Course Profile
Principles of Financial A
Unit
2: Financing and Business Structures
Time: 22 hours
Activity 2.1 | Activity 2.2 | Activity
2.3
Unit
Description
This unit
concentrates on the financing aspects of a business. Students explore and
analyse equity and debt financing and investigate the corporation in detail.
Students compare alternative forms of financing, demonstrate an understanding
of partnership financing, demonstrate an understanding of corporation
financing, and demonstrate an understanding of a
Unit Synopsis Chart
|
Activity/Time |
Learning Expectations |
Assessment Categories |
Focus |
|
2.1 |
FIV.01,
FIV.02, FIV.03, FI1.01, FI2.02, FI3.01, FI3.02, FI3.03 |
Knowledge/
Understanding Thinking/Inquiry |
1. Notes payable as a source for short term
financing 2. Situations in which debt financing is
preferable to equity financing 3. Advantages of using long-term borrowing,
e.g., bonds, as a method of financing 4. Alternate sources of funding |
|
2.2 |
ACV.01,
FIV.01, AC1.02, FI1.02, FI1.03 |
Knowledge/
Understanding Thinking/Inquiry |
1. Partnership a 2. Expanded partnership a 3. Admission, withdrawal, and liquidation 4. Case study |
|
2.3 |
FIV.02,
APV.01, FI2.01, AP1.02, FI2.03, FI2.04, FI2.05, FI2.06, FI2.07 |
Knowledge/
Understanding Thinking/Inquiry |
1. The financial structure of a corporate
organization 2. Capital stock and dividends 3. Public vs. private – IPO’s 4. Debt vs. equity |
Activity 2.1: Notes Payable and
Forms of Financing
Time: 7 hours
Description
Activity
2.1.1 introduces
students to the fundamental characteristics of a firm’s financing methods. They
explore regular and discounted notes payable as a form of short-term loans. The
teacher demonstrates model journal entries for the issuing and retiring of
notes and the appropriate interest calculations. A worksheet gives students the
opportunity to practise the skills and competencies needed to process this
method of financing.
Activity
2.1.2 deals with
the exploration of additional sources of long-term funding. Students learn
about the characteristics, advantages, and disadvantages of bond financing and
compare it to equity financing. Students investigate the effects of
credit-rating and regulatory agencies on how businesses raise capital. They
journalize the necessary entries and end with a practice exercise that explores
the feasibility of bond financing under different interest rate scenarios.
In Activity
2.1.3, students research additional sources of funding available to a firm,
such as venture capital, Federal Business Development Bank loans, government
grants, mortgages, and leasing. The results of their research are presented to
the class in the form of oral reports or electronic presentations.
Strand(s)
& Learning Expectations
Overall
Expectations
FIV.01 -
demonstrate an understanding of partnership financing;
FIV.02 -
demonstrate and understanding of corporation financing;
FIV.03 -
compare alternative forms of financing.
Specific
Expectations
FI1.01 -
explain the use of notes payable as a source of funds for short-term financing;
FI2.02 -
explain the use of notes payable as a source of funds for short term financing;
FI3.01 -
describe situations in which debt financing is preferable to equity financing;
FI3.02 -
explain the advantages of using long-term borrowing (e.g., bonds) as a method
of financing;
FI3.03 -
describe alternative sources of funding available to business (e.g., venture
capital, federal business development bank loans, government grants).
Prior Knowledge &
Skills
The
prerequisite course, BAF3M, familiarity with percent calculations, Internet
research skills
Planning Notes
The teacher:
·
prepares
notes/handouts;
·
photocopies
instructions and worksheets for all tasks in Activity 2.1;
·
selects
appropriate case studies for available texts;
·
consults
background resources;
·
arranges
a
·
prepares
an oral presentation rubric and oral presentation checklist;
·
prepares
assessment tools for group presentation and peer assessment (see BTX4C Public);
·
prepares
a summative test;
·
obtain
school and board policies related to use of the Internet.
Teaching/Learning
Strategies
Activity 2.1.1
The teacher:
·
presents
school and board policies related to using the Internet;
·
introduces
the topic of financing, fills in the classification table in Appendix 2.1.1
with the help of the class, and discusses the categories;
·
introduces
the topic of short-term notes payable;
·
using
handout notes, discusses the material in the notes (See Appendix 2.1.2);
·
assigns
practice exercise for students to apply the material (See Appendix 2.1.3).
Students:
·
take
notes on the topics of financing and short-term notes and participate in the
discussion of financial instrument classifications and note payable journal
entries;
·
practise
notes payable journal entries using Appendix 2.1.3.
