Capital Stock
1. Definition
Capital Stock (or Legal Capital) represents the total par value of the shares issued by a corporation. It serves as the legal foundation of the company's equity and acts as a protective buffer for creditors. Unlike market capitalization, Capital Stock is a fixed accounting value determined by the corporate charter and is not affected by daily stock price fluctuations.
2. Calculation Formula
Capital Stock is calculated by multiplying the par value per share by the total number of issued shares.
$$ \text{Capital Stock} = \text{Par Value per Share} \times \text{Total Number of Issued Shares} $$
3. Components
In financial statements, Capital Stock is typically categorized based on the class of shares:
3.1. Common Stock
The aggregate par value of common shares, which carry voting rights and represent residual ownership.
3.2. Preferred Stock
The aggregate par value of preferred shares, which generally do not have voting rights but have priority over common stock in dividends and liquidation assets.
4. vs. Additional Paid-in Capital (APIC)
While both accounts represent shareholder contributions, Capital Stock is strictly recorded at par value, whereas APIC captures the excess paid by investors.
| Criteria | Capital Stock | APIC |
|---|---|---|
| Basis | Par Value | Excess of Issue Price over Par |
| Nature | Legal Capital (Restricted) | Capital Surplus |
| Factors | Issuance of shares, Stock splits | Premium on stock issuance |
5. Alteration of Capital
Changes to Capital Stock require formal corporate actions and approval.
- Capital Increase: Issuing new shares to raise capital (Paid-in Capital increase) or converting reserves into capital (Bonus Issue).
- Capital Reduction: Reducing the number of shares or par value to offset deficits or return capital to shareholders.