Ch 10 Stocks

Share holders

  • Can elect board of directors

Stages of Equity financing

  • 1. Inv founders

  • 2. Inv but friends of founders

  • 3. Inv venture capital firm

  • 4. Initial pub offering(IPO)

Pub

  • More stockholders

  • Reg sec

  • Ex Walmart

Privately held corp

  • No pub inv

  • Fewer stockholders

  • Ex oil and gas companies

Rights

  • Vote

  • Receive dividends

  • Distribution of assets

🌟 Advantages

  • Limited Liability: Stockholders only risk losing the money they personally invested.

  • Capital & Ownership: Raising funds and transferring ownership shares is simple.

  • Outside Investment: Attracting new investors is much easier compared to other business structures.

⚠ Disadvantages

  • Double Taxation: Corporate earnings are taxed twice—once at the corporate level and again on individual stockholder dividends.

  • Heavy Paperwork: Administrative demands and legal documentation requirements are high.

  • Strict Regulation: Federal and state governments impose rigorous reporting and oversight compliance rules.

Outstanding stock + treasury stock =issued stock

  • Authorized out+ treasury+ unissued stock


The Two Types of Stock Value

  • Par Value

    • Arbitrary legal amount per share.

    • Set when corporation forms.

    • Listed on the stock certificate.

  • Market Value

    • Actual current selling price.

    • Determined by marketplace buyers.

    • Changes constantly during trading.

Scenario 1: No-Par Stock (The Simple Way)

When stock has no par value, all the money goes into one single account.

  • Debit Cash ($30,000): To record the total money coming into the business.

  • Credit Common Stock ($30,000): To record the total value of the ownership given away.

Scenario 2: Par Value Stock (The Split Way)

When stock has a par value (here, $0.01), you must split the incoming money into two separate accounts.

  • Debit Cash ($30,000): Stays the same; this is the total money collected.

  • Credit Common Stock ($10): Strictly limited to the par value ($0.01 per share \(\times \) 1,000 shares).

  • Credit Additional Paid-In Capital ($29,990): The leftover "premium" amount paid by investors above the baseline par value.

Preferred stocks

1. First Dibs on Dividends

  • Priority Payouts: If the company distributes cash profits (dividends), preferred shareholders get paid completely before common shareholders receive a single cent.

  • Fixed Amount: Their payout is a locked-in, set amount—either a specific dollar figure per share or a fixed percentage of the stock's par value.

2. First Dibs on Liquidated Assets

  • Company Dissolution: If the company goes out of business and shuts down, its assets are sold off for cash.

  • Asset Priority: After paying off debts to bankers and suppliers, preferred shareholders get their remaining money back before any leftover cash is handed down to common stockholders.

Recording Preferred Stock (Image 1)

Accounting for preferred stock follows the exact same pattern as common stock: split the cash between par value and the extra premium.

  • Debit Cash ($40,000): Total money collected from investors (40 per share \(\times \) 1,000 shares).

  • Credit Preferred Stock (30,000): Locked at the baseline par value (30 per share \(\times \) 1,000 shares).

  • Credit Additional Paid-In Capital (10,000): The extra "premium" cash kept by the company above the par value.

The Equity Balance Sheet Section (Image 2)

The Stockholders' Equity section groups all of the company's equity into clear, organized categories.

  • Paid-In Capital Block:

    • Preferred Stock ($30,000): Listed first due to its special privileges.

    • Common Stock ($10): Listed next, always kept at par.

    • Additional Paid-In Capital ($39,990): The combined excess premiums from both the preferred and common stock sales ($10,000 + $29,990 from earlier).

    • Total Paid-In Capital ($70,000): The absolute total amount of cash given directly to the company by all investors.

  • Earned Capital Block:

    • Retained Earnings ($30,000): Accumulated company profits kept inside the business, not paid out as dividends.

  • The Grand Total:

    • Total Stockholders' Equity ($100,000): Total Paid-In Capital + Retained Earnings.

Allocate Dividends Between Preferred and Common Stock

Scenario 1: Cumulative Stock (With Back-Pay)

Cumulative means if the company misses dividend payouts in the past, they owe that money to preferred shareholders later. These missed payments are called dividends in arrears.

  • Back-pay for 2022 & 2023: Preferred shareholders get $4,800 first ($2,400 \(\times \) 2 missed years).

  • Current pay for 2024: Preferred shareholders get their normal $2,400.

  • Leftovers for Common: Common shareholders only get what is left over: $2,800 ($10,000 total \(-\) $7,200 to preferred).

Scenario 2: Noncumulative Stock (No Back-Pay)

Noncumulative means if a company misses a dividend payout in a past year, it is gone forever. No back-pay is owed.

  • Back-pay for 2022 & 2023: Struck out entirely ($0).

  • Current pay for 2024: Preferred shareholders get their normal $2,400.

  • Leftovers for Common: Common shareholders win big here, keeping the rest: $7,600 ($10,000 total \(-\) $2,400 to preferred).

Treasury Stock

  • Boost price: Makes the stock price go up.

  • Return cash: Gives extra money back to investors.

  • Improve ratios: Increases Earnings Per Share (EPS).

  • Employee stock: Uses shares for employee bonus plans.

Treasury stock Debit

Cash Credit


  • Contra-Equity Account: Treasury stock is a negative equity account.

  • Subtracted at the Bottom: It is listed at the very end of the equity section and subtracted from the total.

  • Reduces Total Equity: Total stockholders' equity drops directly from $100,000 down to $97,000.

  • Common Stock Unchanged: The main stock account lines do not change because the shares are still considered "issued," just no longer "outstanding."


  • Debit Cash ($3,500): The actual money collected from selling the shares ($35 × 100 shares).

  • Credit Treasury Stock ($3,000): Erases the stock from the books at its original cost ($30 × 100 shares).

  • Credit Additional Paid-In Capital ($500): Records the "gain" difference ($5 per share profit).

  • No Income Gain: A company can never record a profit or income gain from buying or selling its own shares; the extra money goes directly into equity.

Would you like to see what happens if they sell treasury stock below cost (at a loss), or do you want to wrap up with a quick test review of all these


Resales of Treasury Stock (bellow cost)

  • Debit Cash ($2,500): The actual money collected from the sale ($25 × 100 shares).

  • Debit Additional Paid-In Capital ($500): Reduces equity to absorb the $5 per share "loss" difference.

  • Credit Treasury Stock ($3,000): Erases the stock from the books at its original cost ($30 × 100 shares).

  • No Income Loss: A company cannot record an income statement loss from transactions involving its own shares; the difference directly reduces equity.


Cash Dividends


  • Declaration Date

    • Date on which board of dierectors announces the next dividend to be paid

  • Record date:

    • the date on which the company looks at its records to determine who the stockholder of the company are

    • Is not recorded

  • Payment date:

    • the date of the actual distribution of dividends



  • March 15 (Declaration Date): Creates the legal obligation to pay.

    • Debit: Dividends — $500 (Reduces Equity)

    • Credit: Dividends Payable — $500 (Increases Liability)

  • April 15 (Payment Date): Pays out the cash to shareholders.

    • Debit: Dividends Payable — $500 (Decreases Liability)

    • Credit: Cash — $500 (Decreases Asset)