Financial Choices and Accounting Policies for Youtus Enterprise

This homework assignment analyzes the financial decisions and accounting policies of Youtus Enterprise. It explores the reasons for better accounting information systems, corporate governance, and business status under an equity financing model. It compares the costs of debt and equity financing, considering factors like interest rates, risk of insolvency, and restrictions on company activities. The assignment also examines the undue influence of Youtus Enterprise on public policy, using examples of other companies like Apple and Coca-Cola. Furthermore, it delves into agency theory, the relationship between principals and agents, and the impact of leasing options on financial aspects such as leverage, sales growth, and business risk. The document concludes with recommendations on whether Youtus Enterprise should opt for equity or debt funding, and whether to capitalize or consider an operating lease.

Contents
INTRODUCTION.....................................................................................................................................2
ANSWER 1:............................................................................................................................................2
ANSWER 2:............................................................................................................................................2
ANSWER3:.............................................................................................................................................3
Part A.................................................................................................................................................3
Part B.................................................................................................................................................3
ANSWER 4:............................................................................................................................................3
Part A.................................................................................................................................................3
Part B.................................................................................................................................................4
CONCLUSION.........................................................................................................................................4
References.............................................................................................................................................5

INTRODUCTION
Positive accounting theory is mainly concerned with anticipating few actions such as the choice
which the firm do in the accounting policies of firm and hoe the company will react to the change in
the policy and the accounting standards of the firm.
Positive accounting theory helps to make co-ordination in the efficient market theory with the
consequences in the economy. It explains the contract which the senior management of the firm
enters into shows the concern of the management regarding selected accounting policies.
ANSWER 1:
The three possible reasons for the requirement of better accounting information system, an
effective corporate governance and a change in business status is required under the equity
financing model for the company Youtus enterprise are here in below:
 The senior level managers of the company can make decision which favours their own
interest and will only adopt such practices which can benefit them with the reward so the
accounting standard outline the parameters within which the company has to make their
financial report.
 It outlines at least the minimum requirement of reporting. Beyond this the reporting can be
done by managers according to their own will. (LinkedIn Corporation, 2019)
 The better accounting information system helps to produce better report with a proper
collection and data storage.
ANSWER 2:
The cost of funding under the debt option expected to be higher than the cost of funding under the
equity method of financing due to cost of debt is required to be paid off at some point of time .The
interest debt is also the fixed cost for the company which raises the break-even point for the
company .Higher the interest cost ,the risk of insolvency is greater during financial crisis .Companies
that are burdened with debt often might it difficult to grow because of the high cost of debt. Cash
flow is also required for the interest and principal amount at the end of certain period in case of
debt, while no such outflow is involved in case of equity financing. Debt funding also provide certain
restrictions on the activities of the company which prevents the management to take any other
decisions. The larger the ratio, the company is considered to be riskier by the lenders, sometimes the
owners of the company also required to provide guarantee to the debt holders regarding repayment
of their loan amount in case any worse situation arises in near future. In case of equity funding
option, no such above scenario exist as the company does not have any fixed burden to pay to its
investors unless the company is in profit. (Thomson Reuters, 2019)

ANSWER3:
Part A
In the present case, Youtus Enterprise is planning to exercise an undue influence over framing of
public policy in its own favour. The said action shall enable the company to continue its existing
growth and profit. The said action can be carried out by various means encompassing lobbying of
government officials.
The only justification that Youtus Enterprise can contend is freedom of trade and Globalisation
whereby there shall be no such policies implemented which restricts the trade between two
countries as levy of duty on import shall increase the cost of production for the company and reduce
its existing chain of growth.
Further, Youtus shall also justify the said action by stating that the law shall be derogatory for the
industry in the manner that it shall reduce healthy competition and shall not promote the domestic
industry to be competitive. Thus, enaction of law in accordance with the existing draft model can
make domestic industry too much dependent on public policy for its survival.
Also, there may be a retaliatory measure from countries on which such import duty shall levied
which shall impact trade balance of the countries.
Part B
Apple Inc. has been one of the biggest electronic giants. Further, the enterprise marks its presence
pan world. The company has always been charged of deeply involved in public policy matters and
has a great influence in the government decisions. Also, the company searched for new policy
directors to influence government. The leading case was seen in Ireland and Washington.
Another example of Coca Cola drawing ground water in India above the proposed limit under public
policy by using undue influence. (Fingas, 2018)
ANSWER 4:
Part A
Agency theory explains the relationship between the principal and agents. In this one party
determines the work of another party and the task of the principal is performed by the another
party which the principal is unable to perform (Teeboom, 2019).The studies have shown that ratio of
lease and debt are very much positively correlated indication that both may be complements rather
than substitutes. The firm with the leasing option has lower agency and bankruptcy costs. Therefore,
the firm will find leasing option attractive with high agency cost of debt and high bankruptcy, even
without any incentive in the tax rate. The leasing and non-leasing differs in many financial aspects.
The aspect of bankruptcy is higher in case of leasing firm. The firm with lease has higher leverage,
higher sales growth rate, earnings before interest and tax and higher fixed assets value. The firm
undertaking leasing also has business risk higher as measured by the coefficient of variation of
earnings before tax and interest. (Texas Tech Universities Library, 2017).If the company Youtus
enterprises post tax cost of debt is more than the return on equity than the company should go for
the trading on equity benefit.

So according to the above fact mentioned if the youtus enterprise go for the debt option the risk is
higher as the lease liability also increase the debt equity ratio which can affect the shareholders
wealth.
Part B
Youtus enterprises should not capitalise this lease agreement, if the same lease has been considered
as an operational lease. If the lease has been considered as a financial lease than the said assets
need to be capitalised.
CONCLUSION
The company Youtus Enterprises can either opt for equity funding option or debt funding option by
considering the post tax cost of debt and benefit from trading on equity.Operating lease can be
considered if the company does not want to capitalise the assets in books of accounts. Financial
lease can be considered if the company wants to capitalise the assets .
References
Fingas, R., 2018. Apple Insider. [Online]
Available at: https://appleinsider.com/articles/15/06/26/apple-searching-for-new-public-policy-

director-to-influence-government
[Accessed 29 April 2019].
LinkedIn Corporation, 2019. www.slideshare.net. [Online]
Available at: https://www.slideshare.net/GerardIlott/lo61-define-positive-accounting-theory-and-
explain-its-development
[Accessed 29 April 2019].
Teeboom, L., 2019. The Agency Theory in Financial Management. [Online]
Available at: https://smallbusiness.chron.com/agency-theory-financial-management-81899.html
[Accessed 29 April 2019].
Texas Tech Universities Library, 2017. An agency theory approach to financial leasing. [Online]
Available at: https://ttu-ir.tdl.org/handle/2346/17134
[Accessed 29 April 2019].
Thomson Reuters, 2019. Debt vs. Equity -- Advantages and Disadvantages. [Online]
Available at: https://smallbusiness.findlaw.com/business-finances/debt-vs-equity-advantages-and-
disadvantages.htm
[Accessed 29 April 2019].