Accounting 203 Chapter 10

Stockholders’ Equity

The residual value of a company’s assets after deducting its liabilities (also known as “net assets”)

→ Represents the owner’s claims against the assets of a corporation after all liabilities have been deducted

Capital Stock

Amount of common and preferred stock that a company is authorized to issue.

I. Preferred Stock (PS)

II. Common Stock (CS)

III. Additional Paid-In Capital (APIC)

Retained Earnings (or Deficit)

A company’s cumulative net earnings or profit after accounting for dividends

Accumulated Other Comprehensive Income (AOCI)

Items that are often outside of the manager’s control (e.g., foreign currency translations, unrealized gains or losses on security). These items bypass net income and are recognized directly in equity

Treasury Stock (Share Repurchases)

Shares that were once outstanding but were later repurchased by the company

Raising Capital within a Corporation

Most large businesses are organized as corporations to increase the company’s ability to raise cash (or capital) by easing the transfer of ownership and limiting personal liability of owners

→ Ownership of a corporation is divided into many equal parts or shares. Owners are also called stockholders or shareholders

Authorized Shares

The maximum number of shares a company may issue in each class of stock, specified in the company’s charter

Issued Shares

The number of shares issued/sold to stockholders

Outstanding Shares

The number of shares owned by stockholders

→ The number of outstanding shares will differ from the # of issued shares if a corporation buys back some of their own stock

Treasury Stock

Previously issued shares, repurchased by the issuing corporation. When firms reacquire their own stock, the reacquired shares are not considered to be outstanding

Benefits of Common Stock

1. Voting in the election of the board of directors

→ Controls the company’s operating and financial policies

2. Sharing in the profits and dividends of the company

3. Keeping the same percentage of ownership if new stock is issued (I.e., referred to as a ‘Preemptive Right’)

4. During liquidation, share the distribution of the company’s assets

→ This is the residual claim because common stockholders are only paid after all creditors and preferred shareholders are paid in full (which is rare)

How Investors Make Money with Common Stock

1. Stock Appreciation: When value of stock increases above the price initially paid

2. Dividends: Payments to a company’s stockholders from earnings (can be cash or noncash)

Benefits of Preferred Stock

1. Generally, pays a regular dividend (a percent of par value)

2. Generally, a less risky investment as compared to common stock

3. Receive a priority over common stockholders in the payment of dividends and the distribution of assets in the event of liquidation

Preferred Stock Dividend Preferences

a. Preferred stock dividends are usually established as one of the terms of the issue

b. Most preferred stock issuances fix their dividend rate as a percentage of par value

c. Preferred stock always has a current dividend preference

Current dividend preference

i. Means that dividends must be paid to preferred stockholders before any dividends are paid to common stockholders

ii. This preference does not guarantee payment of preferred dividends. The company may choose to not pay dividends to both the preferred and common stockholders

Par Value

An arbitrary monetary amount printed on each share of stock that establishes a minimum price for the stock when issued but does not determine its market value

Additional Paid-In Capital (APIC)

The amout received in excess of the par value

Capital Stock

The portion of a corporation’s stockholders’ equity contributed by investors (owners) in exchange for shares of stock

Corporations can distribute cash to stockholders in the following ways:

i. The corporation can issue dividends

ii. The corporation can repurchase the shares from owners

What type of account is Treasury Stock

contra-equity account (normal debit balance)

Stockholder repurchases ___ equity

reduce

If a company reissues the treasury stock, we _____

record the receipt of cash and reduce the treasury stock account

Dividend

An amount paid by a corporation to a stockholder as a return on invested capital

i. Dividends are distributions of accumulated net income (I.e., retained earnings)

ii. Dividends are usually paid in cash but may also be paid in the form of noncash assets or additional shares of a corporation’s own stock

iii. All dividends reduce retained earnings

Cash Dividends

The payment of a cash dividend is preceded by an official announcement or declaration by the board of directors

Declaration Date

The date on which a corporation announces its intention to pay a dividend

Dollar Amount of the Dividend

Usually stated as the number of dollars/cents per share

Date Recorded

The date on which a stockholder must own shares of stock to receive a dividend

Payment Date

The date the dividend will be paid

Stock Dividends

i. A stock dividend transfers shares of stock from the corporation to its stockholders — additional shares of the corporation’s own stock

ii. For each share outstanding, a fixed number of new shares are issued and an amount of retained earnings is transferred to the contributed capital accounts (referred to as capitalization of retained earnings)

Stock Splits

A stock split increases the number of outstanding shares without altering the proportionate ownership of the corporation (no JE)

Earnings per Share (EPS)

The ratio of earnings (net income to shares outstanding (weighted average number of shares outstanding)

EPS = Net Income / Weighted Average Number of Shares Outstanding

Price Earnings Ratio (PE)

The market price per share divided by EPS