with capital borrowed over the same period.
If an asset has an indefinite life, e.g. a building, it is acceptable to take out a mortgage loan over 20 or 25 years and repay the loan over a very long term.
However, if a machine has a lifespan of 3 years, the repayment period of the borrowed capital should not exceed 3 years. If the loan has to be repaid over a period of more than 3 years, the original loan will not even be repaid and a new loan will have to be taken out to replace the machine.
