Introduction
For a business, a balance sheet is a snapshot of the entity's financial status at any given time and is essential because it acts as a link to other financial statements such as cash flow and income statements. Additionally, the balance sheet allows the determination of the value of a company at that particular period. The accounting equation used is where assets are placed on one side, and liabilities plus shareholders' equity are placed on the other side to balance it out. On the assets side, the company's major assets, whether current or long-term, are listed in order of their liquidity. Examples of such include land, machinery, buildings, and intellectual property. Liabilities that are included are salaries and wages, interests, bank overdrafts, loans, and dividends.
The Two Types of Financing Used to Finance Assets on A Balance Sheet
When the firm is acquiring a short-term loan, it uses asset financing pledges on inventory assets as well as accounts receivables. The funds are used to cover the daily funding needs, such as paying wages or the purchase of raw materials. Thus, the company is not buying a new asset but using the already owned ones to maintain the cash flow. There are two types of financing, namely, debt and equity ( Hong, 2017) . For debt financing, the loan must be paid back with interest while equity does not require payment but relinquishes all ownership rights to the shareholders. The two basic financial assistance given is secured loans where the company pledges an asset against the debt and unsecured loan where there is no collateral involved, but a claim on any of the assets can be made in case of a default.
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Gross Working Capital and Net Working Capital
Gross working capital summates all the company's assets that are readily convertible to cash and used in the funding of all the day-to-day activities while the net working capital is the business entity's liquidity measure, efficiency in its operations and the short-term financial health ( Mergaerts & Vander Vennet, 2016) . Net working capital is calculated by the gross working capital minus current liabilities ( Mergaerts & Vander Vennet, 2016) . Positive working capital is interpreted as a healthy business as it means existing assets are greater than current liabilities.
Debt Ratio
The debt ratio refers to the amount of a company's assets that are funded by debt, and it is a measure of the firm's leverage ( Mergaerts & Vander Vennet, 2016) . While a ratio value that is more than 1 depicts that the business entity has greater liabilities than assets, a number below 1 is an indication that a more significant portion of the assets is financed by equity.
Describe the Process Where All the Above Steps Show How the Capital and Debt Ratio Illustrate the Financial Strength or Weakness of a Business
Calculated through subtracting current liabilities from current assets, a high gross and net working capital indicate the company's liquidity and its competency in meeting all the short-term obligation ( Mergaerts & Vander Vennet, 2016) . Similarly, a higher debt ratio means the company is more leveraged, which translates into a higher financial risk for the investors. While this is the case, leverage is an essential tool as companies use it to grow since most of the businesses rely on debt for sustainability.
Equity and Its Sources
If all the company's assets were to be liquidated and all the debts paid off, the remaining amount of money that would be reimbursed to the shareholders is referred to as shareholder equity ( Ng & Rezaee, 2015) . Equity on a balance sheet is also one of the critical indicators of the firm's financial health and capability. Some of the components include retained earnings not paid as dividends and treasury shares, which is a representative of the stock that the company has purchased back from the existing shareholders.
How A Firm's Equity is Reported on A Balance Sheet?
Since equity represents the shareholder's stake in the company's assets, they are calculated by total assets minus the total liabilities in the balance sheet ( Ng & Rezaee, 2015) . In the same way, they can be expressed as the entity's retained earnings and share capital subtract the treasury shares value for interpretation by financial investors and analysts.
How the Earnings Before Taxes and Net Income are Calculated for the Income Statements
Calculations before taxation are a measure of profitability for any business, and they are found by adding the gross income, interest, taxes, depreciation, and amortization ( Mergaerts & Vander Vennet, 2016) . Net income is calculated by subtracting all business expenses, operating costs, and tax from the total revenue ( Mergaerts & Vander Vennet, 2016) . The values are important to stakeholders as they determine whether the business can pay back the interest from the previous financial deals. In the worst possible scenarios, the calculations determine the restructuring procedure of the company in case of an inability to stay afloat.
How Earnings Per Share and Dividends Per Share are Calculated and Its Importance to the Firm
Considered as one of the essential variables used to establish a company's financial strength, earnings per share is a portion of the net income that would be earned in the event of all profits being paid out to the stakeholders ( Mergaerts & Vander Vennet, 2016) . When a firm is profitable enough to pay more dividends to the stakeholders, it means that it has higher earnings per share value. This is usually revealed when investors compare the values of two competitors and the market to determine the performance of the firm in relation to the industry as well as other similar companies. In addition to that, investors use earnings per share values to compare the performance over the years to establish a trend and forecast future results. Consequently, they can keep track of their investments.
Summary and Conclusion
In retrospect, financing in the economic system is essential as it allows firms to acquire products out of their immediate reach. The two main types of company financing are debt and equity. Equity financing involves the investors bearing all the risk since they are given exclusive rights to control the business. For instance, they have an opinion on how the company operates and are consulted in times of difficulty. They offer money in exchange for ownership, which assures them of a share in future earnings, which is equivalent to their contributions. Equity financing is appropriate for the long-term sustainability of the business. On the other hand, debt financing, which is advisable for start-up businesses and short-term obligations, requires collateral for the loan, which is repossessed in case the company is unable to repay the loan and the interest accrued.
References
Hong, S. W. (2017). Earnings Management by Debt Financing Types. International Business Management , 11 (3), 714-720.
Mergaerts, F., & Vander Vennet, R. (2016). Business Models and Bank Performance: A Long- Term Perspective. Journal of Financial Stability , 22 , 57-75.
Ng, A. C., & Rezaee, Z. (2015). Business Sustainability Performance and Cost of Equity Capital. Journal of Corporate Finance , 34 , 128-149.
