Monthly Archives: July 2013

Pros & Cons of Buying Annuities!

Annuity retirement accounts present a helpful way of earning money on your savings, instead of just getting nominal earnings through a usual savings bank account. You get different kinds of annuities, each having its own benefits and limitations. It is therefore imperative for an investor to know the pros and cons of buying annuities before making any investment.

Identification

If you visit the website named Investment FAQ, you’ll find that there are two kinds of annuities available, namely the fixed ones and the variable kind. On choosing to invest in fixed annuities, you can be assured of a fixed amount towards your retirement income. The worth of variable annuities, on the other hand, keeps fluctuating as per market conditions. Investors also have the choice of having an immediate annuity that starts paying soon after they open an account or they may get deferred payment till a prefixed date. So, when it comes to assessing the pros and cons of buying annuities, investors will appreciate that fixed annuities provide a dependable source of income, guaranteed for life of the investor. Though variable annuities offer the prospects of earning more funds, compared to the fixed kind, the former also present the risk of losing money if the market conditions become unfavorable.

Function

Look at annuities as a vehicle that allows investors to receive money wherein tax gets deferred. Annuities help transforming total amount of money for obtaining a regular amount of money for long time. Fixed annuities also offer the advantage of protection of principal amount, meaning the investor is guaranteed of getting back his principal amount. As fixed annuities are invested in low risk secured investments, the interest they pay remains low for as long as the account remains there. In nutshell fixed annuities are the safest choice but investors are denied the benefits of a fluctuating market.

Accessibility

While considering pros and cons of buying annuities, investors should not overlook the penalties to be paid for withdrawing money. Having invested fund in an annuity account, the investor can expect either an immediate distribution or a differed one. In certain cases, investors are permitted to withdraw funds on facing financial emergency, but generally one is required to pay a penalty for withdrawing funds before a specified period of time, which could be five years or even more.

Effects

Going by the information provided by Investment FAQ, the prospects of earning more money are directly proportion to the kind of risk the investor is willing or can afford to take as the earnings are subject to fluctuating market conditions. You cannot rule out the possibility of finally earning an amount less than what you had invested initially.

Considerations

Because of the tax shelter that annuity investments offer, they make a viable option if one wants to shift funds from 401k or IRA account. As annuities are treated as tax exempted savings account, there is no tax penalty on shifting funds from other kinds of investments. Then, there is also the choice of safeguarding earnings from annuity against inflation by buying added inflation protection. Though this kind of protection helps maintaining earning level, the expense of getting this coverage could be so substantial that distribution amount is reduced.

Pros and Cons of Buying Annuities!

Annuity retirement accounts present a helpful way of earning money on your savings, instead of just getting nominal earnings through a usual savings bank account. You get different kinds of annuities, each having its own benefits and limitations. It is therefore imperative for an investor to know the pros and cons of buying annuities before making any investment.

Identification

If you visit the website named Investment FAQ, you’ll find that there are two kinds of annuities available, namely the fixed ones and the variable kind. On choosing to invest in fixed annuities, you can be assured of a fixed amount towards your retirement income. The worth of variable annuities, on the other hand, keeps fluctuating as per market conditions. Investors also have the choice of having an immediate annuity that starts paying soon after they open an account or they may get deferred payment till a prefixed date. So, when it comes to assessing the pros and cons of buying annuities, investors will appreciate that fixed annuities provide a dependable source of income, guaranteed for life of the investor. Though variable annuities offer the prospects of earning more funds, compared to the fixed kind, the former also present the risk of losing money if the market conditions become unfavorable.

Function

Look at annuities as a vehicle that allows investors to receive money wherein tax gets deferred. Annuities help transforming total amount of money for obtaining a regular amount of money for long time. Fixed annuities also offer the advantage of protection of principal amount, meaning the investor is guaranteed of getting back his principal amount. As fixed annuities are invested in low risk secured investments, the interest they pay remains low for as long as the account remains there. In nutshell fixed annuities are the safest choice but investors are denied the benefits of a fluctuating market.

Accessibility

While considering pros and cons of buying annuities, investors should not overlook the penalties to be paid for withdrawing money. Having invested fund in an annuity account, the investor can expect either an immediate distribution or a differed one. In certain cases, investors are permitted to withdraw funds on facing financial emergency, but generally one is required to pay a penalty for withdrawing funds before a specified period of time, which could be five years or even more.

