Page 65 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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chased with a loan agreement instead of a lease contract.
Remember: a lease can also be simply a long-term rental
agreement in which there is no actual transfer of ownership, and
therefore no recording of the asset and liability on the compa-
ny’s books. However, some leases are written more like pur-
chase agreements than leases, which is why they often appear
on balance sheets, as in our example.
Long-Term Debt
A company with financing needs that extend out for years might
opt to borrow money with a payment term that extends out as
far as possible, enabling it to put the money to use and earn
enough to easily repay the loan. In such cases, entire amount of
the loan is reported as a long-term debt and the portion of that
loan that is due to be paid within the next 12 months—meaning
“currently due”—is shown under “Current Liabilities.” This is
what Wonder Widget has done in our example.

Loans from Stockholders
This is another special category of loan, most often seen on the
balance sheets of privately owned companies operated by the
owners. For some privately owned companies, this is how own-
ers put money into the company when it needs it and take it
back out again when it doesn’t. All too frequently, however,
business conditions may not improve soon, so loans from
stockholders may stay on the balance sheet for years. In fact,
banks and other outside lenders may actually require that such
balances remain unpaid as long as the company has outside
loans. Thus, these amounts can end up looking more like own-
ers’ equity than loans to the company, often a frustrating reality
for entrepreneurs and small business owners, who had hoped to
be repaid at some point.

Ownership Comes in Various Forms
Owners’ equity or stockholders’ equity (for a corporation) or
capital (for a proprietorship or partnership) is the owners’ stake