This chapter explores various accounting issues related to measuring the financing activities of the firm. Both profitability analysis and risk analysis are affected by managements choice between interest-bearing debt and shareholders equity to finance the acquisition of operating capacity. The proper measurement and reporting of liabilities enables the analyst to understand the risk of investing in the firms debt and equity instruments, and the existence of off-balance-sheet arrangements complicates the analysis.

Required :

What is financial leverage?

What are the differences between debt financing and equity financing?

What are off balance sheet liabilities?

What is equity based compensation?

What is a variable interest entity?