Question: The entity theory of equity implies that there should be no need for financial statements to distinguish between debt and equity. Alternatively, proprietary theory implies

The entity theory of equity implies that there should be no need for financial statements to distinguish between debt and equity. Alternatively, proprietary theory implies that such a distinction is necessary and yields information vital to owners and potential stockholders.

Required:
a. Discuss the entity theory rationale for making no distinction between debt and equity.
b. Is entity theory or proprietary theory consistent with modern theories of finance— that is, does the firm’s capital structure  make a difference? Explain.

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a The entity theory was proposed in 1922 by Paton who stated that the accounting equation is properl... View full answer

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