Corporate and Financial Accounting: Sources of Funds Analysis

This report analyzes various sources of funding available to companies and their impact on business operations. It begins with an overview of different funding sources, categorized by time period, ownership, and generation. The report then delves into a comparative analysis of two companies, examining their annual reports over a three-year period to identify trends in their funding sources. Part A focuses on owner's equity, contributed capital, retained earnings, and reserves, along with the liabilities of the companies. Part B explores proprietary companies and other reporting entities, offering a comprehensive understanding of financial accounting practices. The report also discusses the advantages and disadvantages of external funding sources, such as public deposits and deferred tax liabilities. Finally, the report provides a conclusion summarizing the key findings and insights gained from the analysis.

Running Head: CORPORATE AND FINANCIAL ACCOUNTING
Corporate and Financial Accounting
Name of the student:
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CORPORATE AND FINANCIAL ACCOUNTING
Abstract
In this report it is discussed about different source of fund available for companies to
raise funds and how these sources affect the business. Then different sources of funds
are analyzed by taking two companies by taking their three year annual report. Then
classification of reporting entities is shown.

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Table of Contents
Introduction........................................................................................................................3
Type of sources of fund.....................................................................................................3
Part A.................................................................................................................................5
Part B...............................................................................................................................10
Conclusion.......................................................................................................................11
Reference list...................................................................................................................12

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Introduction
A business cannot operate without money as it is the main requirement of a
business function. Money is required throughout the life of a business. In modern
business it requires huge capital and fund to run. Whether to start up a new business or
to expand the business money is needed. Every business needs to raise external funds
or capital to expand their business, increase goodwill, and invest on research and
development programs and also to create competition in the market (Amel-Zadeh and
Zhang 2014). There are several source of financing in a business but first they have to
consider the amount needed, purpose of the need and when needed. Business needs
also vary according to size and type of the business. So business uses different sources
of fund which can be based on time period, ownership and source of generation. A
business has different alternative to raise capital or fund by choosing the right source
and mix of finance. This selection process of right fund needs an in-depth analysis of
every fund and sources to choose the best among them (Balakrishnan, Watts and
Zuo,2016).
Type of sources of fund
Source of fund are classified on time basis, ownership and source of generation
which are as follows:
1. On the basis of period – The different sources of fund under this is classified into
three are as follows
 Long term sources- This source of fund for a business is for a period of
more than five years like share, debenture, preference share and long-

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term loans from financial institution and which are basically used to
acquire fixed assets (Crowther 2018).
 Medium term sources- This source of fund is for the period of more than
one year but less than five year and it include sources like loan from bank
or public deposits.
 Short term financing – This fund is acquired for a period of less than one
year which includes term loans, loan from commercial bank and credit
loans.
2. On the basis of ownership- On the basis of this source it can be classified into
two are as follows
 Owner’s fund- It is owners own fund used in the business including profit
gained from the business. These funds are basically for long period which
are not required to refund during the life of the business. Owner’s funds
are mainly obtained from equity shares and retained earnings (Edwards
2013).
 Borrowed fund- This fund mainly consist of borrowed loans as it is the
most common source of fund. It includes loans from financial institution,
banks, public deposit and other leases. These sources are for a particular
time period with some condition and this has to refund with interest after
the expiry of the term period.
3. On generation basis – This fund are generated basically from the external or
internal source of the organization.

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 Internal source – This are the fund that are generated from inside of the
business like by equity shares and retained earnings. It can also be
generated by disposing of assets, increasing business profit and reducing
debtors. This source can fulfill the needs of the business for short period
of time (Hillier et al.,2013).
 External source- This sources are from outside of the firm like investors,
bank loan, debenture, pref. share or equity shares. This source is used
when large amount of fund is required by the firm and internal funds are
not enough to fulfill the business wants.
Part A
(1) Owner’s equity consist of total values of a company’s asset claimed by its owner
and shareholders or which shows the amount of the owner invested in the
business after deducting the withdrawal from owner business. It can also be
calculated by adding all business assets and deducting all liabilities from it. Main
component of owners’ equity are contributed capital, additional paid-up capital,
comprehensive earning and retained earnings. The items recorded in Owner’s
equity in case of Woolworths Limited are contributed equity, retained earnings
and reserves whereas Commonwealth Bank has ordinary share capital, reserves
and retained profits (Lanis and Richardson 2013).
Contributed capital consists of total amount of equity recorded by the
organization and it can be shown separately within shareholders account in the
balance sheet. This capital consists of the shares that the investor has brought
directly from the company including initial public offering.

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Retained earnings consist of the amount that company has kept aside out of the
profit earned for a particular period. The larger the amount of retain earning the
more it implies a healthy organization.
Reserves are also the part of retained earnings as it is kept aside out of business
profit. The more reserve a company have the more strength the business will get.
This fund is created to save cash and using it when required.
Share capital is the mixture of equity capital, contributed capital and shareholders
capital which is invested by the company to use in the business. It denotes the
amount that the company raised by issuing these shares (Maas, Schaltegger and
Crutzen 2016).
(2) Statement of owner equity shows the owners capital at the starting of the period
which can affect the capital resulting at the end of the period which is also known
as statement of owner equity. Increase of share capital of the company caused
ordinary shares to be paid off as a result the dividend is paid off fully. Holder of
ordinary shares is also entitled to receive dividend that declares one vote per
shares at meeting. Retained profit includes accumulated profit for the group
recognized directly as retained profit. Reserves are derived from revenue profit
which is available for dividend payment and it is not the part of undistributed
profit. Capital is increased by owner contribution and income is decreased by
withdrawn and other expenses. Wools worth has drawn $400 million from
syndicate bank as loan but later on it was replaced by pre financing and got $500
million fund and this facilitate an obligation of self-insurer by acting as a bank
guarantee in favor of Australian authority (May 2013).

