Chapter 11 - Stockholders' Equity

Treasury Stock

Reports shares that were previously owned by stockholders but have been reacquired and are now held by the corporation.

Retained Earnings

Reports the accumulative amount of net income earned by the company, less the accumulative amount of dividends from when the corporation was first organized.

Accumulated Other Comprehensive Income

Reports unrealized gains and losses which are temporary changes in the value of certain assets and liabilities the company holds.

Contributed Capital

The amount of capital that a company receives on investors contributions, in exchange for the companies common and preferred stock.

Additional paid in capital =

(# of shares issued)(market price per share - par value)

Cash received =

(# of shares issued)(market price per share)

Common stock =

(# of shares issued)(par value per share)

Treasury stock & cash =

(# of shares repurchased)(purchased price)

Stockholders' Equity four main categories:

1. Contributed Capital 2. Retained Earnings 3. Treasury Stock 4. Accumulated Other Comprehensive Income (Loss)

The four significant payment dates related to dividends:

1. Date of declaration 2. Date of record 3. Date of payment 4. Year end

Equity financing advantages:

1. Equity does not have to be repaid. 2. Dividends are optional.

Investors purchase stock with the hope of making money, which can be achieved in two ways:

1. If the stock price goes up 2. When income is received from dividends.

Debt financing advantages:

1. Interest is tax deductible. 2. Debt does not change stockholder control of the corporation.

Benefits of owning common stock include:

1. The right to vote. 2. The receipt of dividends. 3. A residual claim to assets at liquidation. 4. Preemptive rights - the rights to purchase newly issued stock before it is available to others.

Preferred stock

a class of stock that a person can make available to a special group of investors.

Year end

company closes all temporary accounts into retained earnings

Date of declaration

day that the board of directors declares that a dividend will be distributed

Date of payment

dividend distributed to shareholders

Average common stockholders' equity

helps find return on equity. A higher ratio means common stockholders are likely to enjoy greater returns. Beginning Common stockholders' equity + Ending common stockholders' equity / 2

Par value

how much is reported in specific contributed capital accounts when stock is sold.

Price / earnings (PE)

indicates how many times more than the current years earnings investors are willing to pay for a companies common stock. Current stock price (price per share) / earnings per share (annual)

Issued shares

issued shares are the number of shares of stock the company has sold to investors.

Date of record

list of current shareholders that will receive the dividend is finalized

Return on equity (ROE)

measures the amount of income generated for each dollar of common stockholders' equity. Net income - preferred dividends / Average common stockholders' equity

Outstanding shares

outstanding shares represent shares that are currently held by stockholders, and not by the corporation itself. It also represents the number of shares entitled to receive dividends. If the number of shares issued is equal to the number of shares outstanding, then the company does not hold any treasury stock.

Authorized shares

the number of shares authorized is simply the number of shares the corporation is allowed to sell, and is specified in the corporate charter.

Treasury stock

the number of shares of stock that the company has repurchased from investors. Treasury stock reduces total stockholders' equity.

Corporation

the only type of business entity where ownership is acquired by purchasing shares of stock.

Stock split

the total number of authorized shares is increased by the exact ratio.

Earnings per share (EPS)

used to report how much income is generated per each share owned by common stockholders; disclosed on the income statement. An increase from one year to another indicates an increasing rate of profitability. Preferred dividends - net income / Common shares outstanding

Additional paid-in captial

used when the market price per share is greater than the stocks par value.

Debt financing

when the corporation borrows money from a creditor like a bank.

Equity financing

when the corporation sells stock in exchange for cash.