Activity 2.1.2
The teacher:
·
brainstorms
with the class about Advantages and Disadvantages of Debt Financing and
Advantages and Disadvantages of Equity Financing;
·
summarizes
the brainstorming results with the class and develops notes on the topic
(See Appendix 2.1.4);
·
takes
up answer to Challenge (See Appendix 2.1.4.);
·
introduces
the topic of bond financing using overhead or board notes (See Appendix 2.1.5);
·
assigns
worksheet (Appendix 2.1.6);
·
collects,
evaluates, returns, and discusses answers to worksheet (Appendix 2.1.6).
Students:
·
brainstorm
the topic and develop appropriate notes with teacher assistance;
·
answer
and discuss Challenge question (Appendix 2.1.4);
·
take
notes on bond financing and participate in discussion of bond characteristics
and bond related journal entries (Appendix 2.1.5);
·
complete,
hand in, and discuss answers for worksheet (Appendix 2.1.6).
Activity 2.1.3 – Alternative sources of funding available to business
The teacher:
·
divides
the class into five teams;
·
assigns
the research task and explains parameters (Appendix 2.1.7);
·
provides
opportunity for research and presentation;
·
may
have to arrange for a computer station and broadcasting tool if electronic
presentations are made;
·
allows
for team or self-evaluation and feedback (See BTX4C Public Presentation Group
Work Assessment);
·
evaluates
team presentations and gives feedback;
·
prepares
and returns summary test on Activity 2.1.
Students:
·
decide
on topic and division of group tasks (Appendix 2.1.7);
·
research
topic;
·
present
findings to class;
·
hand
in peer assessment to teacher;
·
complete
summary test on Activity 2.1. The test allows the student to assess the
information they will need for Activity 2.2. If it is used as a diagnostic test
for Activity 2.2, a mark is not assigned.
Assessment & Evaluation of Student Achievement
Formative
Knowledge/Understanding,
Application – Completion of Notes Payable Worksheet (Appendix 2.1.3)
Thinking/Inquiry
– Bonds As A Method of Financing Worksheet (Appendix 2.1.6)
Communication,
Knowledge/Understanding (and peer assessment of group process) Presentation
Group Work Assessment, BTX4C Public, Oral Presentation Checklist found
in BBB4M Public at www.curriculum.org for presentation on Alternative Sources
of Financing (Appendix 2.1.7). Build in time for revisions for formative self-,
peer assessment and revisions before the summative evaluation by the teacher.
Summative
Knowledge/Understanding,
Thinking/Inquiry, Communication, Application – Oral Presentation Checklist
found in BBB4E Public at www.curriculum.org of presentation on Alternative
Sources of Financing (Appendix 2.1.7)
Knowledge/Understanding,
Application – Summary Test Activity 2.1.
Acc ommodations
The following are ways
in which the activity can meet students’ individual needs:
·
use
peer tutoring to assist students who require more instruction;
·
assign
tutorial CD-ROM (see Resources) to students for review;
·
provide
extension activities for students requiring enrichment (see Resources).
The Ontario Curriculum Unit Planner provides a
Resources
Eckart
H., H. Freedman, and J. Toste. Principles of Financial A
2002. ISBN 1-55232-071-5 (Textbook) 1-55232-077-4 (Workbook)
Eckart
H., H. Freedman, J. Toste, and S. Wambolt. A
ISBN 1-552332-057-X (Textbook) 1-55232-059-6 (Workbook) Simply A
Horngren
C., W. Harrison, and W.M. Lemon. A
Larson,
K., W. Pyle, M. Zin, et al. Fundamental A
ISBN 0-256-03601-2. See pp. 496-501 for notes payable; pp. 703-723 for bond
background information.
Meigs,
R., W. Meigs, and W. Lam. A
pp. 709-720 for bond background information.
Possible websites for Research Assignment
|
Federal
Business Development Bank |
Government
Grants |
|
Leasing
|
Mortgages
|
|
Venture
Capital |
|
Appendix 2.1.1
Financing Information Sheet
Financing: Acquiring money for business
purposes
|
Purposes of Financing ·
To finance operations ·
To acquire assets |
Nature of Financing ·
Short-term ·
Long-term |
|
Types
of Financing ·
Debt ·
Equity (Proprietor, Partnership, Corporation) |
Some
Sources of Financing ·
Bank Loans ·
A ·
Owner Investment ·
Notes Payable ·
Bonds ·
Private Loans ·
Mortgages |
Sort the
types and sources of financing items listed above into the table below as well
as you can.
