Int. 2 Chapter 14: Stockholders' Equity

Residual interest

Owner/ stockholder’s interest in a company

Stockholders’ (owners’) equity

Represents the cumulative net contributions by stockholders plus retained earnings and accumulated comprehensive income

Contributed (Paid-in) capital

total amount paid in on capital stock—the amount provided by stockholders to the corporation for use in the business.

Earned capital

Capital that develops from profitable operations

• consists of all undistributed income that remains invested in the company.

Retained earnings

represents the earned capital of the company

Accumulated other comprehensive income

Reflects the aggregate amount of the other comprehensive income items.

• Includes items- unrealized gains and losses on available-for-sale debt investments and unrealized gains and losses on certain derivative transactions

Common stock

residual corporate interest that bears the risk of loss and receives the benefit of success.

Paid-in Capital in Excess of Par—Common Stock

Account indicates any excess over par value paid in by stockholders in return for the shares issued to them

• Once paid in, the excess over par becomes a part of a company’s additional paid-in capital

• known as “Additional Paid-In Capital”

No-par stock

issuance of common stock without par value

Stated value

minimum value

• creates the same issues as par value stock.

Lump-sum sales

When corporation issues two or more classes of securities for a single payment

• Companies use one of two methods of allocation…

  1. Proportional method

  2. Incremental method

Water stock

Overvaluation of the stockholders’ equity resulting from inflated asset values

Secret Reserves

When corporation undervalues the recorded assets

Dividend in arrears

Any passed dividend on cumulative preferred stock

Participating preferred stock

share ratably with the common stockholders in any profit distributions beyond the prescribed rate

Convertible preferred stock

Allows stockholders, at their option, to exchange preferred shares for common stock at a predetermined ratio.

Callable preferred stock

Permits the corporation, at its option, to call or redeem the outstanding preferred shares at specified future dates and at stipulated prices

Redeemable preferred stock

Allows the stockholder to redeem it at any time.

Cost method

As the name implies, a company will debit the Treasury Stock account for the reacquisition cost of the stock. On the balance sheet, this account is a deduction from the total paid-in capital and retained earnings.

Par (stated) value method

All transactions in treasury shares are recorded at their par value. On the balance sheet, treasury stock is reported as a deduction from capital stock only.

Both methods are generally acceptable, but the cost method enjoys more widespread use. We will focus on the accounting for the cost method.

Preferred stock

special class of shares that possess certain preferences, characteristics, or features not possessed by common stock

Cumulative Preferred Stock

Requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders

Treasury Stock

corporation’s own stock, reacquired after having been issued and fully paid

Outstanding stock

means the number of shares of issued stock that stockholders own

Cash dividend

board of directors of a corporation votes on the declaration and later pays dividend with cash

Property dividends (Dividends in kind

Dividends payable in assets of the corporation other than cash that may be merchandise, real estate, or investments, or whatever form the board of directors designate

Liquidating dividends

Dividends based on other than retained earnings; considered return of the stockholder’s investment rather than of profits

• Dividend comes out of APIC account

Stock dividend

issuance by a corporation of its own stock to its stockholders on a pro rata basis, without receiving any consideration.

• Can be small or large

Small (Ordinary) Stock Dividend

Stock dividends of less than 20–25%

Large Stock dividend

Stock dividend distribution of 25% or more of the common shares outstanding.

Stock split

Reduce the market price of shares

Statement of Stock equity

Presented…

1. Balance at the beginning of the period.

2. Additions.

3. Deductions.

4. Balance at the end of the period.

Return on Common Stockholders’ Equity (ROE)

measures profitability from the common stockholders’ viewpoint; ratio shows how many dollars of net income the company earned for each dollar invested by the owners

Trading on the equity

using borrowed money or issuing preferred stock in hopes of obtaining a higher rate of return on the money used.

Payout ratio

Ratio of cash dividends to net income;

Book value per share

amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet.