You are a consultant for several emerging, high growth technology firms that were started locally and have been a part of a business incubator in your area. These firms start out as sole proprietorships but quickly realize the need for more capital and often incorporate. One of the common questions you get is about stockholder’s equity. Explain the key ways the companies need to view retained earnings if they want to use it as a source of capital for future expansion and growth after incorporating.
You are a consultant for several emerging, high growth technology firms that were started locally and have been a part of a business incubator in your area. These firms start out as sole proprietorships but quickly realize the need for more capital and often incorporate. One of the common questions you get is about stockholder’s equity. Explain the key ways the companies need to view retained earnings if they want to use it as a source of capital for future expansion and growth after incorporating.
Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.
You are a consultant for several emerging, high-growth technology firms that were started locally and have been a part of a business incubator in your area. These firms start out as sole proprietorships but quickly realize the need for more capital and often incorporate. One of the common questions you are asked is about stockholder’s equity. Explain the characteristics and functions of the retained earnings account and how the account is different from contributed capital.
a.
Contributed capital has been provided directly by the owners; retained earnings has been generated through operations.
b.
Contributed capital can be returned to owners by way of dividends; retained earnings are permanent.
c.
Profits increase retained earnings while losses decrease contributed capital.
d.
Contributed capital represents the par or stated values of issued and outstanding shares; any additional amounts contributed by owners are included in retained earnings.
Steve Osbourne is considering opening a business, but the major decision faced is how to organize the business. Steve anticipates generating a massive profit during the first year and that the following years should be relatively profitable. Although he has enough to start the business now as a partnership, he believes cash flow may be an issue as the company grows. Steve believes that the corporate form of operation will be his best option and have hired you as a consultant and seek your advice.
Requirements:
Explain the term outstanding stock.
Is it true or false that corporations muse issue common stock, but may or may not decide to issue preferred stock?
Is it true or false that all forms and classes of stock carry voting rights?
Is it true of false that stock sold for amounts in excess of par value results in a gain reported on the income statement?
A financial services company is considering investing in a new fintech startup that has developed a new technology platform for investment management. The company is concerned about the risks associated with the investment and wants to evaluate the potential return on investment. You have been hired as a consultant to help the company make an informed decision. Which of the following financial ratios would be most appropriate for the financial services company to evaluate the financial health and performance of the fintech startup?
Gross profit margin
Debt-to-equity ratio
Return on investment (ROI)
Price-to-earnings (P/E) ratio