Hi there,
I got an interesting interview question the other day. This wasn't something I prepped for, so I don't know if I got it correct. Say as a student you start a business and put in $100 from your pocket. Which line item under Shareholders' Equity would this affect? I said Common Stock but don't know if it was correct since there wasn't a mention of equity issuance etc.
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Retained earnings
how the hell are you an Analyst-1 lol, it's definitely NOT Retained Earnings.. smh
Feeling stupid but why is it obvious this isn’t the case?
Oh my, lol. I appreciate that you shot your shot with such confidence, though.
APIC (Paid in Capital)
This was another option I was considering but I remember in the M&I 400 guide, APIC formula was based on stock options?
APIC is simply paid in capital over the par value of common stock. It applies to primary sales such as IPOs in addition to stock options.
That said, the distinction between common stock vs APIC on the balance sheet is pretty meaningless compared to common stock vs retained earnings. Common vs APIC is much more of a question for the accountants and lawyers than for bankers.
I doubt the interviewer genuinely cares other than to evaluate whether you know common stock vs retained earnings. It would be best to keep the answer simple in an interview rather than ramble about the impact of par value on APIC or make a mistake complicating the answer on some nuanced accounting topic.
Common stock would likely be the best answer, although it would depend on whether the $100 you put into your business was invested in common or some other security. I would think he was looking for a distinction between retained earnings and common stock on the B/S.
I mean I got to the next round so I guess my answer was sort of correct lol. But there was definitely ambiguity in how this $100 gets to the company (equity issuance etc.) and since it was a small business I didn't ask to clarify that part hahah
Equity infusions in private co's go into APIC as far as I know. Also what we do when modeling in my shop
i'd say APIC
commmon stock because its $100 is esstenialy your investment and you have 100% equty
Debit Cash 100, Credit Common Stock (APIC) 100
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