As I continue my quest to self teach accounting I came across these burning questions:…
Debt to capital is defined as (total debt) / (total debt +total shareholder’s equtiy). It goes on to say that total capital = total debt + “various pieces from shareholders equity”… depends on who you ask. So which is it? Is it bottom line, grand total of equity on the balance sheet, or is it specific key items within equity? I noticed none of the ratio descriptions mentioned “contributed capital” which seems to be one of the most significant values on the balance sheets I have looked at.
2)… that brings me to curiosity #2. I understand contributed capital (a.k.a. paid-in capital) to be the funds raised in excess of the par value when funds are raised through stock issue. I’m assuming when the company uses these funds, the contributed capital is decreased, yes? where do you look to see what the funds where spent on? If I am correct so far, then I am confused as to why a company that went public ages ago still has such a high entry under contributed captial.
when a company has an IPO or issues new shares, what is the other entry on the balance sheet that changes to balance the new input in shareholder’s equity… cash increases?
… while on that note, when there are entries in “comprehensive income” , what other balance sheet entries balance those out? (what balances out an “unrealised gain or loss in a security held for sale”???)
that is all for now, thanks for any contribution in my understanding any or all of these issues.
I don’t see anywhere in the curriculum that it reads, "various pieces from shareholders’ equity.
Total capital is total debt plus total equity.
You’re confusing paid-in capital with additionalpaid-in capital. Additionalpaid-in capital is the money paid for stock in excess of par; paid-in capital is capital stock (at par) plus additional paid-in capital. If you issued one share of stock with a par value of $100 for $500, then capital stock is $100, additional paid-in capital is $400, and (total) paid-in capital is $500.
Yes: cash increases. In the example above, you now have $500 in cash.
The change in value of the security. You have an AFS bond with a market value of $980. Next year its market value is $990. You have an unrealized gain of $10 in OCI, and the value of your assets has increased by $10.
Also note that somewhere like in continental Europe contributed capital surplus account is stated as “other capital reserve” account instead “Additional Paid In Capital”. This account is surplus account for issues stock entries above par. The principle is the same. Maybe it’ s not important info for exam purpose but it is important for FS analysis purpose.
Contributed equity is not special highlighted as the most important part of equity than equity as a whole is important. It is concerned by invested (contributed) and earned (retained earnings). In debt to total capital ratio take care on debt part of denominator. In denominator you have to add whole equity position and only interest bearing debt (not AP position f.ex.).
thanks for the contributions! I am still a little in the dark with the big picture if anyone else has more details to enlighten me with…
so “contributed capital” is like a contra account basket to throw things in when they can’t balance elsewhere because the gains or loses are not yet realized… yet they are not clear cut enough to be considered a “payable” or “recievable” With the example above with the AFS bond that gains in value. It is orginally posted in assets, but then also entered in contributed capital so the balance sheet can balance. Is that the right way to think about it?
No that’s not function of contributed capital. CC is primarly stockholders equity divided proportionaly in shares.
You probably have problem with understanding common equity position and revaluation reserve which is a part of equity, not a contributed capital.
AFS assets class (stocks, bonds etc.) is shown in Assets position (financial assets). Subsequent measurement (I mean unrealized gains/losses) are shown in Equity in Revaluation reserve. Changes in revaluation reserve account are not shown in P/L but are shown in OCI. If gain or loss of financial asset in class AFS would be realized(asset sold), it should be booked and shown through P/L.
Sample
Purchasing security classed as AFS
A. Cash -1.000.000 Decrease (Asset position decrease)
Offset
B. Financial Assets 1.000.000 (Asset position increase)
Measuring on f.ex. 31.12.2xxx
Asset Fair (market) value changes for 10 %+.
A. Financial Assets (Asset position increase)
+100.000 (Balance 1.100.000)
B. Revaluation reserve (Equity position)
+100.000 Increase (Balance 100.000)
Measuring on f.ex. 31.03.2xxx (next year)
Asset Fair (market) value changes for 5 %-.
A. Financial Assets (Asset position decrease)
-50.000 (Balance 1.050.000)
B. Revaluation reserve (Equity position)
-50.000 Decrease (Balance 50.000)
etc.
Revaulation reserve can reach negative balance as well. When you use revaluation reserve, also note that you will probably have deffered tax position.
Contributed capital isn’t a contra account, nor is it a basket into which to throw things that don’t balance elsewhere.
Contributed capital is the money that shareholders have paid the company for stock. Nothing more, nothing less.
Suppose that you issue 100 shares of $100-par preferred stock for $15,000 and 1,000 shares of $20-par common stock for $35,000.
Contributed capital is $50,000 (= $15,000 + $30,000)
Preferred Stock is $10,000 (= $100/share × 100 shares)
Common Stock is $20,000 (= $20/share × 1,000 shares)
Total capital stock is $30,000 (= $10,000 + $20,000)
Additional Paid-In Capital for Preferred Stock is $5,000 (= $15,000 − $10,000)
Additional Paid-In Capital for Common Ctock is $15,000 (= $35,000 − $20,000)
Total additional paid-in capital is $20,000 (= $5,000 + $15,000)
Contributed capital is Preferred Stock plus Common Stock plus Additional Paid-In Capital
In addition to paid-in capital, there is _ retained _ capital (retained earnings). This is the accumulation of net income since inception, plus accumulated OCI (other comprehensive income: income that didn’t pass through the income statement) since inception, less dividends declared since inception.
The example of the AFS bond that increases in value doesn’t affect contributed capital. It affects retained capital: specifically, _ OCI _.
OCI is report which shows changes in equity, this is not retained capital position that extended P/L report (Income statement). It was implemented (not so long ago) due to better understanding basic financial statements and misreporting prevetning.
wait, back up… I am sure I can learn from this extensive review of “contributed capital”… BUT what I meant to say was “comprehensive income”… is THAT like a conta account basket of leftovers? crap, sorry about the confusion!
Net income is income that runs through the income statement; OCI is income that _ doesn’t _ run through the income statement. Under US GAAP, there are four components to OCI, which can be recalled using the mnemonic PUFE (pronounced “poofy”):
Certain P ension expenses
U nrealized gains/losses on available-for-sale (AFS) securities
F oreign currency translation gains/losses when using the current rate method
E ffective portion of a cash flow hedge
(I think that under IFRS there’s another component to OCI, but I don’t recall off the top of my head.)
Once again, Comprehensive Income in general, and OCI in particular, is not a dumping ground for gains/losses/income/expenses; it’s well-defined: only certain things go there, and those things _ always _ go there.
Thank you both for your contributions! Accounting is like a bunch of disconnected pieces of information when you try to self teach. Thanks for having patience and connecting some of the dots for me!
yep, time to take a break!