STEP 1: FINANCING

Option 2: Debt Finance option chosen

The rationale for the decision?
Debt financing refers to a company acquiring a loan and promises to repay it over a

set period of time with set interest amounts.

The advantages of choosing this option by SunsTruck is as follows:

 The business ownership is kept intact

When the business takes a loan from a financial lender, its only obligation will

be to pay on time for the entire period of the loan. The owner will not lose any

control of the company, unlike equity financing where one is forced to cede

with some ownership of the company to be funded.

 It's cheaper over time

When the debt is taken the full cost is clear, determined and accounted for

immediately. It makes planning much easier, unlike equity whose cost is

unclear and the company is forced to share its profits indefinitely which will

end being expensive over time. Also, the paperwork to obtain debt financing is

less complicated and less expensive.

 Availability of tax benefits

The debt interest payments are normally deducted from the income before tax

hence reducing the company’s taxable income. This helps in mitigating the

cost of the loan since the effective cost of borrowing is less.

 Ease of availability

Debt financing is widely available in many forms and the paperwork involved

is less complicated. The company will be able to get the funding quickly and

use it for the urgent expansion.

STEP 2: ACCOUNTING CYCLE

The next best logical step to take will be to prepare the unadjusted trial balance and

adjusting entries to the income statement.

This is because the data given has already been summarized into similar groups

which means that it is past the previous steps. The single transactions were

identified and analysed from their original activities in the first step.

The transactions were then recorded in their respective journals in the second step.

This is where they are shown in chronological order hence helps in organizing the

data into a comprehensive record for the company’s transactions. Each journal entry

will consist of debit and credit amount, the transaction date and a brief explanation.

The third step involves posting the journal entries to ledger accounts. The general

ledger accumulates all the accounts a company maintains. Here they are

represented in the form of T-accounts and the account balances for each group of

the ledger are then generated.

The fourth step is where all the information from the general ledger is then

transferred into the unadjusted trial balance showing all account balances.

Therefore, this is the data we have been given and will be used to prepare the

unadjusted trial balance for the company. The debit totals will be shown on the left

column while the credit totals will be shown on the right column and these totals

must match.

This will now lead to the fifth step where adjusting entries are recorded to amend the

final balances of the various general ledger accounts. These modifications are made

to match the reported results of the company.

Once the above amendments have been done, the sixth step will now involve

preparing the adjusted trial balance with all the changes incorporated. It will show the

balance of all accounts including the adjusted ones which should balance.

In the seventh step, the information from the adjusted trial balance will now be used

to prepare the revised income statement which shows the actual result of the

company.

The eighth and ninth steps will be the final steps of the accounting cycle where

closing entries will be made to transfer the main balances to the next period and the

temporary balances reduced to zero. Finally, the post-closing trial balance will then

be prepared with the permanent entries which will bring to an end the accounting

cycle.

STEP 3: FINANCIAL STATEMENTS

The correct financial statement that shows the information on the current debt of the

company is the balance sheet statement.

The current debt is shown on the liabilities section of the company’s balance sheet

statement.

The balance sheet is provided since it is an important tool for the investor to gain an

insight into the company and its operations. It covers the assets, liabilities and

shareholders equity which will give the investor an idea of the company’s financial

position, that is the strengths and risks involved.

If I was the financier I will invest in SunsTruck.

The rationale behind the reasons for investing in the company after analysing its

financial statements are highlighted below:

 Stability of the company

The company capital structure is strong since it's able to cover its short-term

and long term liabilities using its assets, it has a strong working capital which

is essential for the growth of a company.

 Return on Investment

The company’s ability to generate enough profits will provide a return through

dividends payments or profit-sharing which will show a positive investment.

 Anticipated Advantages

The company has the potential and capability for further growth through the

new ventures being undertaken. This will increase the future profitability of the

company and gains on the investment.

 References

Lackland, B. (n.d.). 5 Reasons to Choose Debt Over Equity Financing. Retrieved

May 07, 2020, from https://techdayhq.com/community/articles/5-reasons-to-
choose-debt-over-equity-financing

Richards, L. (2019, February 11). List the Steps of the Accounting Cycle in Their
Proper Order. Retrieved May 08, 2020, from https://bizfluent.com/info-7979308-
list-accounting-cycle-proper-order.html

Masters, T. (2019, January 10). Reasons to Invest in a Company. Retrieved May 08,
2020, from https://pocketsense.com/reasons-invest-company-5894.html