Can someone please shed some light on the composition of the terms below?
-
Total Debt vs Total Liability
-
Total Capital vs Total Assets
As i see it:
- Total debt includes all short and long term INTEREST bearing debt, total liability includes all obligations of a company regardless if they are interest bearing (bonds etc.) or not (accounts payable, DTL etc.)
- Total capital is equity + all long and short term interest bearing liabilities, and the difference between total assets are non-interest bearing liabilties
Thanks.
Does that imply that short term assets -including cash, inventories, recievables, prepaid expenses, investment in financial assets - etc are all a part of a company’s capital?
Also, are goodwill excluded from a firm’s capital?
No no, assets are assets they are not a part of capital, they are financed by total capital and non interest liabilities. Goodwill is an asset also so it is not a part of capital also, it is financed by total capital or non int. bearing liabilities.
Thx for this
My confusion here is that for Accounting equations to make any sense, then your Total Assets must somehow be related to your Total capital - either through liabilities or equities, I can’t seem to be able to draw this connection!
Let’s Look again at this portion of your post.
- Total capital is equity + all long and short term interest bearing liabilities, and the difference between total assets are non-interest bearing liabilties
Since Total Capital = Equity + All Long & Short term Interest bearing Liabilities.
and
Equity = Total Assets - Total Liability
then should it not be the case that
Total Capital = Assets - Total Liability + Short & Long Term Interest bearing liabilities.
In which case, if we break out the last two components then
Total Capital = Assets - Non interest bearing liabilities —> which doesn’t make much sense???/
I’ll try to explain it with an example of a company’s balance sheet:
Assets 100** Equity & Liabilities 100**
Cash 5 Paid in capital 20
Inventories 10 Retained earnings 20
Recievables 5 Equity 40
Short term assets 20 Payables 10
PP&E 60 Short term interest debt 10
Goodwill 20 Short term liabilities 20
Long term assets 80 Bonds 40
Long term liabilities 40
So total capital is equity 40+ short term interest bearing debt 10 + long term interest bearing laibilities 40=90
Total assets are 100 so the difference is 10
Total liabilities is short term liab. 20 and long term liabilities 40 = 60
Total debt is short term interest b. debt 10 + long term liabilities 40=50
Difference between total debt and total liabilities is 10 or in this case payables
But that’s exactly what it is, beacuse you are getting non interest bearing financing for free it is not considered to be a part of capital. When you compute WACC you also do not use non interest bearing liabilities in your weights.
Thanks for the example man. It’s pieces are starting to form in my head and it’s all starting to make sense.
In order words, i can simply split into two
Total Sources of Capital = Total use of Capital.
Total sources of Capital in this case = All paid in Capital + All retained earnings
Total use of capital = All assets minus Non finance liabilities.
So in other words, going back to my second post, the items listed will be correctly named as part of a company’s capital, only they are not sources of Capital but use of Capital.
The way i look at it is your whole assets are financed either by equity or by liabilities which can be interest bearing or non-interest bearing. If they are non-interest bearing than you get them for free (no charge) and since they are free they are not considered to be a part of capital (they do not belong to either equity holders nor debt holders). Usually companys finance their receviables from buyers by passing the costs to suppliers in the form of accounts payable free of charge (in other words you get paid when we get paid).
You’re welcome guys, i’m happy i can help.