|
Short-term
Debt Financing |
Long-term
Debt Financing |
Equity
Financing |
|
(To
conserve space the teacher is asked to add the necessary rows.) |
|
|
Appendix 2.1.2
Notes Payable Information
Sheet
A note
payable is a promise to pay a certain amount of money by a specified date,
including any charges for the use of that money. Notes can be short term, if
they are to be paid within one year, or long term, if the repayment period
extends over more than one year. In most cases, firms create notes payable when
they borrow funds from a bank. It is, however, possible for a firm to issue a
note to guarantee an a
The
journal entry for an a
|
DATE |
PARTICULARS |
DEBIT |
CREDIT |
|
|
May |
1 |
A/P –
Smith Ltd. |
2000 |
|
|
|
|
Notes Payable |
|
2000 |
|
|
|
Issued
an 8% note for 3 months to guarantee debt to Smith Ltd. |
|
|
|
|
|
|
|
|
|
July |
31 |
Notes
Payable |
2000 |
|
|
|
|
Interest
expense |
40 |
|
|
|
|
Bank |
|
2040 |
|
|
|
Paid
3-month 8% note |
|
|
The entry
on May 1 records the conversion of the a
Interest
expense calculation: $2000
× .08 = $160 for a full year. $160 ÷ 12 = $13.33 per month. 13.33 × 3 = $40 for
3 months. In short: (2000 × .08) ÷ 12 × 3 = 40.
The entry
on July 31 shows the payment of the note including the promised interest.
Appendix 2.1.2 (Continued)
Short-Term Financing From
a Bank
A firm
might decide to obtain short-term funds from a bank to finance operations or
the purchase of additional fixed assets. In this case, the bank has two options
to collect the interest charges on the loan:
A. Interest
charges are to be paid at the end of the lending period. In the example below,
the bank collects the total interest charge on the day the note is due.
|
Date of Loan |
Loan Amount |
Loan Period |
Interest Charge |
|
April 1, 20-- |
$12 000 |
6 months |
11% |
Here are
the corresponding journal entries when the note is issued and when it is paid
off.
|
DATE |
PARTICULARS |
DEBIT |
CREDIT |
|
|
April |
1 |
Bank |
12 000 |
|
|
|
|
Notes Payable |
|
12 000 |
|
|
|
Issued
an 11% note for 6 months to bank to finance new truck |
|
|
|
|
|
|
|
|
|
Sept. |
30 |
Notes Payable |
12 000 |
|
|
|
|
Interest
Expense |
660 |
|
|
|
|
Bank |
|
12 660 |
|
|
|
Paid
6-month, 11% note |
|
|
B. The interest on the loan is calculated at the
beginning and the bank deducts this amount from the original loan figure. These
interest charges are referred to as a bank discount. In the example below, the
bank collects the total interest charged on the day the note is made out.
|
Issue Date of Note |
Note Amount |
Note Period |
Interest Charge per annum* |
|
April 1, 20-- |
$12 000 |
6 months |
11% |
*per
annum = per year
Here are
the corresponding journal entries when the note is issued and when it is paid
off.
|
DATE |
PARTICULARS |
DEBIT |
CREDIT |
|
|
April |
1 |
Bank |
11 340 |
|
|
|
|
Interest
expense |
660 |
|
|
|
|
Notes Payable |
|
12 000 |
|
|
|
Issued
an 11% discounted note for 6 months to bank to finance new truck |
|
|
|
|
|
|
|
|
|
Sept. |
30 |
Notes Payable |
11 340 |
|
|
|
|
Bank |
|
11 340 |
|
|
|
Paid
6-month, 11% discounted note |
|
|
Appendix 2.1.3
Notes Payable Worksheet
Journalize
the following short-term note transactions. Assume that all notes were paid on
time and in full.
Note: Students should journalize these
transactions using the days in the note period.
|
Issue Date of Note |
Type of Note |
Note Amount |
Note Period |
Interest Charge per annum* |
|
February
12 |
Regular |
$26 300 |
8
months |
7% |
|
May 23 |
Discounted |
$4800 |
3
months |
6% |
|
June 15 |
Regular |
$6200 |
1 month |
9% |
|
Sept 19 |
Discounted |
$18 000 |
4
months |
12% |
*per
annum = per year
|
DATE |
PARTICULARS |
DEBIT |
CREDIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The teacher will need to add rows or supply the student with general journal paper.
Appendix 2.1.4
Debt vs. Equity Financing
|
DEBT FINANCING |
|
|
Advantages |
Disadvantages |
|
Raises
capital |
Increases
liability |
|
No
change in ownership/management claims |
Payable
when due regardless of whether there is enough profit or cash flow |
|
No
dilution of profit sharing |
May be
too expensive if interest rate is high |
|
Tax
advantage: interest is deductible from Gross Income as an expense |
|
|
|
|
|
|
|
|
EQUITY FINANCING |
|
|
Advantages |
Disadvantages |
|
Raises
capital |
Dilutes
profit sharing |
|
No firm
commitment to repay principal |
May
increase voices in management |
|
No
commitment to pay profits if there are none |
Forgoes
tax advantages |
|
No
third party claim on assets of the firm |
|
The
following illustration shows the circumstances under which Debt or Equity
Financing is more advantageous for the individual investors. All scenarios are
based on the assumption that profits are shared equally among owners. There are
initially five owners in each case. The time-period involved is one year.
|
|
Scenario 1 Borrow $50 000 |
Scenario 2 Two new investors contribute |
Scenario 3 Borrow $50 000 |
|
Net
Income before interest expense and income tax |
$20 000 |
$20 000 |
$20 000 |
|
Interest
expense |
5000 |
0 |
10 000 |
|
Net
Income before income tax |
15 000 |
20 000 |
10 000 |
|
Income
tax (50%) |
7500 |
10 000 |
5000 |
|
Net
Income |
7500 |
10 000 |
5000 |
|
Earnings
per Investor |
$1500 |
$1429* |
$1000 |
|
|
|
|
|
* Rounded
to nearest full $. (10 000/7 investors)
Challenge:
Calculate the break-even interest rate.
Appendix 2.1.5
Bonds as a Method of
Financing
Bond: long-term note that promises repayment of a specified amount borrowed
on a certain date (maturity date) and
regular periodic interest payments to bondholders in the meantime
Characteristics
·
Long-term
debt
·
Loans
obtained from a large number of lenders rather than one financial institution,
e.g., a bank.
·
A
single lender can provide different forms of financing, e.g., loan, bond.
·
Each
bond carries face or par value, e.g., the amount borrowed, printed on the
certificate
(usually $1000).
·
The
maturity date and the interest rate are clearly specified.
·
The
interest is calculated on the face value of the bond.
·
The
frequency of interest payments is clearly specified (usually semi-annually).
·
Bond
holders are a company’s creditors and have no ownership claims to profits.
·
Bond
interest must be paid before profits can be paid out. Bond interest is an
expense.
·
In
case a firm declares bankruptcy, bondholders are entitled to their claims
before owners.
Journal
entries for initial bond issue and half-yearly interest payment:
|
DATE |
PARTICULARS |
P.R. |
DEBIT |
CREDIT |
|
|
Mar. |
1 |
Bank |
|
800 000 |
|
|
|
|
Bonds Payable |
|
|
800 000 |
|
|
|
Issued
8% 15-year bonds |
|
|
|
|
|
|
|
|
|
|
|
Aug. |
31 |
Bond
interest expense |
|
32 000 |
|
|
|
|
Bank |
|
|
32 000 |
|
|
|
Paid
6-month interest on 8% bonds |
|
|
|
Journal
entries for the maturing bonds:
|
DATE |
PARTICULARS |
P.R. |
DEBIT |
CREDIT |
|
|
Mar. |
1 |
Bonds
Payable |
|
80 000 |
|
|
|
|
Bank |
|
|
80 000 |
|
|
|
Retired
8% 15-year bonds |
|
|
|
|
|
|
|
|
|
|
Appendix 2.1.6
Bonds as a Method of Financing Worksheet
1. Based on your notes on debt versus equity
financing, set up a table that shows the advantages and disadvantages of bonds
as a means of financing.
|
Bond Financing |
|
|
Advantages |
Disadvantages |
|
(teacher
add rows) |
|
2. Based on your notes, create original
scenarios that demonstrate under what circumstances financing using bonds can
be more advantageous than attracting new investors. State your assumptions
clearly.
|
|
Scenario 1: |
Scenario 2: |
Scenario 3: |
|
(teacher
add 12 rows) |
|
|
|
3. Show the journal entries for an initial bond
sale of $100 000, 12%, 20-year bonds and their semi-annual interest payment.
The sale o
|
DATE |
PARTICULARS |
P.R. |
DEBIT |
CREDIT |
|
|
Mar. |
1 |
Bank |
|
|
|
|
|
|
Bonds Payable |
|
|
|
|
|
|
Issued
8% 15-year bonds |
|
|
|
|
|
|
|
|
|
|
|
Aug. |
31 |
Bond
interest expense |
|
|
|
|
|
|
Bank |
|
|
|
|
|
|
Paid
6-month interest on 8% bonds |
|
|
|
Appendix 2.1.7
Alternative Sources of Funding Available to
Business
Research
Assignment
Task
Description
As a
group, choose one of the following topics and prepare an oral or an electronic
presentation for the class.
A. Venture Capital
B. Government Grants
C. Federal Business Development Bank Loans
D. Mortgages
E. Leasing
Your
report should include the following:
1. A definition/description of the type of
funding
2. Characteristics and mechanics of the funding
vehicle
3. Advantages/disadvantages of the funding
vehicle
4. Where the funding can be obtained
5. Sample journal entries for the obtaining of
the funds, the service/interest charges, and the retirement of the funds
6. A hardcopy fact sheet summarizing the above
information to be handed to the class at the end of the presentation
Divide
the six tasks among the members of your group. Try to get a group consensus.
There will be a chance for peer assessment at the end of the presentation. Make
sure you know the name of each group member and the task they have been
assigned. All members of the group are equally responsible for the material on
presentation day.
Activity
2.2: Partnerships
Time: 5 hours
Description
Activity
2.2 deals with the
financing of a partnership. Students review the creation of a partnership, the
admission of a new partner, and the dissolution of a partnership. They examine
various ways profits and losses are divided (percentage, capital contributions,
fixed drawings plus percentage). They prepare a statement of partners’ equity
and income statement showing the allocation of net income to the partners’
capital a
Strand(s) & Learning Expectations
Overall Expectations
ACV.01 -
demonstrate an understanding of a
FIV.01 -
demonstrate an understanding of partnership financing.
Specific Expectations
AC1.02 -
demonstrate an understanding of the roles of credit-rating and regulating
agencies (e.g., protecting consumers) and their effects on businesses (e.g., by
influencing the cost of borrowing);
FI1.02 -
explain the financial impact of the admission of a new partner and of the
retirement of a current partner;
FI1.03 -
assess the different methods of investing in a partnership (e.g., cash,
property, other assets).
Planning Notes
The teacher:
·
assembles
a review package on related partnership a
·
chooses
appropriate text material from the resources section;
·
develops
handouts on credit-rating and regulatory agencies and the effect these agencies
have on the cost of borrowing;
·
ensures
there are copies of the assessment tools Written Report Rubric, BTX4E
Public, Business Report Assessment Tool, BTX4C Public, and Oral
Presentation Checklist, BBB4M Public, for students.
Teaching/Learning
Strategies
Activity 2.2.1
The teacher:
·
reviews
the partnership agreement; the types of partnerships (General, Limited);
allocation of profits and losses to the partners’ equity a
Students:
·
complete
problems to review the entries and statements. Appendix 2.2.1 – Partnership
Review Problems.
Activity 2.2.2
The teacher:
· introduces the entries for the initial investment into a partnership that include the contribution of existing assets, and determining market value for these assets (independent appraisal, black book for cars, etc.).
·
introduces
three ways of sharing profits and losses: (a) Sharing based on a stated
percentage, (b) Sharing based on determined drawings and percentages, and (c)
Sharing based on determined drawings and interest;
·
assigns
problems for the students to finish. Appendix 2.2.2 – Initial Investments and
Partners’ Income Statement.
Students:
·
prepare
a statement of Partners’ allocations that might appear at the bottom of an
Income Statement.
Activity 2.2.3
The teacher:
·
teaches
the methods for admitting new partners into an existing business: Purchasing an
existing partner’s interest, and Investing in the Partnership (with or without a
bonus);
·
teaches
the entries for withdrawal from a partnership. The entries include: Withdrawal
at Book Value, Withdrawal at less than Book Value, and Withdrawal at more than
Book Value. The final part of this activity deals with the method for handling
the sale of non-cash assets and the entries for the Liquidation of a
Partnership.
Activity 2.2.4
The teacher:
·
assigns
the case study in Appendix 2.2.4a.
Students:
·
write
the report, using a word processor and spreadsheet, and the Business Report
Style in
Appendix 2.2.4b. Students self-assess using Written Report Rubric of Business
Report Assessment Tool, make revisions, and hand in a summative assessment to
the teacher.
Assessment
& Evaluation of Student Achievement
Formative
Application
Problems
Case
study and report (Appendix 2.2.4a and 2.2.4b, Written Report Rubric,
BTX4E Public, and Business Report Assessment Tool – BTX4C Public)
Summative
Test
Case
study and report, Business Report Assessment Tool – BTX4C Public Course
Profile
Resources
Meigs,
R., M. Bettner, and W. Lam. A
Warren, Carl,
et al. A
Nelson, 1999. ISBN 0-17-616638-6 (Vol 1), ISBN 0-17-616748-x (Vol 2).
