1. You and Frank are studying for an upcoming accounting exam. Frank says, Contributed capital is basically the stockholders' equity of the company. It includes things like the common stock, paid-in capital in excess of par, preferred stock, and retained earnings. Do you agree with Frank? Why or why not? Explain with examples.
2. Another student in your accounting class says that, as she understands it, most current liabilities appearing on the balance sheet arise from transactions involving operating activities. Do you agree? Why or why not? List three current liabilities that might appear on the balance sheet. For each one, explain the underlying transaction that must have occurred for that specific liability to arise. Indicate, for each liability, whether it is the result of an operating, financing, or investing activity.
1. Frank is mostly correct, but capital can be subdivided into two types: contributed and earned capital. Contributed capital includes common stock, paid in capital, and preferred stock. What those three have in common is that an investor paid in or contributed assets to a company, and usually cash. For example, if you had bought a share of Google at $85 when it went public, that value is represented as contributed capital in Google's records. It is either common stock or both common stock and paid in capital depending on how the company structured their equity section.
Earned capital represents the excess earnings over revenues (net income) ...
The 429 word solution explains the concepts including examples for better understanding.