Controllership Discussion Due October 15, 17 At 12 MN Ctnewt

Controllership Discussion 6due On 101517 12mn Ctnewton Company Is

Controllership: Discussion 6 Due on 10/15/17, 12mn CT. Newton Company is privately owned by four individuals. The company sells athletic shoes, clothing, and accessories. An existing piece of equipment that keeps breaking down must be replaced. Management has asked for your opinion about how to finance the cost of this equipment. What kind of questions would you ask management? What information would you need to research to make a decision? Pick one method you might recommend and describe the advantages and disadvantages of this recommendation.

Paper For Above instruction

Introduction

In the realm of managerial accounting and corporate finance, decisions regarding significant expenditures necessitate thorough analysis and strategic planning. The scenario involving Newton Company, a privately owned business that sells athletic shoes, clothing, and accessories, exemplifies such a decision—specifically, choosing the appropriate financing method for replacing a frequently breaking-down piece of equipment. This paper explores pertinent questions to ask management, identifies key information required for informed decision-making, examines one recommended financing method with its advantages and disadvantages, and concludes with insights into effective financial strategies for small, privately owned companies.

Key Questions for Management

Before recommending a financing strategy, it is essential to understand the company's overall financial health and strategic objectives. Critical questions include:

- What is the cost of the new equipment? Understanding the total expenditure is fundamental to assessing financing options.

- What are the current cash flows and liquidity position? Determining whether the company has sufficient cash reserves influences the choice between internal funding and external financing.

- What are the company's credit requirements and existing debt obligations? This affects the company's ability to take on new debt without risking financial stability.

- What is the expected useful life of the equipment, and how does this align with the financing period? Matching the financing term with the asset's lifespan ensures fiscal responsibility.

- Are there any restrictions or covenants that could influence borrowing or leasing options?

- What is the company's growth outlook and investment policy? Longer-term growth plans may favor certain financing methods over others.

Essential Information for Decision-Making

Researching and gathering specific data is vital for making an informed choice:

- Capital budgeting analysis to evaluate the return on investment (ROI) and payback period for the new equipment.

- Market interest rates and terms for financing sources, such as loans or leases.

- Tax implications of different financing options—interest expenses, depreciation, and potential tax credits.

- The company's historical financial statements to assess profitability, debt capacity, and cash flow patterns.

- Industry standards and competitive practices concerning equipment financing.

- The residual value or salvage value of the equipment at the end of its useful life, relevant for leasing or financing assessments.

Recommended Financing Method: Equipment Leasing

After evaluating available options, equipment leasing emerges as a practical choice for Newton Company. Leasing involves renting the equipment for a specified term, often with the option to purchase or renew at the end of the lease. This method provides flexibility and preserves capital, enabling the company to allocate funds elsewhere.

Advantages of Equipment Leasing

- Preservation of Cash Flow: Leasing typically requires lower initial payments compared to outright purchase, easing immediate cash flow constraints.

- Off-Balance Sheet Financing: Operating leases, in particular, may not appear as liabilities on the balance sheet, potentially improving financial ratios.

- Tax Benefits: Lease payments are often tax-deductible as operating expenses, providing potential tax advantages.

- Up-to-Date Equipment: Leasing allows periodic upgrades, enabling the company to keep pace with technological advancements without large capital expenditures.

- Reduced Maintenance Costs: Leasing agreements may include maintenance services, reducing operational burdens.

Disadvantages of Equipment Leasing

- Higher Long-Term Cost: Over the lease term, total payments may exceed the cost of purchasing the equipment outright.

- No Ownership at Term End: Unless a purchase option exists, the company does not own the equipment at the end of the lease period, potentially leading to continued costs for renewal or replacement.

- Lease Restrictions: Leasing contracts may contain restrictions on usage or modifications.

- Potential End-of-Lease Charges: Additional fees may be incurred for damages or exceeding usage limits.

- Impact on Credit Rating: Lease obligations may affect the company's credit profile, especially if not structured favorably.

Conclusion

Choosing an effective financing method for replacing equipment is critical for maintaining operational efficiency and financial stability. For Newton Company, leasing offers notable benefits, including cash flow preservation, tax advantages, and flexibility, aligning well with the needs of a private company with potentially limited access to large capital reserves. However, the decision should also consider the total cost over time and strategic considerations such as ownership and upgrade cycles. Comprehensive analysis of financial data, market conditions, and company objectives will facilitate an optimal choice that supports ongoing growth and profitability.

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