CFA Level 1

AAA

Financial Statements - Components of Stockholders' Equity

Within this section we'll identify the components that comprise the contributed capital part of stockholders' equity.

Contributed Capital
Contributed capital is the total legal capital of the corporation (par value of preferred and common stock) plus the paid-in capital.

  • Par value - This is a value of preferred and common stock that is arbitral (artificial); it is set by management on a per share basis. This artificial value has no relation or impact on the market value of the shares.
  • Legal capital of the corporation - This is par value per share multiplied by the total number of shares issued.
  • Additional paid-in capital (paid-in capital) - This is the difference between the actual value the company sold the shares for and their par value.

Example:
Company XYZ issued 15,000 preferred shares to investors for $300,000.
Company XYZ issued 30,000 common shares to investors for $600,000.
Par value of preferred shares is $7 per share.
Par value of common shares is $15 per share.

Legal capital:
Preferred shares: $105,000(15,000 x $7)

Common shares: $450,000(30,000 x $15)
Legal capital $555,000

Paid-in capital:
Preferred shares: $195,000 ($300,000-$105,000)
Common shares: $150,000 ($600,000-$450,000)
Paid-in capital $345,000

Legal capital + Paid-in capital = Contributed Capital


Look Out!

If issued common shares have no par value, the amount the stock is sold for constitutes common stock. Preferred stock is always sold with a stated par value.

Accounting for Dividends
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