Appendix 2.2.1
Partnership Review Problems
·
Lynda
Brown and Karen Green formed a partnership called B&G Computer Consulting.
Their capital contributions were $60 000 and $40 000 for Lynda and Karen
respectively. In their first year, their Net Income was $120 000. Calculate
their shares of net income under the following scenarios: (a) There is no
written partnership agreement.
(b) They agreed to divide profits a
·
The
trial balance for Young & Olde, Partners in Law, is given below. Prepare
the Balance sheet given a 60% (Young) 40% (Olde) split of profits. The Net
Income for the year was $180 000.
|
|
Young & Olde |
|
|
|
Dr |
Cr |
|
Bank |
$5080.20 |
|
|
A/R |
$17
491.00 |
|
|
Supplies |
$2635.00 |
|
|
Prepaid
Insurance |
$1800.00 |
|
|
Equipment |
$133
950.70 |
|
|
Automobiles |
$32
500.00 |
|
|
A/P |
|
$4802.50 |
|
GST
Payable |
|
$940.20 |
|
GST
Recoverable |
$516.80 |
|
|
Young,
Capital |
|
$44
418.12 |
|
Young,
Drawings |
$48
000.00 |
|
|
Olde,
Capital |
|
$35
812.90 |
|
Olde,
Drawings |
$24
000.00 |
|
|
Consulting
Fees |
|
$266
263.80 |
|
Automobile
Expense |
$32
756.04 |
|
|
General
Expense |
$1575.00 |
|
|
Rent
Expense |
$10
000.00 |
|
|
Telephone
Expense |
$1567.00 |
|
|
Wages
Expense |
$40
365.78 |
|
|
|
$352
237.52 |
$352
237.52 |
Appendix 2.2.2
Partnership Problems
Initial Investments and Partners’ Income
Statement
1. Webb and Boyer formed a partnership under the
name Paul and Pat’s Plumbing. Webb contributed $3000 cash, plumbing supplies of
$3700, and a van with a market value of $25 000, which originally cost him $42
000. Boyer contributed $12 000 cash and $6500 worth of tools, which had
originally cost $12 000. Journalize the opening entries for the partnership.
2. Dini Lough and Lynda High formed a
partnership under the name DiLyn’s Esthetics. The Partnership made a Net Income
of $120 000 for the year ended
·
Calculate
each partner’s share of the Net Income.
·
Complete
the Financial Statements below:
DiLyn’s Esthetics
Income Statement
For the year Ended
|
Revenues 0 |
|
|
Expenses
|
80
000.00 |
|
Net
Income |
$
120 000.00 |
Allocation of Net Income:
To Dini Lough $
To Lynda High $ $
DiLyn’s Esthetics
Statement of Partners’ Equity
For the Year Ended
|
|
Dini |
Lynda |
|
Capital
|
$ 35
000 |
$62 000 |
|
Allocations |
________ |
________ |
|
Subtotals |
|
|
|
Withdrawals |
$(
12 000) |
$
(15 000) |
|
Capital,
|
|
|
DiLyn’s Esthetics
Balance Sheet
|
Total
Assets |
|
$190
000 |
|
Partners’
Equity |
|
|
|
Dini
Lough, Capital |
$ |
|
|
Lynda
High, Capital |
$ |
_________ |
|
Total
Capital |
|
$ |
Appendix 2.2.4a
Partnership Case Study
You are
an a
Madd has
expressed displeasure with the way profits and losses are being divided. The
agreement does not take into consideration their capital balances, which have
changed because of investments and withdrawals by each of them. Miner has
withdrawn more from the partnership than Madd has over the five years. Their
current capital balances are:
Miner $220
000
Madd $315
000
Miner put
forward two proposals to attempt to solve the problem.
Proposal
1
a. The fixed drawings would be changed, so that Miner
and Madd get $35 000 and $50 000 respectively.
b. Interest of 6% would be allowed on the
capital balances at the beginning of each year. The fiscal year of the
partnership ends at December 31 of each year.
c. Any excess profits would be split equally.
Proposal
2
a. There would be no fixed drawings, and the
profits would be based solely on a percentage. Miner would get 40% and Madd
would get 60%.
Madd has
asked for your advice on the proposals. He has suggested that net income for
the next three years should be $90 000, $150 000 and $200 000.
Required
Analyse
the data in the case.
Prepare a
Business report, using the Business Report Style included with this Case Study.
Appendix 2.2.4b
Business Report Style
Parts of
the report
·
Cover
Page
·
Table
of Contents
·
Executive
Summary
·
Problem
Statement
·
Analysis
·
Decision
Criteria and Alternatives
·
Recommendations
·
Conclusion
Executive Summary
This is a
brief overview of the report as a whole, outlining the case background, the
problem, and, in broad terms, what you recommend. This is the last thing you
prepare, but it is the first thing in the report after the Table of Contents.
