okay excellent we are doing really well
the next topic on our agenda is financial liabilities a firm’s debt
generally we can have two forms of financing in a company money provided by
shareholders which in finance and accounting is considered as own money
and money provided by third parties liabilities if these liabilities are
interest-bearing then we are talking about financial liabilities so obviously
one of the first questions that pops up is about distinguishing between debt and
equity we must be able to classify correctly between the two when raising
finance if not our company’s debt ratio will misrepresent the firm’s actual
financial health situation in addition this could affect the firm’s bottom line
interest expenses arising from financial liabilities decrease net profit while
dividends payments to equity holders are the distribution of earnings and have no
impact on the P&L the criteria for classifying financing as debts rather
than equity is straightforward if the financing instrument contains an
obligation to repay money then we are talking about a debt instrument a
financial liability if we are raising money and there is no promise of
repaying that money but a promise to share the firm’s earnings then we have
equity financing in the past few decades financial engineering created multiple
alternative instruments such as convertible bonds having the
characteristics of both debt and equity convertible bonds are bonds with the
option to be converted into equity shares but our interest bearing and a
certain amount is owed at maturity if the bond isn’t converted the
accounting of these instruments is not something most finance managers must
deal with often so we will not dive into the specifics of how to register these
instruments accounting wise instead in the next lesson
dig much deeper into the different financial liabilities companies operate
with okay this will do for now thanks for watching