it has to be 500 words
Group Discussion Board Forum Instructions For this collaborative discussion board, the instructor will place you into a group at the beginning of the course. You will create a thread in response to the provided prompt for each forum. Each thread must be at least 500 words and demonstrate course-related knowledge. You must support your assertions with at least 2 citations other than the textbooks; the Bible may be 1 of those sources. The composition must be attached as a word document within a new thread of the forum. Put the chapter and case in the subject line of your thread, as in "Chapter 1 Case 1-1." In addition to the thread, the student will reply to the thread of at least 1 classmate. The reply must be at least 250 words. Citations for the replies are not required, but are encouraged. Everything must be in current APA format. Note: Due to constant updates and revisions, you must always consult the most current style guide in completing citations and formatting. The sample provided is the work of a student and must not be used as an official sample. Submit your thread by 11:59 p.m. (ET) on Thursday of the assigned modules/weeks, and submit your reply by 11:59 p.m. (ET) on Monday of the same modules/weeks. Above IS THE ACTUAL CASE STUDY THAT HAS TO BE WORKED. Below is the sample paper with instructions. Example paper: Research Case 1-2 - Preferred stock and the distinction between debt and equity; research an article in Accounting Horizons Requirement 1 From my local library, I was able to obtain a copy of Professor Clark’s article in Accounting Horizons, “Entity Theory, Modern Capital Structure Theory, and the Distinction between Debt and Equity” (Clark, 1993). The article examines the competing views of equity in comparison to debt in the context of the Discussion Memorandum issued by the Financial Accounting Standards Board, which elevated the debate regarding the nature of financial instruments (Financial Accounting Standards Board [FASB], 1990, p. 4). “The DM asks whether financial instruments, such as preferred stock and options written on an enterprise’s own stock, are debt or equity, and how securities that combine two or more fundamental financial instruments should be treated” (Clark, 1993, p. 14). Requirement 2 Preferred stock is classified as equity in traditional financial statements. It is included in the Owners Equity section of the balance sheet along with common stock and retained earnings. The controversy with this treatment centers around the fact that preferred stock can more closely resemble a liability than equity in practice. In order to obtain desired financing without having to report an increase in liabilities, companies can issue preferred stock that is attractive to investors by providing terms very similar to a bond issue. The textbook explains that “preferred shares are somewhat hybrid securities- a cross between equity and debt” (Spiceland, Sepe & Tomassini, 2004, p. 947). Professor Clark’s article takes this argument further, debating whether preferred stock should be considered equity at all. In fact, Clark states, “Preferred stock, in most cases, is a liability” (1993, p. 15). This can be substantiated by comparing the terms of preferred stock to the characteristics of a liability. In particular, liabilities are “probable, future sacrifices of economic benefits” (Spiceland, et al., 2004, p. 619). If the terms of the preferred stock compel the company to pay dividends, particularly in the case of preferred stock that is cumulative, then it can easily fit this definition of a liability (FASB, 1990, p. 4). The different exhibits in the article go on to show various alternatives to reporting preferred shares in the financial statements. Requirement 3 Paton’s Entity Theory model views all equity and liabilities in an entirely different manner than the traditional treatment. “Under entity theory, both creditors and stockholders provide capital, in return for which they receive compensation” (Clark, 1993, p. 15). This model views debt and equity instruments as essentially the same, as stockholders and bondholders are both equally considered to be corporate investors. There are a couple of major implications to this treatment. First, the accounting equation is altered from Assets = Liabilities + Equity to Assets = Equity. Secondly, there is no use for the debt to equity ratio. Risk as a function of a company’s leverage is considered irrelevant. “In this model, there is no distinction between debt and equity, and no debt-to-equity ratio to compute” (Clark, 1993, p. 20). The financial statements produced using the entity theory approach have a quite different appearance from financial statements prepared using the traditional approach. On the balance sheet the elements of equity are current liabilities, long-term liabilities, preferred stock, common stock, and retained earnings. These are reported each on a separate line, but not subtotaled. They are reported as one total for the category of Equities. Also of note, the statement of retained earnings “shows how corporate net income is distributed among the four types of capital providers- the government, creditors, preferred stockholders, and common stockholders” (Clark, 1993, p. 20). Unlike traditional financial statements which report interest expense and tax expense in the income statement, entity theory reports these items in retained earnings, and includes the equity income claim in current liabilities. Therefore, the income statement produced under this model reports a much higher net income than reported using a traditional approach. Requirement 4 The decision-useful model for financial statements is in some ways