Effects

Going by the information provided by Investment FAQ, the prospects of earning more money are directly proportion to the kind of risk the investor is willing or can afford to take as the earnings are subject to fluctuating market conditions. You cannot rule out the possibility of finally earning an amount less than what you had invested initially.

Considerations

Because of the tax shelter that annuity investments offer, they make a viable option if one wants to shift funds from 401k or IRA account. As annuities are treated as tax exempted savings account, there is no tax penalty on shifting funds from other kinds of investments. Then, there is also the choice of safeguarding earnings from annuity against inflation by buying added inflation protection. Though this kind of protection helps maintaining earning level, the expense of getting this coverage could be so substantial that distribution amount is reduced.

What Is a Retirement Annuity Fund?

A retirement annuity fund is a financial instrument that insurance companies sell.  You can buy and participate in a qualified annuity fund as a part of your retirement plan. Such policies enable you to enhance your savings to be used during retirement. IRS considers these as non- formal retirement accounts. Before you opt to put your money in one such fund, you should first understand what is a retirement annuity fund.

Identification

The fund comprises of a number of varied stocks with the common objective of enhancing value of savings of retirees. However, remember, that as it is a retirement annuity, there is a limit to the contribution you can make and you also get penalized for early withdrawals. The contributions you make by way of premiums to such funds are not taxed. Mutual funds that operate within the retirement pensions are known as retirement annuity funds

Purpose

A retirement annuity fund is designed to increase savings of retirees. However, the worth of a retirement annuity fund could keep fluctuating and there is no surety that it would certainly increase your savings by any fixed amount.

Benefits

An important advantage of retirement annuity funds is that you earnings are not taxable as long as you don’t remove your funds from that account. You have a total control over your investment. It simply amounts to your having freedom of switching over to other form of investments within the annuity.

Disadvantage

Retirement annuity funds do have a shortcoming. When you decide to take out your funds from the fund, you are required to pay capital gain tax at usual rates of income tax. Depending on the amount of income you derive from such funds, your total income may become legible for a higher tax bracket. It means that you may be liable to pay additional tax not only on your retirement income but also on your IRA and pension amount. Moreover, as such funds do not provide any guarantee for minimum growth, you stand to lose a substantial part of your retirement funds in case the performance of the fund is bad.

Considerations

Before you opt to invest in any retirement annuity fund it is imperative that you get prospectus of the company managing fund and understand working of that fund. You can know through the prospectus the type of stocks it intends investing in and expenses thereof.  You’ll also realize the objectives of the fund managers. All these points need consideration before making investment.

Now that you know what is a retirement annuity fund and its limitations and benefits, you can take a calculated decision for investing in this vehicle.

How to Understand Financial Ratios

Businesses use financial ratios to compare performances of various business activities over a period of time. Since trends keep changing with time, it is recommended comparing ratios of current year to earlier years as calculating ratios for one year doesn’t really serve much purpose. Any business would need to compare its financial ratios to standards prevailing for that industry. Industrial surveys come handy for knowing such standards. However, certain businesses perform better during particular parts of the year. This fact should be taken into consideration while making comparisons. Before you start comparing different ratios you should know how to understand financial ratios.

Liquidity Ratios

Liquidity ratio is calculated to know the ability of business to suit interim debt obligations.  Quick ratio and current ratio are the two frequently used liquidity ratios. Current assets ÷ by current liabilities give current ratios. Quick ratios = present assets-inventory÷ present liabilities.

This is how the ratios so obtained are analyzed:

When the quick or current ratio is above 1.0, the business is considered to have adequate assets to meet requirements of interim debts. Creditors look at higher ratios as a positive sign as it implies lower chances of business being unable to honor its obligations.

Now, let’s see how shareholders interpret these ratios. They treat lower ratio valuable as it indicates that the company is exploiting its assets to enhance its operations.

Asset Turnover Ratios

Calculating asset turnover ratios tells us how competently the business is using its assets.

Sum of credit sales ÷ sum of receivable accounts= receivables turnover. Cost of merchandise sold ÷ average annual inventory= inventory turnover.

To have a better analysis, find out the average period of collecting receivables. Divide 365 days contained in one year by receivable turnover ratio already calculated. The resultant figure tells you how many days the business spends to collect payment of merchandise sold on credit. If period for collecting payments is large, it means the business needs to modify its credit collection policies.

