Total company capital computation: How to do it?

The topic of discussion will be the comparison of Random Error and Systematic Error, which are two broad categories of measurement errors. To differentiate between them, one can use the formula of opening capital, which is the difference between opening assets and opening liabilities. It is important to note that an error is the discrepancy between the measured value and the actual or true value.

Solution 1:

I’m curious about the method used to determine a company’s
overall financial resources.
What specific entries in the financial statements should I examine to obtain this information?

One of the methods used to calculate a company’s return on capital is by adding the amounts of long-term debt and total shareholder equity, which are both listed on the balance sheet. This combination is commonly known as total capital.

To illustrate my point, let’s take a look at Gilead Sciences’ (GILD) 2012 10-K form’s balance sheet. The total capital, which is the sum of net long-term debt and total stockholder equity, amounts to $16,605,424,000. Providing an example with practical figures can be useful, even though it’s possible to calculate the numbers.

Occasionally, the expression “total capital” may be used interchangeably with “total capital stock” or “total capital assets.” In such cases, it pertains to physical capital, which includes assets such as inventory, PP&E, and others, and not financial capital or leverage.

How can I compute notes payable? Is it equivalent to accounts payable?

Though both are liabilities, accounts payable are debts owed to suppliers, while notes payable are debts owed to banks and other institutions a business has a formal agreement with, and uses formal debt instruments such as loan contracts. The definition I found online matches what I was taught, and the term “payable” implies the same.

When examining a balance sheet, notes payable can often be identified by combining the short-term debt with the current portion of the long-term debt. This represents the debt that must be paid within the fiscal year. For Gilead Sciences’ balance sheet, only the amount labeled as “Current portion of long-term debt and other obligations, net” ($1,169,490,000) should be considered as notes payable since the other current liabilities appear unrelated to formal debt agreements.

As the notes payable section in GILD’s balance sheet lacks diversity, it may not be the best example. Therefore, I will provide the most recent balance sheet of Monsanto, which includes a term called “Short-term debt, including current portion of long-term debt” with a value of $36 million. This term appears to be almost identical to the definition of notes payable.

Please be aware that in Monsanto’s 10-K, the financial statement named “Statement of Consolidated Financial Position” is provided.

Solution 2:

Total Capital

Nowadays, the term “bank capital” is more commonly used in the finance industry, whereas the phrase “very old fashioned” is rarely employed.

The sum of Preferred Equity, Common Equity, and Liabilities equals the Total Capital.

Typically, financial institutions, particularly banks, tend to utilize true blue preferred shares. In contrast, all other companies tend to use the more contemporary ones that can be converted to common shares.

Notes Payable

This is a term that was once used in a traditional sense, but in today’s Generally Accepted Account Principles (GAAP), it holds a different implication.

The initial meaning of a note or promissory note is a commitment to repay a set sum of money at a designated time.

The bond has undergone changes and now takes the form of a zero coupon bond, which does not involve any cash interest payments but instead makes a single payment comprising both principal and interest.

A bank note, such as the One Dollar bill, is a form of payment that never specifies a repayment date. It pays out One Dollar, which maintains its constant value despite inflation. This is why bank notes are favored as a medium of exchange.

The definition of GAAP considers any debt that needs to be paid off within a year as a current liability.

Solution 3:

The opening capital can be calculated by subtracting the opening liabilities from the opening assets.

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