Key Points on Stockholders' Equity

  • Accounting Equation:
    Assets=Liabilities+Stockholders’ Equity\text{Assets} = \text{Liabilities} + \text{Stockholders’ Equity}

    • Stockholders’ Equity Components:
    1. Paid-in Capital: Investment by stockholders.
    2. Retained Earnings: Earnings retained and not distributed as dividends.
    3. Treasury Stock: Company’s repurchased stock.

  • Types of Business Entities:

    • Sole Proprietorship: Owned by one person.
    • Partnership: Owned by two or more persons.
    • Corporation: Legally separate from its owners and liable for its own taxes.

  • Equity Financing Stages:

    1. Founders’ investment.
    2. Friends and family investment.
    3. Angel investors and venture capital.
    4. Initial Public Offering (IPO).

  • Types of Corporations:

    • Publicly Held: Open for public investment, regulated by the SEC.
    • Privately Held: No public investment, fewer stockholders, not SEC regulated.

  • Stockholder Rights:

    • Right to vote.
    • Right to receive dividends.
    • Right to share in asset distribution during dissolution.

  • Corporation Advantages and Disadvantages:

    • Advantages: Limited liability; easier capital raising.
    • Disadvantages: Double taxation; increased paperwork.

  • Common Stock Features:

    • Authorized: Total available shares.
    • Issued: Shares sold to investors.
    • Outstanding: Shares held by shareholders (not including treasury).
    • Par Value: Nominal value assigned when shares are issued.

  • Preferred Stock:

    • Priority in dividends and asset distribution if dissolved.
    • May be cumulative (dividends in arrears) or convertible to common stock.

  • Treasury Stock:

    • Purchased shares of the company. Decreases stockholders’ equity.
    • Recorded as a contra equity account.
    • Sale of treasury stock can impact additional paid-in capital.

  • Retained Earnings:

    • Represents net income minus dividends over the company’s life.
    • Not an actual cash reserve.

  • Dividends:

    • Distributions to stockholders; must be declared by the board.
    • Recorded on declaration date; paid on payment date.

  • Stock Dividends and Splits:

    • Stock dividends increase shares without cash; recorded at market value.
    • Stock splits increase shares by reducing par value; no entry made.

  • Reporting Stockholders’ Equity:

    • Balance sheet shows equity accounts at a point in time.
    • Statement of stockholders’ equity shows changes over time.