Problem Statement
This
outlines, in two or three sentences, what the problem is that has to be solved.
Analysis
This
includes all the data that has been analysed. This could be from a spreadsheet
file used to organize the data.
Recommendations
These are
what you recommend and why.
Conclusions
Conclude
with a brief summary statement.
Activity
2.3: The Financing of a Corporation
Time: 10 hours
Description
Activity
2.3 focuses on the
corporation. Students are introduced to corporate financing. The teacher
introduces the various classes of shares (common and preferred), dividends
(cash and stock) and the resultant effects on the equity section. Students
explore and evaluate: financing issues, such as IPOs (Initial Public Offering);
advantages and disadvantages of public share ownership from a company’s
perspective; various dividend distributions and their effect on shareholders’
equity; and implications and consequences of debt versus equity financing.
Students investigate these issues using the Internet, print resources, and/or
magazines, and books. Students compile and present the research in report form
using electronic tools. Financial report writing and electronic presentation is
something that students need to become familiar with and practise in this
course, and these issues are excellent topics for that purpose. (See:
Introduction to International Business, BBB4M Public, at www.curriculum.org for
an Oral Presentation Checklist, BTX4C Public for an Electronic
Presentation Rubric, Resources for a student tutorial on PowerPoint.)
Opportunities for self-, peer, and teacher assessment and evaluation are in
detail in the fully developed unit.
Strands(s) & Learning
Expectations
Strand(s): Financing
Overall
Expectations
FIV.02 -
demonstrate an understanding of corporation financing;
APV.01 -
explain a
Specific
Expectations
FI2.01 -
describe the financial structure of a corporate organization;
AP1.02 -
explain the purpose of a promissory note;
FI2.03 -
describe the features of preferred and common stocks;
FI2.04 -
describe an Initial Public Offering and its purpose;
FI2.05 -
explain the advantages and disadvantages of public share ownership for a
company;
FI2.06 -
demonstrate the impact of alternative forms of dividend distribution on
shareholders equity;
FI2.07 -
demonstrate an understanding of debt financing (e.g., loans, notes payable) and
equity financing (e.g., issuance of capital stock) from both the issuer’s and
the market’s point of view.
Prior Knowledge &
Skills
The
prerequisite course, BAF3M, Business Structures, Internet Research Skills,
Report Writing, Development and Use of Spreadsheets.
Planning Notes
The teacher:
·
assembles
material a review package;
·
books
appropriate computer facilities;
·
ensures
students know how to a
·
chooses
appropriate text material from the resources listed;
·
prepares
a summative test (see Resources);
·
ensures
students have copies of assessment tools: Oral Presentation Checklist,
Electronic Presentation Rubric, Written Report Rubric, Business Report
Assessment Tool at the start of the activities.
Teaching/Learning
Strategies
Activity 2.3.1
The teacher:
·
reviews
the corporation’s structure including what it is, how it is formed, the
functions of the board of directors and the corporate officers, and its
advantages and disadvantages;
·
describes
and compares the financial structure of the corporations using the “Liabilities
and Shareholders Equity” sections of the various corporate balance sheets;
·
distinguishes
between current and long-term liabilities (debt) and the various forms of
capital stock (equity);
·
explains
the purpose and the elements of a promissory note;
·
explains
the use of notes payable as a source of funds for short-term financing
including: (a) Explicit interest – interest expense and interest payable, (b)
Implicit interest – discount on note, and amortization of the discount.
Students:
·
complete
the review exercise, Appendix 2.3.1a – Corporation Review;
·
obtain
the balance sheet of a major public corporation (obtained through SEDAR™, see
Resources);
·
complete
notes payable problems.
Activity 2.3.2
The teacher:
·
introduces
the concepts of capital stock, including issuance and stock splitting
procedures, and dividends (cash and stock), including declaration and payment;
·
describes
the features of preferred and common stocks using the various corporate balance
sheets;
These
include:
|
Common ·
Rights regarding sharing profits and losses ·
Rights regarding voting for directors and in the selection of
professional managers ·
Rights regarding sharing in asset distribution upon liquidation of the
corporation ·
The preemptive right to subsequent share issuance ·
Non-voting and convertibility market value versus book value |
Preferred ·
Rights regarding dividend payment and a ·
Rights regarding voting and asset distribution ·
Various issues and types such as convertible, redeemable, retractable,
and participating ·
Market value versus book value |
·
explains
the process of dividend declaration and distribution for the various types of dividends
such as cash, property, and stock.
