Stockholders’ Equity

Stockholders’ Equity

Ownership interest of stockholders in a corporation.

Public Sector Corporation

Owned by a governmental unit (example: FDIC).

Private Sector Corporation

Owned by private individuals or entities.

Nonstock Corporation

Nonprofit entity such as a church or charity.

Stock Corporation

For-profit entity such as General Motors or IBM.

Private Enterprise

Stock not available for public purchase; often uses cash/tax basis accounting.

Public Enterprise

Stock available for public purchase; required to use GAAP accounting.

Primary Focus of Stockholders’ Equity Accounting

Public enterprises.

Legal Authority Governing Corporations

State law in the state of incorporation.

Articles of Incorporation

State-approved document establishing a corporation; also called a corporate charter.

SEC Requirement for Public Stock Issuance

Approval through a registration filing.

Common Stock Profit Rights

Share proportionately in corporate profits.

Common Stock Voting Rights

Elect directors who select management.

Common Stock Liquidation Rights

Share proportionately in assets after all other claims are satisfied.

Preemptive Right

Right to share proportionately in new issues of the same stock.

Stock Indenture Agreement

Legal document defining shareholder rights for a specific stock issue.

Preferred Stock Dividend Preference

Receives fixed dividends before common stockholders.

Cumulative Preferred Stock

Unpaid dividends accumulate and must be paid later.

Non-Cumulative Preferred Stock

Unpaid dividends do not accumulate.

Participating Preferred Stock

May receive additional dividends beyond the stated amount.

Non-Participating Preferred Stock

Receives only the stated dividend.

Preferred Stock Liquidation Preference

Paid before common stockholders upon liquidation.

Preferred Stock Voting Rights

Normally no voting privileges.

Callable Preferred Stock

Company may redeem stock at its discretion per indenture agreement.

Convertible Preferred Stock

May be converted into common stock.

Preferred Stock Treated as Debt

Preferred stock with fixed redemption date or holder-optional redemption.

Dividend Treatment for Debt-Like Preferred Stock

Reported as interest expense.

Capital Stock

Common and preferred stock that has been issued.

Paid-In Capital (PIC)

Amounts received from stock issuance, warrants, or options.

Retained Earnings

Earnings accumulated minus dividends paid.

Treasury Stock

Company’s own stock repurchased and held; contra-equity account.

Subscribed Stock

Stock contracted to be issued but not yet issued.

Stock Subscriptions Receivable

Amounts owed by subscribers for stock.

Accumulated Other Comprehensive Income (AOCI)

Gains and losses recorded directly to equity under GAAP.

Reason Certain Gains/Losses Bypass Income

Political pressure from firms.

Issuing Stock Effect on Equity

Creates capital stock and paid-in capital.

Stock Subscription Contract Effect

Creates subscribed stock and subscriptions receivable.

Issuing Warrants or Options

Creates paid-in capital.

Treasury Stock Transactions Effect

Increase or decrease treasury stock balance.

Retiring Stock Effect

Reduces stock and paid-in capital.

Closing Net Income

Increases retained earnings.

Closing Net Loss

Decreases retained earnings.

Declaring Dividends Effect

Reduces retained earnings.

Issuing Par or Stated Value Stock at or Above Par

Credits common stock at par and PIC for excess.

Issuing Stock Below Par

May create a discount on common stock if PIC is insufficient.

No-Par Stock Issuance

Common stock credited for total sales price.

Convertible Preferred Stock Issuance

Recorded like regular preferred stock until conversion.

Conversion of Preferred to Common Stock

No gain or loss; book value method used.

Subscribed Stock Concept

Stock issued only after full payment is received.

Default on Stock Subscription

Balances removed and net credited to paid-in capital if allowed by law.

Warrants or Options Issued to Public

Recorded in paid-in capital.

Exercise of Warrants

Transfers PIC-Warrants to common stock and PIC-CS.

Treasury Stock Definition

Company’s own shares held for future use.

Treasury Stock Balance Type

Debit balance; contra-equity account.

GAAP Rule on Treasury Stock Gains/Losses

No gains or losses recorded in income.

Treasury Stock Cost Method

Records treasury stock at purchase cost.

Selling Treasury Stock at a Gain

Increase paid-in capital from treasury stock.

Selling Treasury Stock at a Loss

Reduce PIC-TS, then retained earnings if needed.

Stock Retirement Definition

Company repurchases and permanently cancels its stock.

Accounting for Stock Retirement

Adjust paid-in capital or retained earnings; no gains or losses.

Outstanding Shares Formula

Issued shares minus treasury shares.

Cash Dividend Accounting

Recorded as a reduction of retained earnings.

Dividend Declaration Date

Creates dividends payable liability.

Dividend Record Date

Determines eligible shareholders; no journal entry.

Dividend Payment Date

Dividends payable reduced; cash paid.

Property Dividend

Distribution of non-cash assets to shareholders.

Property Dividend Valuation

Property adjusted to fair value at declaration.

Liquidating Dividend

Dividend paid partly from paid-in capital.

Return of Capital

Reduction of paid-in capital.

Stock Dividend

Distribution of additional shares instead of cash or property.

Effect of Stock Dividends on Total Equity

No change in total stockholders’ equity.

Small Stock Dividend Valuation

Recorded at market value.

Large Stock Dividend Valuation

Recorded at par value.

Stock Split Purpose

Adjust market price by changing number of shares.

Stock Split Accounting

No journal entry; par value adjusted.

Lump-Sum Security Issuance

Multiple securities sold for one total price.

Proportional Method

Allocates price based on relative market values.

Incremental Method

Uses known market value of one security to value others.

Noncash Stock Issuance Valuation

Use fair value of stock or property, whichever is clearer.

Stock Issuance Costs

Reduce paid-in capital, not expensed.

GAAP Equity Presentation Requirement

Show components of stockholders’ equity on the balance sheet.

GAAP Equity Disclosures

Rights, preferences, conversions, contracts, and equity changes.