On dividing 365 by inventory turnover, you can get inventory period. Quite like average collection period, a larger inventory period is not healthy. The larger the inventory held by business the larger is the risk of its going obsolete and hence reduction of its value.

Financial Leverage Ratios

Compute financial leverage ratios to know the long term solvency of company. Find out debt ratio which is equal to total debt÷ total assets. Also find out debt to equity ratio which equals total debt ÷ total equity. These ratios rely on how short term and long term debts are categorized by business.

On analyzing financial leverage ratios, if the value is smaller than 1, it is considered to be in normal range. Nevertheless, it is recommended to check with industry specific benchmarks.

Income before interest and taxes÷ total interest outlay= interest coverage ratio that tells us the extent to which the income from business may be utilized for making interest payments on debts.

Profitability Ratios

Profitability ratio is calculated to assess performance of business over time and to know how it compares to others from that industry. Revenue-cost of merchandize÷ total revenue= Gross profit margin. This evaluates gross profit created by sales.

To find out how effectively the business is using its assets to create profit, divide net income by sum of assets.

Shareholders’ earning per dollar of their investment = net income ÷ total equity.

Whether you are in business or an investor, now you would know How to Understand Financial Ratios.

Businesses use financial ratios to compare performances of various business activities over a period of time. Since trends keep changing with time, it is recommended comparing ratios of current year to earlier years as calculating ratios for one year doesn’t really serve much purpose. Any business would need to compare its financial ratios to standards prevailing for that industry. Industrial surveys come handy for knowing such standards. However, certain businesses perform better during particular parts of the year. This fact should be taken into consideration while making comparisons. Before you start comparing different ratios you should know how to understand financial ratios.

Liquidity Ratios

Liquidity ratio is calculated to know the ability of business to suit interim debt obligations.  Quick ratio and current ratio are the two frequently used liquidity ratios. Current assets ÷ by current liabilities give current ratios. Quick ratios = present assets-inventory÷ present liabilities.

 

This is how the ratios so obtained are analyzed:

When the quick or current ratio is above 1.0, the business is considered to have adequate assets to meet requirements of interim debts. Creditors look at higher ratios as a positive sign as it implies lower chances of business being unable to honor its obligations.

 

Now, let’s see how shareholders interpret these ratios. They treat lower ratio valuable as it indicates that the company is exploiting its assets to enhance its operations.

Asset Turnover Ratios

Calculating asset turnover ratios tells us how competently the business is using its assets.

Sum of credit sales ÷ sum of receivable accounts= receivables turnover. Cost of merchandise sold ÷ average annual inventory= inventory turnover.

 

To have a better analysis, find out the average period of collecting receivables. Divide 365 days contained in one year by receivable turnover ratio already calculated. The resultant figure tells you how many days the business spends to collect payment of merchandise sold on credit. If period for collecting payments is large, it means the business needs to modify its credit collection policies.

 

On dividing 365 by inventory turnover, you can get inventory period. Quite like average collection period, a larger inventory period is not healthy. The larger the inventory held by business the larger is the risk of its going obsolete and hence reduction of its value.

Financial Leverage Ratios

Compute financial leverage ratios to know the long term solvency of company. Find out debt ratio which is equal to total debt÷ total assets. Also find out debt to equity ratio which equals total debt ÷ total equity. These ratios rely on how short term and long term debts are categorized by business.

 

On analyzing financial leverage ratios, if the value is smaller than 1, it is considered to be in normal range. Nevertheless, it is recommended to check with industry specific benchmarks.

 

Income before interest and taxes÷ total interest outlay= interest coverage ratio that tells us the extent to which the income from business may be utilized for making interest payments on debts.

Profitability Ratios

Profitability ratio is calculated to assess performance of business over time and to know how it compares to others from that industry. Revenue-cost of merchandize÷ total revenue= Gross profit margin. This evaluates gross profit created by sales.

To find out how effectively the business is using its assets to create profit, divide net income by sum of assets.

Shareholders’ earning per dollar of their investment = net income ÷ total equity.

Whether you are in business or an investor, now you would know How to Understand Financial Ratios.

Management Accounting Versus Financial Accounting

Professionals believe accounting gives necessary information that businesses require for making financially viable business decisions.  Businesses follow the practice of preparing two kinds of accounting reports: financial and management. Both are equally necessary. Here, we’ll talk about management accounting versus financial accounting and the role of each of these.

