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Sorry to ask again. I have 3 short queries.
1) Is it true that equity (ie capital) is the assets in a sense that they are the left after all the liabilities are settled by the total assets. That’s why it is called net assets?
2) Is it also true that equity is raised to invest in machines because it is the machines that earn profits?
3) Only the public companies have equity section in SOFP because only they can raise money from public otherwise private companies do not have this section?
I’d be grateful if u answer them. Thanks
1. The capital in a company is the equity (share capital) plus the long-term debt (non current liabilities). It is not called net assets but is always equal to the assets less the current liabilities.
2. Investing in new machine is one reason why a company may want to raise more finance. They can raise it either from equity or from debt.
3. Private companies have equity in the SOFP in exactly the same way as public companies, and for the same reason.
This is all knowledge from Paper FA (was F3) and is more relevant to the Paper FA exam than to the Paper PM exam.
I did watch your FA lecture on this. I have few questions relating to you previous answer.
1) If I get it right then capital is refer to a money raised from equity and non-current liabilities
2) Net assets (total assets less current liabilities) is the excess assets left after settling all the current liabilities. This means that it will be equal to the capital plus non-current liabilities?
3) BUT we learn that private companies are not allowed to raise money from public by law!!!
Thanks after all 🙂
You cannot possibly have watched all of my Paper FA lectures!!!
1. Correct.
2. Correct.
3. That is simply not true!!!
The shares of public companies are traded on the stock exchange, the shares of private companies are not traded on the stock exchange. Public companies can advertise new shares for sale to the general public, whereas private companies have to find investors prepared to buy shares. In both cases, the amount raised from shareholders is called equity!!
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