# What does Capital Surplus mean?

Given this information below, what does capital surplus mean? When does a capital surplus go up? What is the formula of capital surplus?

I have read Wikipedia's definition, and it only seem to confuse me. If this is a complex thing to explain, what do we need to know first to understand about capital surplus in relation to stockholder's equity?

• Which stock is that table for? Sep 24 '13 at 15:02

I think it's easiest to illustrate it with an example... if you've already read any of the definitions out there, then you know what it means, but just don't understand what it means.

So, we have an ice cream shop. We started it as partners, and now you and I each own 50% of the company. It's doing so well that we decide to take it public.

That means that we will be giving up some of our ownership in return for a chance to own a smaller portion of a bigger thing. With the money that we raise from selling stocks, we're going to open up two more stores.

So, without getting into too much of the nitty gritty accounting that would turn this into a valuation question, let's say we are going to put 30% of the company up for sale with these stocks, leaving you and me with 35% each. We file with the SEC saying we're splitting up the company ownership with 100,000 shares, and so you and I each have 35,000 shares and we sell 30,000 to investors.

Then, and this depends on the state in the US where you're registering your publicly traded corporation, those shares must be assigned a par value that a shareholder can redeem the shares at. Many corporations will use \$1 or 10 cents or something nominal.

And we go and find investors who will actually pay us \$5 per share for our ice cream shop business. We receive \$150,000 in new capital. But when we record that in our accounting, \$5 in total capital per share was contributed by investors to the business and is recorded as shareholder's equity. \$1 per share (totalling \$30,000) goes towards actual shares outstanding, and \$4 per share (totalling \$120,000) goes towards capital surplus.

These amounts will not change unless we issue new stocks. The share prices on the open market can fluctuate, but we rarely would adjust these.

Edit: I couldn't see the table before. DumbCoder has already pointed out the equation Capital Surplus = [(Stock Par Value) + (Premium Per Share)] * (Number of Shares)

Based on my example, it's easy to deduce what happened in the case you've given in the table. In 2009 your company XYZ had outstanding Common Stock issued for \$4,652. That's probably (a) in thousands, and (b) at a par value of \$1 per share. On those assumptions we can say that the company has 4,652,000 shares outstanding for Year End 2009.

Then, if we guess that's the outstanding shares, we can also calculate the implicit average premium per share: 90,946,000 ÷ 4,652,000 == \$19.52. Note that this is the average premium per share, because we don't know when the different stocks were issued at, and it may be that the premiums that investors paid were different. Frankly, we don't care.

So clearly since "Common Stock" in 2010 is up to \$9,303 it means that the company released more stock. Someone else can chime in on whether that means it was specifically a stock split or some other mechanism... it doesn't matter. For understanding this you just need to know that the company put more stock into the marketplace... 9,303 - 4,652 == 4,651(,000) more shares to be exact. With the mechanics of rounding to the thousands, I would guess this was a stock split.

Now. What you can also see is that the Capital Surplus also increased. 232,801 - 90,946 == 141,855. The 4,651,000 shares were issued into the market at an average premium of 141,855 ÷ 4,651 == \$30.50. So investors probably paid (or were given by the company) an average of \$31.50 at this split.

Then, in 2011 the company had another small adjustment to its shares outstanding. (The Common Stock went up). And there was a corresponding increase in its Capital Surplus.

Without details around the actual stock volumes, it's hard to get more exact. You're also only giving us a portion of the Balance Sheet for your company, so it's hard to go into too much more detail. Hopefully this answers your question though.

Capital surplus is used to account for that amount which a firm raises in excess of the par value (nominal value) of the shares (common stock).. Investopedia has a much simpler answer. Somebody has tried to be smart on wikipedia and have done the calculations without much explanation.

The portion of the surplus of a business arising from sources other than earnings : all surplus other than earned surplus usually including amounts received from sale or exchange of capital stock in excess of par or stated value, profits on resale of treasury stock, donations to capital by stockholders or others, or increment arising from revaluation of fixed or other assets

The number of shares a company wants to issue is decided and agreed with the regulators. They decide the par value and then decide how much premium will be charged, extra money above the par value. Take out any RHP of an issue and you find all these details.

Par Value = 1 Issue price(Price at which investors buy) = 10 Premium = 9

For a single share the capital surplus is 9, multiply it by the number of shares issued and you have the total capital surplus.

• I think that the OP knows how to google and post the content. Why do some companies have a capital surplus that rises sharply some years, and only drifts higher in other years? How should he interpret the numbers above? Sep 24 '13 at 15:04