Chartered Financial Analyst (CFA) Practice Exam Level 2

What is the definition of contributed capital in a corporate context?

1. Equity funds that are generated from earnings

2. Cash and other assets given in exchange for stock

3. Debt financing obtained from banks or creditors

4. Taxable profits distributed to shareholders

The correct answer is: Cash and other assets given in exchange for stock

Contributed capital, in a corporate context, refers to the funds that shareholders invest in a company in exchange for equity, or ownership shares. This investment typically comes in the form of cash or other assets that the shareholders provide when they purchase stock. This concept is essential because it represents the initial and ongoing financial commitment of the owners to the company's growth and operations. When shareholders contribute cash or other assets in exchange for stock, this amount is recorded in the company's equity section of the balance sheet under contributed capital or paid-in capital. It is distinct from retained earnings, which consist of profits that the company has reinvested rather than distributed to shareholders. In contrast, the other options involve different financial concepts that do not align with the definition of contributed capital. For example, equity funds generated from earnings relate to retained earnings rather than direct contributions from shareholders, while debt financing pertains to borrowing and not equity investment. Lastly, taxable profits distributed to shareholders refer to dividends, which further differentiates these concepts from contributed capital.