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Items recorded in liability section of Commonwealth bank are deposit from public as
borrowing, payable to other financial institution, liabilities in income statement at fair
value, derivative liabilities, bank acceptance, controlled entities, current tax liabilities,
deferred tax liabilities, other provisions, insurance policy liabilities, debt issue, bills
payable and liabilities held for sale. Whereas Woolworth’s liabilities recorded in its
financial statement are trade payable, borrowings, current tax payable, other
financial liabilities, provisions, non-current borrowing, non-current financial liabilities
and other non-current liabilities (Modugu and Anyaduba 2013).
(3) One of the important sources of fund uses by companies is public deposits as
borrowing from bank requires strict conditions and formalities and also
companies has to mortgage their asset to get fund by paying high rate of
interest. So public deposits are more recognized as there are some advantages
like low rate of interest, administration cost is low, unsecured and also flexible.
Deferred tax liability is assessed only for the current period which is not yet paid.
It records the facts when company will pay more income tax in future as the
transaction takes place in the current period. Deferred tax represents future tax
payment which is expected to make tax appropriate in the future. Insurance
policy liabilities are part of general insurance system which protects the
purchaser financing risk from the risk of liabilities of lawsuit. Its main objective is
to provide insurance to a party to protect against claims resulting from the Injury
and damages. Debt issues referred to a financial issue that allows the issuer
to raise fund by making promise to repay the lender after a certain point of

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time. Debt issues include mortgages, lease and other borrowing (Needles,
Powers,and Crosson 2013).
Bills payable are documents which contains the value of goods and services
received on credit. It is a specific type of debt instrument uses in the area of
finance and accounting. Bills payable is also known as accounts payable which is
a type of invoice from supplier received by a business recorded in the current
liability side of the balance sheet.
(4) In Common wealth bank deferred tax asset of $50 million and deferred tax
liabilities of $800 million includes in the financial statement whereas the bank has
recognized the tax contribution for the wholly owned tax entity of $100 million.
The amount received by the bank under tax funding agreement is $280 million on
31st march 2018 and the balance is included in the other assets of the balance
sheet (Panaretou 2013). Deferred tax liability is calculated using the balance
sheet by identifying the carrying amount of both asset and liabilities and the
amount recognized as deferred tax are realized or settled by using tax rate
applicable for deferred tax liability. Deposits from customer include both term and
saving deposits which is initially recognized at their fair value which is directly
attributable to the transition cost. Majority of the liability are settled within a year
of the balance sheet date and the amount that are required to be paid at maturity
are at fair value is $8500 million. Debt issue includes both long and short term
issues from different groups consisting of commercial paper, bonds and other
types of notes. It is measured at fair value at amortized cost including premium,
discounts and other issue related expenses in the income statement using a

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correct method of interest calculation. Other provisions are also recognized for
activities when detailed plan are developed with valid expectation. Provisions are
expected to be get used within 12 month of expected payment. Bills payable and
other liability is measured at contractual basis payment as most of the payables
are short term in nature (Qiu, Shaukat and Tharyan 2016).
(5) Every business development needs supports of capital which is the key
ingredient for growth, innovation and long term success. So in order to get the
benefit both advantage and dis advantage of source of fund is required to
understand.The greatest advantage of using external source of fund is that the
business can use a wide range of fund in different area of the business. They
don’t even have to use their own saving or funds in their business. It enables a
business to expand their expenses to make the business bigger. External
sources can be used to benefit or expand any part of the business. There is no
restriction of using this funds and it also helps to speed up the growth of the
business. On the other hand the dis-advantages of using external source of fund
for developing business are like high rate of interest, service charges applicable,
legal expenses and some other expenses. It cost is usually more than owned
capital (Tello 2013). The amount of interest charged on borrowed funds depend
on the credit rating of the business like a low credit rating entity will have given
higher rate of interest and also the unsecured borrowed fund impose high rate of
interest.

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Part B
Proprietary company are those private company which cannot offer shares to the
public because proprietary company has separate legal entity and own tax liability. A
proprietary company sales share to a limited number of shareholders which can be max
of 50 and partnership firms are limited to 20 shareholders. A proprietary company can
be divided into two types like small and large proprietary company (Watson 2015). A
company can be considered as small business when it fulfills two conditions out of the
three conditions which are as follows:
 Have less than $10 million gross operating revenue in a particular year.
 Having assets less than $5 million in a year.
 Having employees of less than equal to 50.
Small business structure has easy tax planning, flexibility to run the business and
limited liability (Zadek Evans and Pruzan 2013). Small company does not require
providing audited financial statement. Whereas the large proprietary companies are
those who satisfies the two conditions out of the three stated below:
 Revenue of the company is more than $50 million or more.
 Having value of assets more than $25 million.
 The company have more than or equal to 100 employees.
Large companies have to provide audited financial statement and required to prepare
financial report for each financial year. If any company does not fulfill at least two of this
above stated criteria then that company is be considered as small company.

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Conclusion
Today’s business sector is more responsive and getting more dynamic so to
match up with the current situation of the market and new technology every business
has to think positively and applying proper plan by considering both internal and
external source. Business exists in a world where it has to get shaped as ongoing real
world at business and management.

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