Author Question: Tarnisha Smith is pleased with the performance of her business, Out of Africa. She is thinking about ... (Read 56 times)

itsmyluck · **on:** Jul 5, 2018

Tarnisha Smith is pleased with the performance of her business, Out of Africa. She is thinking about borrowing money to expand her business.

Before she does that, she wants to learn more about using financial statements to analyze the impact of debt on her business. Explain to Tarnisha what information about liabilities is found in each financial statement. Then explain to Tarnisha how the debt-to-equity is used to evaluate companies.
What will be an ideal response?

Question 2

____________________ provides insurance for employees who suffer a job-related illness or injury.
Fill in the blank(s) with correct word

parshano · **Reply #1 on:** Jul 5, 2018

Answer to Question 1

The balance sheet measures assets and how assets are financed, either by creditors (liabilities) or owners (shareholders' equity). Liabilities are divided into current liabilities, which are due in one year or less and long-term liabilities, which are due more than one year from the balance sheet date. Borrowed money has to be repaid with interest. The income statement shows interest expense that has accrued on both current and long-term liabilities. The statement of cash flows will show the amount of cash generated by operating, investing, and financing activities. The amount of cash generated by operating activities can be used to determine the amount of cash available to cover debt payments. Cash paid for interest appears as a decrease in cash from operating activities. The financing activities section can be used to evaluate cash flows received from issuing bonds and stocks, as well as cash flows used for repayment of debts.

The amount of financial leverage can be measured by the debt-to-equity ratio, which is total liabilities divided by total shareholders' equity. The higher the ratio, the greater the amount of leverage a company is using. As long as a company can earn a return on borrowed money that is higher than the cost of borrowing, a company has positive financial leverage.

Answer to Question 2

Workers' compensation insurance