Study Notes on Stockholders' Equity
ACCOUNTING EQUATION
Accounting Equation: Assets = Liabilities + Stockholders’ Equity
Two funding sources for assets: own money (equity) or borrowed money (liabilities).
Indirect impact of revenues and expenses on stockholders’ equity through retained earnings.
STOCKHOLDERS’ EQUITY
Stockholders' Equity Components:
Common Stock: Value from external investments.
Retained Earnings: Accumulated profits after dividends.
Changes in common stock, retained earnings, or dividends affect total stockholders’ equity.
CORPORATIONS
Corporation Characteristics:
Separate legal entity.
Limited liability for stockholders.
Stockholders own shares, which represent ownership.
Small corporations incorporate through state approval.
ISSUING STOCK
Issuance Variables:
Common Stock: First-time stock sold.
Preferred Stock: Generally provides fixed dividends.
Paid-In Capital: Excess amounts received over par value.
Paid-In Capital in Excess of Par: An account for amounts exceeding par value for stock issued.
TREASURY STOCK
Definition: Shares repurchased by the corporation.
Affects total stockholders’ equity by decreasing it.
Selling treasury stock can create gains/losses relative to purchase price.
DIVIDENDS
Types: Cash dividends (paid directly) and stock dividends (additional shares).
Cash dividends decrease cash and retained earnings; require board declaration, sufficient cash, and retained earnings.
Stock dividends transfer earnings to common stock and paid-in capital.
BALANCE SHEET SUMMARY
Two sections for stockholders’ equity:
Paid-in Capital (from stock investments)
Retained Earnings (profits)
Total Stockholders' Equity Equation: Total Paid-In Capital + Retained Earnings - Treasury Stock.
STOCK SPLITS
Definition: Reduction of par value and issuance of additional shares.
No journal entry required. Total value of capitalization remains the same.
PREFERRED STOCK DIVIDENDS
Cumulative: Missed dividends must be paid in future periods.
Non-cumulative: Missed dividends not paid later.