Students:
·
complete
the Capital Stock and Dividend a
·
complete
case studies that demonstrates the impact of alternative forms of dividend
distribution on shareholders equity;
·
analyses
a case study in business report style. The case study could take the form of an
electronic presentation;
·
peer
or self-assess their report, make the appropriate corrections, and hand it in
for summative teacher evaluation;
Activity 2.3.3
The teacher:
·
describes
both the concept and the process of an Initial Public Offering of shares and
its impact to the company and the shareholders;.
·
explains
the advantages and disadvantages for a company of public share ownership.
Students:
·
complete
the Initial Public Offering Activity. Appendix 2.3.3 – Initial Public Offering
Activity.
Activity 2.3.4
The teacher:
·
reviews
performance analysis and the use of a
·
explains
the financial analysis and decision-making concepts used by both the corporation
and the market as they relate to (a) Long-term liquidity, e.g., Debt/Equity,
(b) Performance, e.g., Leverage, Return on Assets, and Return on Equity, and
(c) Analysis, e.g., Cross-sectional, Time-series.
Students:
·
complete
problems and cases studies that relate to debt vs. equity financing.
·
complete
the summative unit test.
Assessment &
Evaluation of Student Achievement
Knowledge/Understanding,
Thinking/Inquiry, Communication Application
Formative
Teacher
uses problems for formative assessment purposes.
Self- and
peer assessment using the assessment tool that matches the product, case study,
report, or electronic presentation. Oral Presentation Checklist, Electronic
Presentation Rubric, Written Report Rubric, Business Report Assessment Tool.
Summative
Teacher
evaluation of case study, report, or electronic presentation, Oral
Presentation Checklist, Electronic Presentation Rubric, Written Report Rubric,
Business Report Assessment Tool, BTX4C Public, BTX4E Public, BBB4E Public
found at www.curriculum.org.
Test –
Knowledge/Understanding, Thinking/Inquiry (marking scheme)
Resources
Canadian
Depository for Securities Inc., System for Electronic Document Analysis and
Retrieval (SEDAR) [online – www.sedar.com].
Hoskin,
R. E., M. R. Fizzell, and R. A. Davidson. Financial A
Meigs,
R., M. Bettner, and W. Lam. A
U.S.
Securities and Exchange Commission. Electronic Document Gathering and Retrieval
(EDGAR) [online – www.sec.gov/edgar.shtml]
Welch,
Ivo. Initial Public Offerings Resources. online – www.iporesources.org.
Yahoo! Canada Finance. Initial Public Offerings. online – http://ca.biz.yahoo.com/ipo/
Ontario Securities Commission – www.osc.gov.on.ca
Toronto
Stock Exchange – www.tse.com
Appendix 2.3.1a
Corporation Review
1) Describe what a corporation is. Distinguish
between a “private” and a “public” corporation.
2) List the advantages and disadvantages of the
corporation as a form of business organization.
Advantages: list
five.
(teacher
adds space)
Disadvantages:
list three.
(teacher
adds space)
3) How is a corporation organized? Fill in the
hierarchical structure chart; include the rights and responsibilities of each
level, including how each level is chosen.
Appendix 2.3.3
Debt vs. Equity Financing Case Study
Initial
Public Offering Activity
In this
activity, you will use the Internet to a
1. Go to the Canadian Depository for Securities
Inc.’s SEDAR database at www.sedar.com/search/search_form_pc_en.htm.
2. For “Document Type” select “prospectus” and
click on the “Date of Filing” button under Sort documents by…
3. Start at the top. Not all will be for an IPO.
If you cannot find three move on to the next step.
4. Go to Yahoo! Canada, Finance at
http://ca.biz.yahoo.com/ipo/ to see which companies are in which stage of their
IPO.
5. Most of these will be listing their stock on
one of the American stock exchanges. Write down the company names of those who
are filing a prospectus.
6. Go to the U.S. Securities Exchange
Commission’s (S.E.C.) EDGAR database at
www.sec.gov/edgar/searchedgar/formpick.htm to retrieve the most recent version
of that company’s prospectus.
7. Type in the company’s name and look for the
most recent S1 or S1/A document.
8. Now answer the flowing questions for each:
a) What does the company do?
b) What was their Net Income for each of the
previous three years?
c) How much debt do they have?
d) How much equity do they already have?
e) How many shares are they offering?
f) What is the price of each share?
g) How much capital do they expect to raise?
h) Why are they making a public offering of
their shares?
9. Which one of the three IPO’s would you
subscribe? Why?
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