When situations arise that require cash in excess of what is available in the bank and investments, companies raise funds from one of two sources:
- equity financing
- long-term borrowing
Equity financing means gathering additional capital from the existing owners or taking on new owners and will be covered in a later chapter.
Debt financing may either be through borrowing from a bank (e.g. a mortgage on a building or a note payable) or the corporation could issue commercial paper or bonds. This kind of financing is often long-term (due in more than a year) and is therefore reported and accounted for slightly differently than current liabilities and short term borrowing.
In this section, we will cover types of bonds, commercial paper, and capital leases, that are treated like debt financing. In addition, this section will include a review of the time value of money since that affects how we account for long-term debt.
