Reference no: EM131820575

The business would have to consider the cost of acquiring new debt (ie. issuing bonds), and compare that with the cost of equity (ie. selling equity/stock in the company). The business would also have to consider how they will utilize this additional capital to increase their future cash flows, since by issuing long-term debt (bonds), they will have to make regular interest payments to their investors.

Bonds issued at par are reflected on the financial statements like this:

Cash $XX

Bonds Payable $XX

The debit to cash increases the Cash asset account on the balance sheet, and the credit increases the Bonds Payable liability account on the balance sheet.

Financial statement users can use this information to see how much debt the company has, and use this to calculate various financial ratios - debt to equity ratio, debt to cash flows ratio, capitalization ratio, etc. This information can be used to determine whether or not the company would be an attractive to an investor, or to determine at what interest rate the company could issue bonds in the future.