Identification

Management accounting is required for managing companies’ operations. These come handy to managers while making significant financial decisions. Account personnel make these statements and forward these directly to executive and managers of the company. Such statements give detailed information in numbers and forecasts concerning various departments of company, its products, clients and workers and how these could influence company’s operations.

Accounting personnel also prepare reports of financial accounting. Such reports are directly forwarded to those outside the company like shareholders, lenders and tax consultants. These reports contain statistical data, achievements and mistakes made in the past. These documents provide factual information but don’t give any projections or forecasts. That’s one major difference when you compare management accounting versus financial accounting.

Benefits

Though financial and management accounting reports are prepared for use of two different categories of executives, they carry unique benefits for each. 

Management accounting statements try making an educated guess of what could happen in future. Managers find such information helpful in deciding their future moves instead of focusing on what’s already taken place because financial status keeps changing with time.

Accounting reports are vital for assessing the performance of companies and thus of interest to stakeholders and tax consultants. These reports provide data that can be interpreted to check the financial health of companies.

Principles

As financial accounting reports are meant for use of outsiders to the company, these must conform to GAAP, generally accepted accounting principles. That calls for preparing such reports as per already existing rules to ensure their consistency and accuracy.

For instance, GAAP stipulates that the price of land should be evaluated as per its historical cost but if the company is considering purchasing land, the management would need to see its present price and how or what factors could affect its future price.

Significance

Financial accounting as well management accounting both play important role in the functioning of the company. Though significantly different in certain ways, both are equally important.

Since managers are more concerned about future of business, management accounting certainly helps formulating future plans and finances to facilitate business growth on taking clues of what is likely to happen in future.

Investors, creditors and tax advisors are more interested in financial accounting that provides useful information about company’s past and present affairs. Investors can evaluate the performance of company over a definite time period while tax professionals get accurate information about company’s tax liabilities.

History

It was only towards the end of 1800s that management accounting was first introduced. Initially, it was designed to provide essentially needed information for managing production of goods like textiles and steels. Since there were no shareholders or unsecured debts at that time, the need for accurate and widespread reports was not realized.

In the early part of 1900s, accounting needs changed due availability of credit and regulation of taxes by the governments. It became necessary for companies to provide financial information to outsiders who were keen on getting informed of the financial affairs and health of the company.

Advantages and Disadvantages of a Market Economic System

Free market or market economic system is best described as an economic system wherein creation and allocation of goods as well services, is not at all or slightly controlled by the government of the country. There is no restriction on the flow of commodities and or services among private participants or groups thereof.  It is the law of demand and supply that controls the prices of commodities and hence their production. Like any other economic system, there are advantages and disadvantages of a market economic system.

Divisions

If one tries to assess the advantages and disadvantages of a market economic system, one disadvantage that becomes very obvious is the socio-economic divisions that it causes because of its very competitive and open nature. As the difference between the stimulus and capabilities of individuals is very vast, over prolonged period of time this system of economy has a propensity to an escalation of wealth among decreasing number of people. It becomes self satisfying as the more is the wealth with an individual, the easier it becomes for him to gain more wealth whereas those lacking it find it increasingly difficult to acquire it. 

Efficiencies

Since market economy creates extremely competitive environment, it causes efficiency to go up. It’s easy to understand this phenomenon.  If a product doesn’t work to the expectations of users, people stop buying it and the manufacturer loses business, making it necessary to improve its features or forego its production and hence profit.  The compulsions of market necessitate improvements and modifications to be able to survive prevailing economic environments.

Niches

In case of free markets, it is the spirit of enterprise that flourishes. A lot of human effort is made in recognizing and fulfilling market requirements because of the motivation to make more profit. Market may have demand for special or niche products, which markets other free markets may not find worthwhile or viable to produce. An example is that of machines designed for handicapped people.  Since the possibility of making profit is there, free market economy comes up with a solution for special products, though their requirement is quite limited.

Effects

A drawback of free economy is that at times the consequences of profit driven economic activities may harm others collectively or individually. In this kind of economy something that may be profitable or worthwhile for one or many persons or companies may prove harmful or of little use to others. For instance, a manufacturer would find it quite expensive to take steps for reducing harmful environmental effects caused by the process of manufacturing being followed by him. Unless these harmful effects affect the profit of business or there is a legal obligation to implement those steps, the business is not prompted to undertake implementation of those steps.

