WHAT IS CAPITAL STOCK
Capital stock is an accounting term that refers to the number of shares authorized for issue by the charter of a corporation. This includes common stock shares and preferred stock shares. On the corporate balance sheet ,capital stock is the initial capital investment in a company. This investment stays on the balance sheet at the original price paid and does not change unless there is a new investment. Capital stock is not relevant when considering the actual market price of a stock or the market value of a company. The process for listing a corporation’s shares on an exchange includes issuing the capital stock and then offering it to the public. For financial accounting purposes capital stock is an asset in the corporate charter, and contributions to capital stock are included in charter amendments. In financial statement analysis, increasing levels of capital stock signals economic strength. This is because the corporation can use the additional funds to invest and create more profits.
HOW TO CALCULATE CAPITAL STOCK
To calculate the capital stock of a corporation you need several financial statements, including the Balance Sheet, Statement of Stockholders’ Equity, and the Income Statement.
- Balance Sheet: From the B/S you need the assets and liabilities of the company
- Income Statement: From the I/S you need the revenues and expenses of the company
- Statement of Stockholders’ Equity: From the SE/S you need the dividends paid out to the company’s shareholders.
Once you have all this information you can calculate a company’s capital stock. Here is the basic formula:
Capital Stock = (change in equity) – (Net Income – dividends paid)
Lets use the following example to illustrate. Suppose a company has the following financial data:
Beginning of year Assets: $1,000,000
Beginning of year Liabilities: $600,000
End of year Assets: $1,500,000
End of year Liabilities: $500,000
Subtract Beg. Liabilities from Beg. Assets à $1,000,000 - $600,000 = $400,000
Subtract End. Liabilities from End. Assets à $1,500,000 - $500,000 = $1,000,000
The difference is the change in Owner’s Equity = $1,000,000 - $400,000 = $600,000
Then calculate the Net Income by subtracting the Revenues from the Expensesà
$450,000 - $150,000 = $300,000
Next subtract the Dividends from Net Income: $300,000 - $100,000 = $200,000
This $200,000 figure represents the increase in the company’s equity.
To calculate the change in capital stock, you simply use the bold numbers listed above. Since the company increased their equity this year by $200,000, but the Owner’s Equity account actually changed by $600,000, there must have been some capital stock issued. In this case, the change in capital stock during the year was:
$600,000 - $200,000 = $400,000.
Simply take this additional capital stock issued and add it to the existing capital stock, and you have your new figure.