The syllabus isn't very clear on the difference between capital and suprlus and some old exam problems use the terms in an inconsistent way.
In the MCT reading, capital is defined as the sum of various balance sheet items:
qualifying category A common shares
contributed surplus
R/E (Retained Earnings)
reserves
AOCI
qualifying category B instruments
qualifying category C instruments
non-controlling interests
Then the terms surplus and equity are generally used interchangeably and both are equal to:
assets - liabilities
Then the terms assets and liabilities are defined by which side of the balance sheet they are shown on. (There's no ambiguity regarding assets and liabilities.)
Note that capital includes both assets and liabilities. Loosely speaking, capital is anything a company owns that is used to generate wealth, while surplus is a margin for absorbing unexpected losses.
The exam problems where this issue arises are:
2015.Fall Q20a (from the both the MCT and DCAT readings)
2014.Spring Q28 (from the DCAT reading)
In the 2015 problem, the solution assumes that capital and equity are the same. In the 2014 problem, the solution assumes that capital and surplus are the same. This of course implies that all 3 terms represent the same thing, which isn't true. The examiners were sloppy in how they constructed these questions.
TIP: If you get a problem on the exam where you need to calculate the MCT ratio but they don't provide the required balance sheet items that sum to capital, you might need to use equity or surplus instead.
Comments
The syllabus isn't very clear on the difference between capital and suprlus and some old exam problems use the terms in an inconsistent way.
In the MCT reading, capital is defined as the sum of various balance sheet items:
Then the terms surplus and equity are generally used interchangeably and both are equal to:
Then the terms assets and liabilities are defined by which side of the balance sheet they are shown on. (There's no ambiguity regarding assets and liabilities.)
Note that capital includes both assets and liabilities. Loosely speaking, capital is anything a company owns that is used to generate wealth, while surplus is a margin for absorbing unexpected losses.
The exam problems where this issue arises are:
In the 2015 problem, the solution assumes that capital and equity are the same. In the 2014 problem, the solution assumes that capital and surplus are the same. This of course implies that all 3 terms represent the same thing, which isn't true. The examiners were sloppy in how they constructed these questions.
TIP: If you get a problem on the exam where you need to calculate the MCT ratio but they don't provide the required balance sheet items that sum to capital, you might need to use equity or surplus instead.
Thank you graham!