Final answer:
The Statement of Cash Flow for a small business reflects the cash transactions within a set period, aiding in assessing liquidity and fiscal health. Small firms often seek private investment due to lower costs and simplicity versus an IPO. Venture capitalists usually understand a firm's profit potential better than bondholders due to in-depth evaluations.
Step-by-step explanation:
Conceptual Framework of the Statement of Cash Flow
The preparation of the Statement of Cash Flow is based on a conceptual framework that involves reporting on the cash generated and used by a business over a specific period. The primary goal is to provide stakeholders with information about the company's financial health, specifically its liquidity and solvability. For a small business, this statement is essential for transparency and helps in forecasting future cash flows.
Early-Stage Corporate Finance
Regarding early-stage corporate finance, very small companies generally raise money from private investors because it's less costly and complex than going through an Initial Public Offering (IPO). These companies may be too small to attract public market interest and may not be able to meet the regulatory requirements. On the other hand, small, young companies might prefer an IPO as they grow, because it can provide larger amounts of capital and help boost their public profile, which may be vital for long-term success.
Venture capitalists typically have better information about the potential profitability of a small firm compared to potential bondholders. They possess expertise in assessing start-up businesses and usually perform extensive due diligence before investing. Bondholders, conversely, rely on credit ratings and public disclosures that may not fully reveal the risks or potential of a young company.
Comparison of Bonds and Bank Loans
From a firm's viewpoint, a bond is similar to a bank loan in that both are forms of debt that require repayment with interest. However, they differ in terms of collateral requirements, repayment schedules, interest rates, and the impact on the company's balance sheet and cash flow statement.
Equity Calculation Example
For the given scenario of Fred purchasing a house, we calculate his equity by considering the down payment percentage. Since he places a 10% down payment on a $200,000 home, his initial equity is $20,000, which is the part of the home's value he outright owns.