Reporting and Interpreting Stockholders’ Equity

This set of vocabulary flashcards covers the reporting and interpretation of stockholders' equity, including stock types, dividend practices, and the structure of corporations, sole proprietorships, and partnerships.

Corporation

A form of business that can raise large amounts of capital from many investors, provides limited liability to its owners, and is created by application to a state government.

Contributed capital

Primary source of stockholders' equity resulting from the sale of stock to investors.

Earned capital

Capital generated by a company’s profit-making activities, represented as Retained Earnings or an Accumulated Deficit if negative.

Authorized number of shares

The maximum number of shares of stock a corporation can issue as specified in its corporate charter.

Issued shares

The total number of shares that have been sold to the public.

Unissued shares

Shares that have been authorized by the charter but have never been sold.

Treasury shares

Issued shares that have been reacquired by the corporation from the public and are held by the issuing company.

Outstanding shares

The total number of issued shares currently owned by stockholders, calculated as issued shares minus treasury shares.

Residual claim

The benefit of stock ownership that provides a proportional share of the distribution of remaining assets upon the liquidation of a company.

Par value

The nominal value per share established in the corporate charter, often used to determine the legal capital of a business.

Legal capital

The specific amount of capital required by the state that must remain invested in the business to protect creditors.

Initial public offering (IPO)

The very first sale of a company’s stock to the public when the company first “goes public."

Seasoned offerings

Additional sales of new stock to the public that occur after an initial public offering.

Stock awards

Compensation that grants shares of stock to employees which vest on future dates.

Stock options

Contracts that give employees the right to buy stock in the future at a fixed price.

Treasury stock

A contra-equity account representing repurchased shares; it is not an asset and carries no voting or dividend rights.

Declaration date

The date on which the board of directors officially approves a dividend, creating a legal liability that must be recorded.

Date of record

The date on which the corporation defines the list of current stockholders eligible to receive a dividend payment; no journal entry is required.

Date of payment

The date on which cash is disbursed to shareholders to fulfill the dividend liability.

Dividend yield ratio

A ratio used to evaluate a company's dividend policy by measuring how much is paid out in dividends relative to share price.

Ex-dividend date

The date established by stock exchanges (typically two days before the record date) to account for the time needed to transfer stock ownership.

Stock dividend

A distribution of additional shares of stock to existing stockholders on a pro rata basis at no cost, which does not change total stockholders' equity.

Small stock dividend

A stock dividend representing less than $20\%$ to $25\%$ of outstanding shares, recorded at the current market value of the stock.

Large stock dividend

A stock dividend representing more than $20\%$ to $25\%$ of outstanding shares, recorded at the par value of the stock.

Stock split

A transaction giving stockholders additional shares for each share held while reducing the par value proportionally; no journal entry is required.

Preferred stock

A class of stock that typically has a fixed dividend rate and priority over common stock for dividend payments and asset liquidation, but usually lacks voting rights.

Current dividend preference

A requirement to pay current year dividends to preferred stockholders before common stockholders receive any distribution.

Cumulative dividend preference

A feature where any unpaid dividends on preferred stock (dividends in arrears) must be paid before common dividends can be distributed.

Dividends in arrears

Unpaid dividends on cumulative preferred stock from prior years, disclosed in notes rather than as a liability until declared.

Sole proprietorship

An unincorporated business owned by one person, utilizing a Capital account and a Drawing account for equity.

Partnership

An unincorporated business owned by two or more individuals where separate capital and drawing accounts are maintained for each partner.