When Forming A Company: The Options Are Sole Proprietor, Par

When Forming A Company The Options Are Sole Proprietor Partnership

When forming a company, the options are sole proprietor, partnership, and corporation. Most choose corporation. Why is the corporate form seen to be best? What rights do the stockholders have? When raising capital sometimes the decision is to sell stock. What are the pros and cons of selling stock? Is it better to sell common or preferred stock? Why? Please attempt this exercise on cash flows. Paul E12-20A The income statement and additional data of Bolton Travel Products, Inc., follow: Bolton Travel Products, Inc. Income Statement Year Ended December 31, 2012 Revenues: Service revenue $237,000 Dividend revenue 8,700 $245,700 Expenses: Cost of goods sold 100,000 Salary expense 59,000 Depreciation expense 28,000 Advertising expense 2,900 Interest expense 2,100 Income tax expense 14,000 Net income $39,700 Additional data: a. Acquisition of plant assets was $130,000. Of this amount, $75,000 was paid in cash and $55,000 by signing a note payable. b. Proceeds from sale of land totaled $25,000. c. Proceeds from issuance of common stock totaled $50,000. d. Payment of long-term note payable was $16,000. e. Payment of dividends was $11,000. f. From the balance sheets: 12/31/2011 Current assets: Cash $125,000 $50,800 Accounts receivable 41,000 57,000 Inventory 94,000 73,000 Prepaid expenses 9,200 8,700 Current liabilities: Accounts payable $32,000 $18,000 Accrued liabilities 82,000 57,000 — Prepare the operating section of Bolton’s statement of cash flows for the year ended December 31, 2012, using the indirect method.

Paper For Above instruction

Understanding the rationale behind choosing a corporate structure over sole proprietorship and partnership offers insight into business financing, risk management, and growth strategies. Corporations are often favored due to their ability to raise substantial capital through stock issuance, limited liability, and perpetual existence, which collectively enhance their attractiveness to investors and facilitate expansion (Kuratko, 2016). Stockholders, or shareholders, possess rights such as voting on corporate matters, receiving dividends, and electing directors. These rights are fundamental as they influence corporate decision-making and profit distribution (Chen & Chen, 2018).

The decision to sell stock—either common or preferred—carries distinct advantages and disadvantages. Selling stock provides access to significant capital without incurring debt, which supports business growth and expansion. However, issuing new stock dilutes existing ownership and control, and the company must share future profits with a broader owner base (Arya & Mittal, 2019). In particular, choosing between common and preferred stock depends on strategic factors. Common stock is more flexible, with voting rights and potential for capital appreciation, making it suitable for entrepreneurs seeking control and growth prospects (Moyer, McGuigan, & Kretlow, 2017). Preferred stock, however, offers fixed dividends and priority in asset liquidation, appealing to investors seeking income stability over voting rights (Brigham & Ehrhardt, 2016).

Analyzing cash flows through the indirect method involves adjusting net income for non-cash transactions and changes in working capital. For Bolton Travel Products, Inc., the operating activities focus on adjusting net income by adding back depreciation, accounting for changes in receivables, inventory, and payables. As an initial step, net income of $39,700 is adjusted by adding depreciation expenses of $28,000, reflecting non-cash charges. Changes in current assets and liabilities influence cash flows: accounts receivable decreased by $16,000 ($57,000 - $41,000), indicating collections from customers that increased cash flow; inventory increased by $21,000 ($94,000 - $73,000), representing cash outflows for purchasing inventory; accounts payable increased by $14,000 ($32,000 - $18,000), indicating extended payables, thus increasing cash flow; accrued liabilities increased by $25,000 ($82,000 - $57,000), also boosting cash due to deferred payments (Fang & Yan, 2020). Combining these adjustments yields the net cash provided by operating activities, which reflects the core cash-generating ability of Bolton Travel Products for 2012.

In conclusion, the corporate form's advantages in raising capital, limited liability, and longevity explain its popularity among business owners. Stockholder rights such as voting and dividends are essential for understanding ownership implications. The choice between common and preferred stock hinges on control and income preferences, affecting strategic financial planning. When preparing cash flow statements, especially using the indirect method, carefully analyzing changes in working capital and non-cash expenses allows firms like Bolton Travel to accurately reflect their operational cash position.

References

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