Analysis of Youtus Enterprise Case Study

This report undertakes the analysis of the provided case study of Youtus Enterprise (Youtus). After that, this report sheds light in the reasons that lead to the presence of better information system, corporate governance and change in business status. Then, this report discusses about certain aspects of both debt financing and equity financing. This report undertakes the analysis of certain theories such as positive accounting theory and agency theory for analysing the aspects like lease liability and others.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction................................................................................................................................2
1. Discussion on the Three Possible Reasons............................................................................2
2. Cost of Funding......................................................................................................................2
3.a Justification for the Firm’s Action.......................................................................................3
3.b Practical Example of Corporate Intervention.......................................................................3
4.a Argument for Equity Shareholders.......................................................................................4
4.b Lease Capitalization Agreement..........................................................................................4
Conclusion..................................................................................................................................5
References..................................................................................................................................6

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Introduction
This report undertakes the analysis of the provided case study of Youtus Enterprise
(Youtus). After that, this report sheds light in the reasons that lead to the presence of better
information system, corporate governance and change in business status. Then, this report
discusses about certain aspects of both debt financing and equity financing. This report
undertakes the analysis of certain theories such as positive accounting theory and agency
theory for analysing the aspects like lease liability and others.
1. Discussion on the Three Possible Reasons
Positive Accounting Theory takes attempts for making good predictions of real world
events in order to translate them to accounting transactions (Christensen, Nikolaev and
Wittenberg‐Moerman 2016). A better accounting information system will assist Youtus in
collecting, storing and processing financial and accounting data for the development of
informational report that the Board of the firm and investors can use for effective decision-
making and this is the key reason for Youtus (Ismail and King 2014). After that, the main
reason behind the implementation of an effective corporate governance framework is that it
enhances the company’s accountability towards their investors so that massive frauds or
disasters can be avoided before their occurrence. Lastly, the key reason for Youtus for
changing the business status is to ensure issuing adequate number of their company shares for
raining the requite capital for business expansion.
2. Cost of Funding
Cost of funding can be considered as the specific costs that the companies are needed
to incur at the time to raise funds from debt or equity financing. In the case of debt financing,
cost of funds is referred to the interest paid by the companies for the funds they have
borrowed in order to raise capital. Thus, the lowest cost of funds leads to better returns. This

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interest expense is a large expense that the companies have to incur under the debt financing
(Jassaud and Kang 2015). However, there is not such interest rate or interest expenses in case
of equity financing since onetime cost of funding needs to be paid under the equity financing.
In the presence of this reason, cost of funding under debt financing is expected to be higher
than that of the equity financing.
3.a Justification for the Firm’s Action
It can be seen from the provide case study of Youtus that there is a possibility of some
regulatory changes in relation to foreign subcontracting by the Australian firms and these
changes will create negative impact on the business operations of Youtus. At the same time,
it also needs to be mentioned that these government regulatory changes have certain negative
impacts on the businesses. These regulatory changes act as hidden taxation on the affected
industries in the presence of regulatory compliance cost, adherence with the complex
regulations and others (Dror 2017). In addition, these regulations affects the market
competitiveness through the introduction of many barriers. These government regulations
protect the interest of specific groups in the business community and thus, they are not useful
for all the industries. In the presence of all these negative impacts, Youtus’s action for finding
means for influencing the outcome of the proposed regulation in justified.
3.b Practical Example of Corporate Intervention
In Australia, the case of Standard Australia can be presented as an example of
corporate intervention in the public policy formulation. In July 2003, Standard Australia
released a group five new Australian standards that cover the areas of corporate governance
to Corporate Social Responsibilities (aph.gov.au 2019). These standards were developed for
all the companies. However, the small non-listed Australian companies had negative impact
of this set of regulations on their business such as major increase in compliance cost, increase

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in the complexity of business operations, decrease in industry competitiveness and others. For
these reason, these companies intervened in this public policy formulation process and made
them excluded from the Australian Stock Exchange Corporate Governance Principles
(aph.gov.au 2019).
4.a Argument for Equity Shareholders
Agency theory is considered as a management and economic theory that helps in
explaining relationships and self-interest within the business organizations by describing the
relationship between principals or agents and delegations of control (Bosse and Phillips
2016). A higher debt-to-equity ratio indicates that the company has used more debt financing
as compared to equity financing. Increase in debts will make the company more risky since
the company will not be able in generating more cash for satisfying the debt obligation. It
also leads to the increased interest expenses for the company in the presence of increased
long-term debts which affects the net profitability (Khadafi, Heikal and Ummah 2014). In the
presence of all of these negative aspects, it can be said that it will create an adverse impact on
the equity shareholders of Youtus as there will be decrease in their return on investment due
to decrease in prodigality.
4.b Lease Capitalization Agreement
It can be seen from the provided scenario that the leased machinery has a useful life of
six years and the lease contract is for five years. After the lease agreement, Youtus can buy
the machinery after the leas tenure. It needs to be mentioned that the capitalization of the
lease will make the machinery as the liability of Youtus and they will be needed to show this
liability in the balance sheet which will affect the company’s financial position (Fitó, Moya
and Orgaz 2013). In case, the machinery is not capitalized, it will be treated as operating

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lease and will not be needed to shows in the balance sheet. On the basis of this argument,
Youtus likely not to capitalize this lease agreement.
Conclusion
The above discussion outlines the reasons for Youtus behind the implementation of
effective accounting information system, corporate governance and status change. It can be
seen that the presence of interest expenses make the debt’s cost of funding higher than that of
equity financing. As per the above discussion, increase in debt-to-equity ratio due to increase
in lease liabilities will reduce the shareholders’ return on investment. In addition,
capitalization of lease agreement will increase the liability of Youtus.

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References
Aph.gov.au. 2019. the Public Policy Case – Parliament of Australia . [online] Available at:
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/rp/rp0304/04RP04 [Accessed 27 Apr. 2019].
Bosse, D.A. and Phillips, R.A., 2016. Agency theory and bounded self-interest. Academy of
Management Review, 41(2), pp.276-297.
Christensen, H.B., Nikolaev, V.V. and Wittenberg‐Moerman, R., 2016. Accounting
information in financial contracting: The incomplete contract theory perspective. Journal of
accounting research, 54(2), pp.397-435.
Dror, Y., 2017. Public policy making reexamined. Routledge.
Fitó, M.À., Moya, S. and Orgaz, N., 2013. Considering the effects of operating lease
capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista
Española de Financiación y Contabilidad, 42(159), pp.341-369.
Ismail, N.A. and King, M., 2014. Factors influencing the alignment of accounting
information systems in small and medium sized Malaysian manufacturing firms. Journal of
Information Systems and Small Business, 1(1-2), pp.1-20.
Jassaud, N. and Kang, M.K., 2015. A strategy for developing a market for nonperforming
loans in Italy (No. 15-24). International Monetary Fund.
Khadafi, M., Heikal, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA),
return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current
ratio (CR), against corporate profit growth in automotive in Indonesia Stock
Exchange. International Journal of Academic Research in Business and Social
Sciences, 4(12).