What is the financing surplus or deficit? How is it calculated?

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What is the financing surplus or deficit? How is it calculated?

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What is the financing surplus or deficit? How is it calculated?

Explanation & AnswerSolution by a verified expert

Explanation

A financial position where the additional assets of the company are more than the funds raised by the company during a particular year is termed as financial surplus. On the contrary, when the finances are more than the additional investments, it is financial deficit.In a financial deficit, a firm needs to borrow funds from external sources to make investments and carry on business operations whereas in financial surplus, firm has sufficient funds to raise investments and perform its operations, so it does not need any external financing.
 
Steps to calculate financial deficit or surplus:

Determine the additional financing which includes inflow of funds from long term debt, long term bonds, equity and preference share capital and retained earnings.
Compute the increase in the value of assets during the period.
Calculate the difference between additional financing and additional assets during the year .
If additional financing is more than additional  assets purchased during the year, it will be a financial surplus but if additional financing is less than additional assets purchased during the year, it will be a financial deficit.

Verified Answer

Financial deficit is a situation where increase in assets is more than increase in finance in a given year whereas financial surplus is a situation where increase in assets is less than increase in finance in a given year.
 
Financial deficit or surplus is computed as the difference between the additional assets and the additional financing of a firm in any given year.

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