Analyzing the Impact of Securities on Financial Report Content

This report comprehensively analyzes the impact of different classes of securities, including equity, debt, and derivatives, on the content of financial reports. It delves into how equity transactions, such as share issuance and dividends, affect the balance sheet, income statement, and cash flow statement. The report also explores the implications of debt securities, encompassing bank loans, debentures, and bonds, on financial statements, including the impact of interest payments and debt restructuring. Furthermore, it examines convertible debt, detailing its accounting treatment, including the allocation of liability and equity components and the adjustments made upon conversion or repayment. The analysis highlights the importance of understanding these securities for informed decision-making by stakeholders and managers and emphasizes the dual-entry system in accounting, illustrating how transactions affect multiple areas of the financial statements.

APPRAISING THE EFFECT OF THE DIFFERENT
CLASSES OF SECURITIES ON THE CONTENT OF
FINANCIAL REPORT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Discussion........................................................................................................................................1
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Financial statements have great use for the business firms as it reflects their overall
performance during a year. Number of transactions are performed in a year and each of them
have huge impact on the financial statements. In the present research study impact of equity and
debt transactions on the financial statement is analysed. In other words, impact of financial
securities on content of financial report is explained in detail.
Discussion
Financial statements are the one of the most important tools that are used by the business
managers to make business decisions. Apart from the business managers there are varied
stakeholders that need company information to make business or investment decisions. It is well
known fact that single transaction affect multiple things in the financial statements and due to
this reason, it is very important for the stakeholders to make an idea about impact of specific
transaction on the financial statement of the business firm. In the financial reporting of the
business firm financial securities have due importance because they carry monetary value and
have huge impact on the business (Ahmad, Salman. and Shamsi, 2015). Thus, they to great
extent affect financial statement of the business firm. It is important to note that there are three
sorts of securities in the market namely equity, debt and derivatives. All these instruments are
different from each other. Equity refers the amount that firm raised from the general public by
issue of shares in the stock market. Important point to note is that in equity retained earning
amount is also included. On other hand, other instrument is debt which include bank loan, bill
payables and debentures and bonds. Time to time large corporate issue bonds in the market and
give fixed rate of interest to the investors. Apart from this, there is another instrument named
derivative which include multiple instruments like future and options. Accounting of these three
is done in the books of accounts and transaction related to all these heavily affect balance sheet,
income statement and cash flow statement (Wong and Joshi. 2015). Important of these in
financial statements can be estimated from the fact that many times debt burden increased and
become too high then in that case capital restructuring is done in the business.
Amount raised from equity is used for business expansion and investment purpose.
Surplus are recorded in the equity section of the statement of the financial position which reflect
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that firm earn large amount of equity through issue of shares. In case firm issue common stock in
the market then in that case cash is deducted from the cash account and credited to the equity
account. Because of receipt of cash bank balance also increased. Thus, in this way issue of share
affect financial statement of the business firm. Thus, double impact of transaction is observed on
the statement of financial position. In case firm issue shares and receive proceed it is also noted
in the cash flow statement (Kamar, 2017). In the statement of cash flows under head cash flow
from financing activity cash amount is increased by the amount that is obtained through issue of
equity in the market. Income statement remain unaffected because it only considers sales revenue
and income gained on financial securities. As part of expense direct and indirect expenses are
taken in to account. Due to this reason income statement remain unaffected by equity. However,
if firm declare dividend then in that case same is recorded in the income statement because it is
business expense.
Balance sheet of the business firm indicate asset and liability as well as shareholder
equity. In the accounting there is a accounting equation concept where asset is always equal to
the shareholder equity and liability. Issue of equity affect both sides as cash balance increase and
shareholder equity also elevate. Cash flow statement section cash flow from financing activity is
heavily affected when firm purchase shares in the market. Because firm purchase shares cash
outflow happened and due to this reason, it is recorded under section cash flow from investing
activity (Beneish, Miller and Yohn, 2015). Apart from this if firm declare dividend then in that
case same is also included in the section cash flow from financing activity in the statement of
cash flow and dividend amount is deducted in the mentioned section. Hence, cash flow some
times become negative. It can be said that equity heavily affect presentation of the financial
statement of the business firm. It affects multiple area of the financial statement in multiple
ways. Thus, it can be said that there is huge importance of the financial statement of the business
firm and its stakeholders.
Debt securities also have impact on the financial statement of the business firm. Debt
include bank loan, debentures and bonds. In case firm take bank, loan cash amount increased and
on other hand, account payable amount also elevates. Apart from this, firm issue bond in the
market then in that case received cash will be added to the bank account and on other hand, long
term debt value will also elevate at sharp rate. In case of debenture also same thing happened and
bank amount is increased because of receipt of cash in the bank account. On other hand,
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debenture value also enhanced. Thus, it can be said that all sources of debt have same impact on
the statement of financial position. However, these debt instruments also affect cash flow
statement of the business firm. This is because when firm issue debenture, bond or take bank
loan it is basically financing its business activity. Hence, in the statement of cash flow like equity
value of cash flow from financing activity get increased by the amount that is received on issue
of debenture, bond and equity. Apart from this, interest income is also added to the section cash
flow from financing activity (Adesina, Nwidobie and Adesina, 2015). On other hand, in year
firm pay back its debt amount then in that case value of cash flow from financing activity may
become negative. In case in year interest is paid by the business firm then in that case same is
recorded in the income statement of the business firm. By interest amount profit get reduced and
on basis of entire discussion it can be said that debt and equity related transactions heavily affect
income statement, balance sheet and cash flow statement of the business firm.
In category of debt there is an instrument named as convertible debt. It is the instrument
under which firm take debt from the business friends and banks. Company make a promise that
on maturity it will either pay entire amount or will convert it in to equity. Due to equity
conversion those who lend money to the business firm become shareholder of the company and
obtain a right to participate in the decision-making process of the company. In accounting of the
convertible debt first of all total fair value of the convertible debt is determined which include
both liability and equity component ( He, 2015). In this regard total present value of the debt
amount given to the company is computed. Difference between present value and actual debt
obtained is assumed as equity portion. Company usually after obtaining loan through convertible
debt estimate present value of the debt amount. Along with this, interest payment liability for
each year is also determined. Present value of interest is added to the present value of debt
amount. By doing so entire amount of debt is estimated at present value.
As mentioned above that in order to compute equity portion from debt amount present
value of debt is subtracted and by doing so portion of equity is calculated. Journal entry of all
these procedures is done in the boos of accounts (Abdullah and et.al., 2015). Under this cash
account is debit with the current value of the debt that is received in cash. In credit side liability
and equity portion of entire debt amount is credited under name bond payable and share
premium (conversion equity). Thus, in this way accounting of the preliminary stage of
convertible bond is done in the books of accounts. It can be said that such kind of entry affect
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income statement, balance sheet and cash flow statements. Company take a convertible loan and
due to this reason, it has interest payment liability. Thus, interest amount is included in the
income statement and deducted from sales revenue. On other hand, liability also increased and
due to this reason debt amount is included in long term loan category. Equity portion is included
in the shareholder equity in share premium amount. On other hand, cash is received through
issue of corporate bond and due to this reason bank amount in current assets increased. Such
kind of transaction also affect cash flow statement and under this received amount will be added
to the section cash flow from financing activity (Levi and Segal, 2015). Thus, it can be said that
adjustment discussed above have impact on income statement, balance sheet and cash flow
statement.
In case firm decide that it will not convert bond into equity on maturity then in that case
bond payable will be debited by overall value of debt and cash will be credited with same
amount. Cash will be credited because it is paid to the creditors on maturity. Cash is paid in
terms of bank loan and due to this it will not be included in the income statement. However, bank
amount will be reduced by the paid amount (Mohr., 2019). On other hand, in the statement of
financial position bank loan amount will also be subtracted by the overall convertible bond
amount. In case of statement of cash flow also changes will be done and in cash flow from
financing activity debt amount will be reduced by the paid amount. In this way entire
adjustments are made in the financial statement of the business firm. Thus, it can be said that
whether transaction is small or big it has very high impact on the income statement, balance
sheet and cash flow statement of the business firms.
As per rules in case of convertible bond on maturity firm can either pay entire debt
amount or convert debt in to stock. Adjustment that need to be made in case entire loan paid is
explained above. If firm make use of second option then in that case it will debt share premium
(conversion in equity) and bond payable and will credit share capital and share premium ordinary
(Zainudin. and Hashim, 2016). Equity portion of the entire debt goes to the share premium
(conversion equity) which is debited in the journal entry. Entire bank loan amount will have
debited to the bond payable in the journal entry. In the share capital and share premium relevant
values will be credited. As mentioned above in this case also relevant debt amount will be
subtracted from the bank loan in the balance sheet and bank amount will also reduce. On other
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hand, in case of cash flow statement debt amount will be added in the cash flow from financing
activity section. In this way entire adjustment will be made.
CONCLUSION
On basis of above discussion, it is concluded that transactions related to debt and equity
heavily affect the statement of income, statement of financial position and statement of cash
flows. Business firm must before be doing transaction should identify impact that of same on the
income statement, balance sheet and cash flow statement. Such kind of act will assist manager in
estimating likely impact that such kind of transaction may have on the firm assets and liability. It
is also concluded that in the accounts there is a dual entry system and due to this reason if one
side of the business get affected then impact will also be seen on other one. Transactions related
to debt and equity have heavy impact on cash flow statement and balance sheet but have limited
impact on income statement.
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REFERENCES
Books and Journals
Abdullah, M.N. and et.al., 2015. The impact of financial leverage and market size on stock
returns on the Dhaka stock exchange: Evidence from selected stocks in the manufacturing
sector. International Journal of Economics, Finance and Management Sciences. 3(1). p.10.
Adesina, J.B., Nwidobie, B.M. and Adesina, O.O., 2015. Capital structure and financial
performance in Nigeria. International Journal of Business and Social Research. 5(2).
pp.21-31.
Ahmad, N., Salman, A. and Shamsi, A., 2015. Impact of financial leverage on firms’
profitability: An investigation from cement sector of Pakistan. Research Journal of Finance
and Accounting. 6(7). pp.2222-1697.
Beneish, M.D., Miller, B.P. and Yohn, T.L., 2015. Macroeconomic evidence on the impact of
mandatory IFRS adoption on equity and debt markets. Journal of Accounting and Public
Policy. 34(1). pp.1-27.
He, G., 2015. The effect of CEO inside debt holdings on financial reporting quality. Review of
Accounting Studies. 20(1). pp.501-536.
Kamar, K., 2017. Analysis of the effect of return on equity (ROE) and debt to equity ratio (DER)
on stock price on cement industry listed in Indonesia stock exchange (IDX) in the year of
2011-2015. IOSR Journal of Business and Management. 19(5). pp.66-76.
Levi, S. and Segal, B., 2015. The Impact of Debt-Equity Reporting Classifications on the Firm's
Decision to Issue Hybrid Securities. European Accounting Review. 24(4). pp.801-822.
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key
ratios: Evidence from Australia. Australasian Accounting, Business and Finance
Journal. 9(3). pp.27-44.
Zainudin, E.F. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using financial
ratio. Journal of Financial Reporting and Accounting. 14(2). pp.266-278.
Online
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Mohr., A., 2019. [Online]. How Debt Financing Impacts a Company's Balance Sheet. Available
through:< https://smallbusiness.chron.com/debt-financing-impacts-companys-balance-
sheet-61685.html>.
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