Equity represents capital that has been invested by

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Equity represents capital that has been invested by the shareholders, either directly via the base of stock, or indirectly in the form of retained earnings that reflect earnings that are - vested in the business and not paid out as dividends. The liabilities and stockholders' equity sections of the Apple balance sheet are reproduced in - ibit 2.2. Apple reports $27,392 million of total liabilities and $47,791 million of stockholders' ity as of its 2010 year-end. Why would Apple obtain capital from both borrowed funds and shareholders? Why not just one the other? The answer lies in their relative costs and the contractual agreements that Apple has each. Creditors have the first claim on the assets of the company. As a result, their position is as risky and, accordingly, their expected return on investment is less than that required by holders. Also, interest is tax deductible whereas dividends are not. This makes debt a less nsive source of capital than equity. So, then, why should a company not finance itself entirely borrowed funds? The reason is that borrowed funds entail contractual obligations to repay principal and interest on the debt. If a company cannot make these payments when they come .creditors can force the company into bankruptcy and potentially put the company out of busi- . Shareholders, in contrast, cannot require repurchase of their stock, or even the payment of ridends. Thus, companies take on a level of debt that they can comfortably repay at reasonable rest costs. The remaining balance required to fund business activities is financed with more y equity capital.
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2-7 Module 2 I Overview of Business Activities and Financial Statements 1 ----- --- -- EXHIBIT 2.2 Liabilities and Equity Sections of Apple's Balance Sheet ($ millions) APPLE INC. Balance Sheet September 25, 2chO Liabilities Liabilities and Stockholders' Equity Current liabilities Accounts payable .......... ................... Accrued liabilities ............. .................. Total current liabilities . Long-term liabilities . Total liabilities . Stockholders' Equity Stockholders' equity Common stock, no par value; 1.8 bil, shares authorized; 915,970,050 shares issued and outstanding . Retained earnings . Other stockholders' equity . Total stockholders' equity . . . . . . . . . . . .. . . Total liabilities and stockholders' equity .. . . $12,015 8,707 20,722 6,670 27,392 10,668 37,169 (46) 47,791 $75,183 Liabilities requiring payment within one year Liabilities not requiring payment within one year Current Liabilities The balance sheet lists liabilities in order of maturity. Obligations that must be settled within one year are called current liabilities. Examples of common current liabilities follow: Accounts payable-amounts owed to suppliers for goods and services purchased on credit. Accrued liabilities-obligations for expenses that have been incurred but not yet paid; examples are accrued wages payable (wages earned by employees but not yet paid), accrued interest payable (interest that is owing but has not been paid), and accrued income taxes (taxes due).
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