Could sum1 please clarify what BS accounts make up these totals? I nd them 4 calculations involvin ROA and ROTC.
If i am not mistaken then they are the same: total asset = total capital = long term debt + current portion of short term debt + preferred shares + common shares.
That is what i think 2. Let me see what the others say
They are not the same. It also depends on the context. If you are talking about capital structure and WACC you mean LTD plus shareholders equity. There are other cases where capital is used in place of equity. But in neither case isit equal to Total assets, because since Assets=liabilities plus equity, You have to consider that there will alwys be current liabilities on the right side of the equation
so then i think it would be safe to say that my above formula is only valid if the context it: solvency ratios liquidity ratios profitability ratios Please correct me if i am wrong or add to it if possible.
can someone please comment on this thx
Dreambig, According to Schweser Book 3 P. 281 Total capital includes short AND long term debt, current portion of long term debt, preferred equity, and common equity. It is the same as total assets. According to CFAI Book 3 P 601 Total capital is all of the capital a firm employs and includes short and long term debt, and equity. Your formula is probably not correct. It does not include short term debt also you probably meant “current portion of long term debt” rather than “current portion of short term debt” which I’m not familiar with. I do not know whether Current Liabilities are included in Total Capital although I would suspect they are.
Total capital = total Assets Assets = Equities + Liabilities where Liabilities include: i) Short & long term debts ii) Deferred taxes iii) Payables Can someone help enlighten me on this pleasee? I’m feeling messed up because of this topic! HELP!
It is annoying that there are 3 names for every concept in FSA.
I am even more confused but i would have to agree with chasinggoats if push comes to shove
Chicago_Bull Wrote: ------------------------------------------------------- > Total capital = total Assets > > Assets = Equities + Liabilities > > where Liabilities include: > i) Short & long term debts > ii) Deferred taxes > iii) Payables > > Can someone help enlighten me on this pleasee? > I’m feeling messed up because of this topic! > HELP! Not much to be confused about. Hope this helps (i) Liabilities: - Long term debt: this is debt with maturity beyond 1 year or one operating cycle, whichever is longer (like notes or bonds a company issues, with a maturity longer than 1 year, or like borrowings from the banks for a loan repayment period longer than 1 year). On a personal note, like a mortgage you would take to buy a house. - Current portion of the long term debt: payments toward the principal and interest for the long term debt – like the monthly/annual mortgage payments that you would need to make - Short term debt: usually in the form of loans taken out by companies from the banks, with a maturity of up to 1 year or 1 operating cycle, whichever is longer – like you borrowing $1,000 from your friend and promising him/her that you would repay it in the next 4 months. (ii) Deferred taxes: are a company’s liabilities toward the government/IRS for taxes. Because of the differences between what companies can deduct for tax purposes and for reporting to shareholders (accounting purposes), there are temporary or permanent differences between the taxable income (on the tax report) and income before tax (on the income statement). These could be deferred tax assets or liabilities. If you did not get to deferred taxes yet, that’s a different animal for which explanatory posts have been previously made on this forum (use the search function when you get there). (iii) Payables: are current liabilities, expenses incurred and not yet paid, therefore short-term: like say you accrued for employees’ salaries (but have not paid yet), you received inventory (but have not paid yet to your supplier). Generally, payables refer to obligations toward suppliers.
What’s the source of capital? isn’t from Owners and investors? If we agree on that then: Total Asset= Total capital only at the inception of the firm. Now let’s take it the other way around: If we assume that Total assets= Total Capital then Total capital= Total Liabilities(Base on accounting equation) However for a firm already in business total capitalTotal Capital(2) Now sometimes capital can be taken into a broader context: Capital gain, capital goods and so on.
Giristide, it sounds to me that you’re getting “sources of capital” and “sources of financing” confused in this sense
Could you explain Why?
Your first comment was “What’s the source of capital? isn’t from Owners and investors?” What you are talking about there is the source of financing for the firm (where they intially get their money). Companies can also continue to get more financing, so it doesn’t need to just be at inception (for example, issuing a new bond or shares). People are right when they post that Total Capital = Total Assets and Assets = Liabilities + Equity
Thanks!
Equity also known as shareholders funds includes common stock, retained earnings and other reserves. LTD includes loan, bonds, debentures, finance lease payments, deferred tax liability,preferred stock, which are reedemable/paid beyond 1 years time. STD includes LTD that are reedemable within 1 year , trade payables, current tax liability etc. Assets=Equity + liabilites(short and long term debt) When a firm/company/commercial organisation starts operating, whatever is invested is either shareholder’s money(capital) or a debt(long and short both). The amount that is injected is invested in assets and therefore the above computation. Further capital (equity and debt) may be required for expansion or to meet obligations which increases assets as well. Retained earnings/other reserves are profits after tax made by the business which belongs to shareholders hence part of equity. Deferred tax assets and leases requires a breakdown in short and long term liabiltiy. Any deferred tax that requires to be settled down within 1 year should be included in current tax.Finance leases may result in assets as well. All of these require utmost attention. Cheers Sumo
If we assume that Total assets= Total Capital then Total capital= Total Liabilities(Base on accounting equation) However for a firm already in business total capital
Although I feel kinda funny replying to a 14-year old thread, I have just encountered the same problem that I believe neither Schweser nor this forum have really supplied a satisfying answer to yet. I found an explanation on the corporatefinanceinstitute (CFI) which settled the question for me:
“In the case of a business that has no liabilities outside of short-term debt, long-term debt, and total equity, return on total capital is virtually identical to the [return on assets (ROA) ratio]. iT is because the business’ capital structure would make up the entirety of the business’ liability section on its balance sheet. That figure would be equal to the business’ total assets. (Assets = Liabilities + Equity).”
I’m not allowed to post the source link, but I guess if you google part of this paragraph, it will show up among the first results.