In their attempt to assess the advantages and disadvantages of a market economic system, many would appreciate that on the whole this system has more advantages than disadvantages

Disadvantages to Capitalism

Karl Marx illustrated a number of disadvantages to capitalism.

Capitalism that is frequently referred to as free market system is an economic system which most countries of present world are using. The United States is among those countries. There are many advantages of following this system, most significant being high efficiency and resultant increased production. Yet, there are disadvantages to capitalism; the notable ones are lack of equality among masses and welfare of society.

1. Inequality of Income

Since the criteria for rewarding people in a capitalist system is their work output and it doesn’t give the same value to all kinds of work, there is a wide disparity in their income. For example, this system accords more importance and thus better rewards someone with ability to get thousands of cars made as compared to ability of maintaining clean drains. This disparity of income results to disparate distribution of wealth that could cause social unrest. The enormously rich may own many houses and yachts while the poor may find it hard to own a dwelling unit.

2. Lower Employment Rates

Most socialistic systems of economy aim for providing equality among masses. Despite low planned efficiency, its positive feature is that it provides high rate of employment.  In contrast, the capitalist system of economy has unemployment as a built-in feature and no effort is made to ensure that everybody gets a job. In its totality this may help economy but the ones left without any job can result to grave consequences.  That is one of the serious disadvantages to capitalism

3. Overproduction

Free market economies face the risk of overproduction. Two factors can cause it.  One is that such economies are inclined to be very efficient, since compensation is directly related to production. So, overproduction is most likely. The other is because of income disparity, low paid factory workers may produce good in so large a quantity that they may never be able to buy. Moreover, the decision of what needs to be produce is governed by its profitability and not utility. As a result, many items essentially needed may not be produced in sufficient quantities as their manufacturing is not profitable for the manufacturer.

4. No Guarantee of Welfare

Another of the disadvantages to capitalism is that the motive of businesses is to make more profit and hence money. As a result, they pay bare minimum to workers to enhance their profits. This helps business and improves economic performance of the country. However, it overlooks if the low wages of workers will suffice for their food, housing and health care, not to mention entertainment, education or items of luxury!

Relationship Between Financial Statements

Companies essentially need to prepare four financial statements. Fundamentally, all these statements comprise of same series of accounting entries, but each statement focuses on a different financial aspect. It is important to understand the relationship between financial statements to know how efficient the operations of a company are.

The income statement of a company tells us the expenses incurred and revenues earned for a defined period. The balance sheet provides information about its financial status pertaining to liabilities, assets and equity of the company as at the completion of that accounting period. The cash flow statement narrates the flow of cash as result of its different activities during that period. Shareholders’ equity statement is a record of the changes in equity account brought by various dealings, responsible for causing changes in rest of the statements.

1. Income Statement and Balance Sheet

Expenses and revenues as contained in the income statement could be connected to certain liability and asset accounts of the balance sheet. Revenue as a result of credit sale is treated as a current asset of the company till payment is received from buyers. Therefore, any such revenue included in the income statement gets recorded as a current asset under the head ‘accounts receivable’ of the balance sheet. There is a similar connection between accrued, non-cash expenses as recorded in the income statement and current liabilities (like accounts payable) as shown in the balance sheet.

2. Income Statement and Cash Flow Statement

Income is accounted for as profit but it may not essentially be in terms of cash. It’s equally applicable that cash flow from operations of the company may not really be the outcome of expenses incurred and revenue earned. Nevertheless, companies may employ figures pertaining to income for calculating actual cash flow from their operational activities. For the purpose of preparing cash flow statements, companies deduct all non-cash proceeds from net income but include all non-cash expenses in the net income shown in the income statement.

3. Balance Sheet and Cash Flow Statement

Balance sheet too is directly connected to cash flow statement. Companies provide information of their entire cash holdings in the cash account of the balance sheet at the completion of the accounting period.  However, the cash flow in the balance sheet doesn’t illustrate the real outflow or inflow of cash received against respective transactions for the accounting period. The cash flow statement narrates cash transaction of all business operation like investing, operating and financing. For instance, payment made for acquiring an asset shown in balance sheet is accounted in cash flow statement as cash outflow.

