Basics of Investment in Debt and Equity

Introduction

• Focus on investment types: debt and equity.
• Difference between investment and financing (debt/equity financing).

Balance Sheet Overview

• Three sections: Assets, Liabilities, and Equity.
• Financing side: resources or source of company funds.
• Two main financing sources:
  • Debt Financing
  • Equity Financing

Debt Financing

• Leads to liability.
• Companies can borrow money or issue bonds.
• Example: Apple borrows from a bank or issues bonds.
• Apple receives cash, gives out notes or bonds.

Equity Financing

• Leads to stockholders' equity.
• Involves issuing common/preferred stock.
• Example: Apple issues stock certificates to shareholders.

Investment Overview

• Focus on asset side of the balance sheet.
• Two types of investment:
  • Debt Investment
  • Equity Investment
• Investments are classified under assets, not liabilities or equity.

Debt Investment Example

• Apple acts as a bank, providing cash to Amazon.
• Amazon signs a credit agreement (debt financing for Amazon).
• For Apple, this transaction is a debt investment.

Equity Investment Example

• Apple invests in stocks of another company, like Amazon.
• For Amazon: equity financing; for Apple: equity investment.
• Stocks can be acquired directly or through a secondary market.

Nature of Investment

• Debt Investment
  • Involves notes payable or bond securities.
  • Has a maturity date (e.g., 3 years).
  • Principal must be repaid at maturity, interest payments in between.
• Equity Investment
  • No set timeline or expiration.
  • Ownership percentage can influence corporate decisions.

Treatment of Investments

• Debt and equity investments have different accounting treatments.
• Debt Investments
  • Maturity impacts treatment.
  • Intention to hold to maturity or sell affects accounting.
• Equity Investments
  • No maturity but involves ownership percentage.
  • Can influence accounting based on ownership level.

Key Points to Remember

• Debt has a maturity with principal and interest repayment.
• Equity does not have maturity but considers ownership control.
• Different investments require different accounting treatments based on intentions and ownership levels.