Owners’ Equity, Liabilities and Working Capital

Abstract

This chapter continues the initial analysis of the balance sheet of the firm by analysing the relationship between the firm, its owners and others who provide its finance. We consider how a firm obtains its finance through the use of owners’ equity and by incurring liabilities, and how the requirement for working capital affects its overall financial resources. We examine the major factors which contribute to the firm’s financing decisions and provide a framework for the analysis of financing problems. Long-term and short-term finance and the concepts of equity and debt are analysed. No consideration is given to the finance markets which constitute the contemporary sources of finance for business,¹ but emphasis is laid on the conceptual distinctions between various financial sources. The importance of liquidity is examined as a special problem in the financing of a firm’s overall asset requirements.