4. Balance Sheet and Shareholders’ Equity Statement

Equity of shareholders is recorded in the equity section of balance sheet that has two more sections. The equity section of balance sheet by itself wouldn’t disclose the status of different accounts but reveals their accrued amounts. The statement of equity of shareholders records amendments in all equity accounts. For instance, cash collected as a result of having extra shares and recorded in balance sheet is accounted by showing increased number of shares while the amount in dollars is shown in the statement of stockholders’ equity.

 

Analyzing and interpreting the relationship between financial statements is vitally important to know where the company is heading to.

How to Read a Financial Statement?

The four most essential statements of a company are: balance sheet, cash flow statement, income statement and statement showing stockholders’ equity. These statements illustrate the financial health of a company, its incoming and outgoing cash, profit and loss and shift in equity of stockholders. Companies make available their periodic financial statements to stockholders.  On analyzing the four financial statements of a company, you come to know its financial health and performance on the whole. Therefore it is very important for investors to know how to read a financial statement. Comparison of consecutive financial statements over different years helps measuring the progress of companies. This is how you can proceed to know how worthwhile it will be to invest in a company

1. Analyze the balance sheet of the company and statement showing stockholders’ equity. Find out its total liabilities and compare the same to the total amount of stockholders’ equity. The total of all the liabilities signifies company’s total debt whereas equity of stockholders indicates the financial investments made by investors. Try to find a financially strong company having liabilities less than stockholders equity. For instance, a company having total liabilities of $100,000 against $ 300,000 as total equity of stockholders means the company is conformist in using debt.

2. From the income statement of a company you can know its total expenses and total revenue. If revenue is more than the expenses it incurred, its income statement will show net income, which equals revenue minus expense. On the other hand if its expenses are more than the revenue earned, it the statement will show net loss. A thriving company should have more revenue, compared to expenses. For example, when a company shows $100,000 as total revenues and $70,000 as total expenses, it will show $30,000 as net income, in the income statement, suggesting that the company produced moderately good profit.

3. Make out the net decrease or increase of cash as noted at the end of the cash flow statement. This is the amount of cash that the company finally created or consumed for the period of accounting. Search for a financially healthy company that can create an increase in its net cash. For example, a company showing a net increase of $90,000 in its cash means that its cash account grew up by $90,000 for that period of time.

4. Watch the opening and closing balance of total equity of stockholders in the record of stockholders equity and the financial amounts which caused changes in the balance. In the statement, the amounts that reduce equity of stockholders are shown in parentheses while the amounts which augment equity of stockholders are shown without parentheses. An increase in closing balance, compared to the opening balance, shows that the equity of company increased, and signifies that the company is growing.  Choose a thriving company wherein total equity of shareholders shows growth and net income primarily contributes to its growth.

5. Make a comparative study of the financial statements for the past few years recognize any negative or positive trends. You should understand that an efficiently managed company would continue maintaining its debt to a conservative level. It will show a steady increase in its net income over the years, showing a progressive addition to its cash and a consistent growth in the equity of its shareholders.

How to Calculate Common Equity?

The amount of equity that a company offers to common shareholders is known as common equity.  Calculating common equity is very easy. Many of the financial statements issued by the company contain total equity of shareholder, from which you need to deduct preferred equity to arrive at common equity. Common equity is an important piece of information for people investing in any company as it allows them to work out important ratios, including returns on common equity and thus know how gainful will it be invest in a particular company as a common shareholder. This is how to calculate common equity:

Instructions

1. You’ll need a copy of the balance sheet of the company to know its common stock that’s outstanding and multiply the same by the face value of stock to get the desired figure. In case of a company having 100,000 shares with a face value of $1/per share, its   common equity will be $100,000.

2. Find out capital surplus for common stock.  Generally, you’ll find it mentioned in the balance sheet of the company under the head Additional Paid-in Capital (APIC.) For instance, a company may have Common Stock worth $25,000.

3. Next, you find out the retained earnings of that company. You’ll find it included in the balance sheet under the head retained earnings below the Stockholders’ Equity section. Let’s say the company’s retained earnings are $20,000.

4. Common equity is equal to value of common stock+ surplus capital+ retained earnings. In this example common equity will be $100,000 + $25,000 + $20,000 = $145,000

Hope the answer is clear of the question “How to Calculate Common Equity”