Stockholders' Equity Notes

Corporations submit articles of incorporation to the state.
The state issues a corporate charter.
Incorporating in states like Delaware, which favor the corporate form, can be advantageous.
Accounting for stockholder's equity is governed by each state's business incorporation act.

Contributed (paid-in) capital: The total amount paid in on capital stock, including the par value of outstanding stock and additional paid-in capital.
Earned Capital
- Retained Earnings: Represents the earned capital of the company.
- Accumulated Other Comprehensive Income: The aggregate amount of other comprehensive income, including unrealized gains/losses on available-for-sale debt investments and certain derivative transactions.

Voting Rights: Common stockholders can vote in the election of the board of directors and on actions requiring stockholder approval at the annual meeting.
Residual Claim: Common stockholders are paid from remaining assets after all other claims (liabilities) have been paid.
Preemptive Right: The right to acquire a proportionate share of new common stock issues. Without this right, existing stockholders' ownership may be diluted by new stock issuances without their knowledge and at potentially unfavorable prices to them.
Term: Common stock is perpetual, lacking a maturity or redemption date.
Dividends: Common stockholders may receive dividends when approved by the board of directors. Dividend amounts may vary and are not guaranteed.

Dividends: Preferred stockholders receive dividends before common stockholders.
- Cumulative Feature: If a dividend isn't paid in a year, it must be paid in a future period before common stockholders receive any dividend.
Nonvoting: Preferred stockholders typically lack voting rights like common stockholders.
Liquidation Preference: If the company liquidates, preferred stockholders have a claim on assets after creditors but before common stockholders.
Term: Preferred stock is typically perpetual or redeemable due to a specific event.
- In limited cases, preferred stock is mandatorily redeemable and reported as a liability.

Purchase of Treasury Stock:
- Cost method (more widely used): Treasury stock reduces stockholders’ equity.
Sale of Treasury Stock:
- Above Cost: Increases total assets and stockholders’ equity.
- Below Cost: Increases total assets and stockholders’ equity.
Retiring Treasury Stock:
- Results in cancellation of treasury stock.
- Reduces the number of issued shares.

Types of Dividends:
- Cash dividends
- Property dividends (dividends in kind)
- Liquidating dividends
- Stock dividends
All dividends, except stock dividends, reduce total stockholders’ equity.

Stock Dividends: Issuance of a company's own stock to stockholders on a pro rata basis without receiving any consideration.
- Used when management wishes to capitalize part of earnings.
- Small Stock Dividend: If less than 20-25% of outstanding shares, the company transfers fair market value from retained earnings.
Large Stock Dividend: More than 20-25% of previously outstanding shares.
- Similar effect on market price as a stock split.
- Par value transferred from retained earnings to capital stock.