At the most recent strategic planning meeting, the board of directors of Target

Question

At the most recent strategic planning meeting, the board of directors of Target Corporation has voted to issue additional stock to raise capital for major expansions for the company in the next five years. The board is considering $5 million. The CEO requests that you prepare a written report (including the financial statements) for her. What is the impact on the income statement, statement of retained earnings, balance sheet, and cash flow statement based on the given scenario if we raise the $5 million capital?

Explanation / Answer

Income Statement: The raising of $ 5 million capital will require issuing costs, underwriting costs and other indirect costs. These costs associated with the issuing of new capital of $5 million will have to be shown as expenses in the income statement and hence reduces the "bottom line" or the net profit

Statement of retained earnings: The statement of retained earnings contains the common stock, additional paid-in capital, treasury stock and retained earnings. With the issue of the new $5 million share capital, the common stock will increase with regards to the statement of earnings

Balance sheet: This increase will impact both the asset side and the liabilities and equities side. On the liabilities and shareholders’ equity side, the common stock will be increased. At the same the since this money is used for expansion, the same will be accounted as plant and equipment (fixed assets) on the asset side thereby balancing the balance sheet

Cash flow statement: The cash flow from "Financing activities" which includes raising money from shareholders will show cash inflow from issue of new securities (stocks).

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