a compromise to the above methods. This model separates the reporting of equities and liabilities, as in the traditional approach. However, preferred stock is categorized as a liability. Thus the balance sheet is divided between Assets, Liabilities, and Common Equity. Liabilities include current liabilities, long-term liabilities, and preferred stock as a part of long-term liabilities. Equity includes only common stock and retained earnings. Another important difference in the decision-useful model is in the reporting of net income. The amount reported as net income in the traditional approach is instead categorized as “income to stockholders.” Income to preferred stockholders is subtracted from the income to stockholders to provide the amount reported as net income in the decision-useful model. Therefore, reported net income using this approach can be less than reported using the traditional method. Requirement 5 Professor Clark supports the decision-useful approach in her article. The decision-useful model provides several advantages over both the traditional approach and the entity theory approach. The traditional method of reporting can understate liabilities in its classification of preferred stock as equity. However, in its treatment of debt and equity as essentially the same, the entity theory omits useful information. “The distinction between debt and common equity contain important information that should be supplied to readers of financial statements so that they can make informed judgments regarding the financial status and promise of a given firm” (Clark, 1993, p. 22). By treating preferred stock as a liability, but separating out common stock as equity, the decision-useful model provides a balanced approach to the treatment of different forms of capital financing. Requirement 6 A significant portion of the article is dedicated to the discussion regarding the distinction between debt and equity in financial reporting. Professor Clark supports drawing a sharp distinction between debt and equity in financial reporting. The reason is that this distinction provides much needed information. Entity theory argues that the distinction between debt and equity is essentially irrelevant; however Professor Clark has found that evidence usually does not support this theory with respect to reporting requirements. Given the mounting body of literature which supports the notion that financing activity does impact the cash flow from operations and vice versa, corporate financial policy does appear to affect firm value. Although this does not invalidate the idea that both bondholders and stockholders supply capital to the firm, it does raise doubts that debt can be viewed in the same light as equity (Clark, 1993, p. 26). Another important aspect to this distinction is the ability to assess risk through the debt to equity ratio. By using the decision-useful model advocated in the article, preferred stock is more accurately portrayed as a liability, so that the equity component of the ratio only includes common stock and retained earnings. This addresses the concerns raised by FASB, while maintaining the distinction necessary to determine a company’s leverage. Professor Clark continues her discussion by stating that, Leverage is considered an important indicator of risk. Risk assessment is needed by present and prospective investors to properly evaluate and determine the amount and timing of future cash flows. Hence, accountants should continue to provide readers of financial statements with a means to separately identify the component of debt-to-equity ratios (Clark, 1993, p. 26). Without a sharp distinction between debt and equity, it is clear that decision makers would be left without information necessary in order to accurately assess a company’s financial position. Requirement 7 The more I learn about financial reporting, the more I believe that investors and other interested parties need to be provided with more information, not less. For this reason, I agree with Professor Clark’s conclusion. The entity theory model omits too much information of use in determining a company’s financial position. However, it is clear that companies are using certain equity financing methods as an alternative to acquiring reportable liabilities. Thus the decision-useful model provides a functional compromise that more accurately portrays a company’s financial position. As stated in the article, “Admittedly, the measurement and reporting methods are not perfect, and off-balance sheet financing remains a problem. But the distinction between debt and equity has information content” (Clark, 1993, p. 26). References Clark, M. W. (1993, September). Entity theory, modern capital structure theory, and the distinction between debt and equity. Accounting Horizons, 7(3), 14-31. Financial Accounting Standards Board (FASB). (1990). Discussion memorandum: Distinguishing between liability and equity instruments with characteristics of both. Stamford, CT: FASB. Spiceland, J. D., Sepe, J. F., & Tomassini, L. A. (2007). Intermediate Accounting (4th ed.). Boston, MA: McGraw-Hill/Irwin. Group Discussion Board Forum Instructions For this collaborative discussion board, the instructor will place you into a group at the beginning of the course. You will create a thread in response to the provided prompt for each forum. Each thread must be at least 500 words and demonstrate course-related knowledge. You must support your assertions with at least 2 citations other than the textbooks; the Bible may be 1 of those sources. The composition must be attached as a word document within a new thread of the forum. Put the chapter and case in the subject line of your thread, as