Finance
Basics: Loan
Financing (B)
by
Laurus Nobilis
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What
is Loan financing? What is the Loan
principal?
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Posted
Apr 2009 |
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Previously on Finance Basics: Holding
Inventory
LOAN
FINANCING
Obtaining
a loan is another way of solving cash problems.
It
is a form of external financing.
LOAN
PRINCIPAL
The
amount of money lent is known as the Loan principal.
It
appears on the cash flow statement as an inflow when the
loan is received and as an outflow when the loan is
repaid.
It
appears on the balance sheet as a liability owed to the
lender.
INTEREST
The
cost to the company of being able to use the loan
principal is the interest.
Interest
charged every period is:
•
a cost on the profit & loss statement
•
a cash outflow on the cash flow statement.
DAY
SIX
Before
going out to make the day's sales, JS looks in the cash
drawer and realizes that there is not enough money to
pay everything owed to Fast Food chain from yesterday.
Unwilling
to disappoint partner, JS grits his teeth and asks the
bank for a loan of $600.
Of
course, the Bank wants to get something out of
the deal, so interest of $20 will be charged each day for
two days and the loan paid back at the end of the second
day.
KEY TIPS
•
The loan principal appears as a cash inflow
during the period in which it is borrowed and as a cash
outflow during the period in which it is repaid.
In
the meantime, it appears on the balance sheet as a
source of funds, an
other liability owed to the lender.
•
Interest expense is a period cost which may be
paid in cash; as such, it affects the profit & loss
and the cash flow statements in the same way.
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Offs
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