There are two basic ways of financing for a business: Debt financing and equity financing. Debt financing is defined as 'borrowing money that is to be repaid over a period of time, usually with interest" (Financing Basics, 1). The lender does not gain any ownership in the business that is borrowing. Equity financing is described as "an exchange of money for a share of business ownership" (Financing Basics, 1). This form of financing allows the business to obtain funds without having to repay a specific amount of money at any particular time. There are also a few different instruments that could be defined as either debt or equity. One such instrument is stock options that an employee can exercise after so many years with the company. Either using the debt or equity method, or a combination of the two methods can be used to account for stock options or other instruments with the similar characteristics.
There are pros and cons to deciding to use either of these methods. First I will discuss the pros of using the debt or equity methods. One pro of using the debt method is that it "does not entail 'selling' their equity, but instead works by 'borrowing' against it" (Financing Using, 1). So the company could account for future stock options by assuming that employees will cash the option in, and, in the books, it will look as if they simply have a liability. Another pro with the equity method is that the company is receiving money, and it does not have to pay the money back. In the end the investing company will normally make money on the investment, but it will come in the form of dividends and/or selling the stock back.
There are also a few cons in accounting for these instruments are either debt of equity. "Excessive debt financing may impair your (the company's) credit rating and your ability to raise more money in the future (Financing Basics, 1). If a company has too much debt, it could be considered too risky and unsafe for a creditor to lend money. Also with excessive debt, a business could have problems with business downturns, credit shortages, or interest rate increases. "Conversely, too much equity financing can indicate that you are not making the most productive use of your capital; the capital is not being used advantageously as leverage for obtaining cash" (Financing Basics, 1). A low amount of equity shows that the owne...
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This would be a very efficient way of accounting for the stock options. There will not be many changes in amounts when the employee has the option. This would be the entry for five years, and then the employee will have their option. Below is the journal entries for both decisions:
Employee takes the cash
Common Shares 2000
Accounts Payable 500
Cash 2500
Employee takes the stock
Accounts Payable 500
Common Shares 500
Again, both methods clear out the accounts payable. Also the employee is receiving the cash or common shares in the right amount.
Debt and equity methods are important decisions when deciding what to do with an instrument like stock options. All three methods, debt, equity, or a combination, are helpful in keeping the books correct and fair until the employee exercises their option. The best method in my mind is the combination of methods. It best shows were the money will go on average before the option is decided on. However the other two methods are also important considering the pros and cons of each decision. No clear answer, however, will ever be known as long as accounting exists.
According to the ASC 718-20-35-3: If there are some modification to share options transactions with employees, the total compensation cost should include two parts: 1. The compensation costs before modifications. 2. The incremental costs because of modifications. In
Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead
Figurative language is when you use words or a phrase that do not have a regular, everyday literal meaning and is used by almost all authors in their writings. Authors use figurative language to make their works more interesting and more dramatic. Examples of figurative language include metaphors, similes, personification and hyperbole. Helena Maria Viramontes uses figurative language all throughout her novel Under the Feet of Jesus. In the opening paragraphs of the novel Viramontes uses imagery to set the scene for her readers, she really makes us feel as if we are riding along in the station wagon with Estrella and her 6 other family members. In this scene she describes to her readers reflects on the hardships that this family, and people
There is a memo outlining the accounting treatment of the stock options that has been sent to the SVP of Finance, copying the CFO, external auditor, and the Tax Manager. This memo summarizes the accounting requirements and disclosure requirements for the Company’s stock option plan adopted in Q3, 2009. It also identifies the model used for valuation of the options and where the parameters are derived from.
What is figurative language? Figurative language is saying something other than what is meant for effect. For example a metaphor, simile, symbol, hyperbole or personification. In the sermon called Sinners in the Hand of an Angry God and the Iroquois Constitution there is a lot of figurative language.
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The consistent high spending of capital equipment is the first reason why one would recommend reducing the debt to equity ratio. A company with higher levels of debt is less flexible in being able to adjust to new market demands and conditions that require the company to make new products or respond to competition. Looking at the pecking order of financing, issuing new shares to fund capital investing is the last resort and a company that has high levels of debt, must move to the equity side to avoid the risk of bankruptcy. Defaulting on loans occur when increased costs or bad economic conditions lead the firm to have lower net income than the payments on loans. The risk of defaulting on loans and the direct and indirect cost related to defaulting lead firms to prefer lower levels of debt. The financial distress caused by additional leverage can lead to lower cash flows available to all investors, lower than if the firm was financed by equity only. Additionally, the high debt ratio that Du Pont incurred also led to them dropping from a AAA bond rating to a AA bond Rating. Although the likelihood of not being able to acquire loans would be minimal, there are increased interest costs with having a lower bond rating. The lower bond rating signals to investors that the firm is more likely to default than if it had a higher (AAA) bond rating.
In “Sinners in the Hands of an Angry God," by Jonathan Edwards, he utilizes similes, imagery, and repetitions to persuade his audience. The main purpose of his sermon reveals that he tries to make the experience of the devil and hell so real and frightening that people in the audience would change their lives. However, when he apply these types of rhetorical devices, he reveals a better understanding of what he says during his sermon.
This author can remember when his former company offered profit sharing for achieving production and it was motivation to do better job. Smart companies recognize that motivated employees are productive employees, which inspires them to create tactics to keep their workforces gratified and inspired. Therefore, it is wise to offer Incentive plans for performance. With that said there are several incentive plans that can be utilized by companies such as “team and group incentives”, “piecework plans”, “stock options”, “non-tangible and recognition based awards”, “employee stock ownership” ,“merit pay”, and “profit sharing plans” (Dessler, 2011).
Every person in that worldly population can relate to the use of metaphors in everyday speech, no matter what their language. It is not uncommon for someone to encounter metaphors multiple times in one day, though many times they go unnoticed even if they are “right under our nose.” These metaphorical phrases are not meant to be taken literally. For example, when someone tells you to “bite the bullet,” they are not requesting that you actually put a bullet in between your teeth. In fact, they are asking you to bravely face up to something unpleasant just as many soldiers were asked to clench a bullet in between their teeth (in lieu of anesthetics) to transfer the pain of the amputation or surgery (something very unpleasant indeed) that they were about to undergo (“Expressions and Sayings”).
There are a number of options to choose from, Employee Stock Ownership Plan (ESOP), Family limited
Equity-settled share-based payment transactions are those, in which the entity receives goods or services as consideration for the equity instruments of the entity. The goods or services received in an equity-settled share-based payment transactions and the corresponding increase in equity must be measured at the fair value of the goods or services, unless that the fair value cannot be estimated reliably. An Equity settled transactions with employees and directors would be normally expensed on the based of their fair value at the grant date. It is normally considered that the fair value of services received in the equity settled share based payment transactions with employees, cannot be measured reliably. Thus, the fair value of the services received from employees is measured by reference to the equity instruments granted, at grant date.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.