2 practice problems like 2017.Fall #10 - First Problem
I'm trying to reconcile the table you provided with the equation given in the wiki article:
(surplus)CY = (direct charges to surplus)CY-1 + (NI)CY + (direct charges to surplus)CY
it looks like the net income column is the (NI)CY part of the equation
and the other column is the (direct charges to surplus)CY-1 + (direct charges to surplus)CY
but where would the dividends to stockholders go in the equation?
we aren't looking at a change so it's not in the (direct charges to surplus)CY, and it's this years div to stockholders so it's not in (direct charges to surplus)CY-1
does the equation need to be updated to subtract out (dividends to stockholders)CY ?
Comments
The correct formula from the wiki is:
(surplus)CY = (surplus)CY-1 + (NI)CY + (direct charges to surplus)CY
https://www.battleacts6us.ca/wiki6us/Odomirok.8-9-IS#:~:text=The mini BattleQuiz has a practice template based on this problem. To summarize, if NI = Statutory Net Income then use this formula to calculate surplus:
The first two terms are the surplus as of end of the respective year. The last two terms are the accrual of the respective item within the current year.
Net Income is gross of dividends to stockholders (DTS). As seen in the Table, DTS comes in as a direct charge to surplus.
Sorry yeah my question was confusing, I was copying and pasting and it looks like I screwed that up somehow [looks like I replaced everywhere I had (Surplus)CY-1 with (direct charges to surplus)CY], but you answered my question!!!! Thank you
I actually sent the question before I got to the end of the article and the very last section explains the breakdown perfectly:
and I created a Formula based on it others may find helpful:
direct charges to surplus =
+ other surplus changes =
+ changes in unrealized capital gains
+ changes in unrealized foreign exchange
+ changes in deferred income tax
- changes in nonadmitted assets
- changes in provision for reinsurance
+ cumulative effect of changes in accounting principles
+ additional capital contributions (includes change in surplus notes and change in gross paid-in & contributed surplus)
- stockholder dividends
I think it may be useful to reference this section higher up in the article where the bullet point
"(direct charges to surplus) CY: The items that are not part of (NI) CY are direct charges. Here you calculate the change in value from CY-1 to CY. The catch is that you have to remember which changes are added (unrealized capital gains, deferred tax), and which are subtracted (provision for reinsurance, non-admitted assets)."
is. I thought this was the extensive list of what was in direct charges to surplus, which is what lead to my confusion
Done. Thx @mec06e! For others reading this post, here's a direct link to the relevant section in the wiki: