INVESTOR INSIGHT
How are the dollar prices per share established for stocks traded on organized
stock exchanges? What factors might influence the price of shares in the market–
place?
buyers and sellers of the shares.
The price of shares is influenced by a company’s earnings and dividends
as well as by factors beyond a company’s control, such as changes
F. Corporate Capital.
shareholders’ equity, or corporate capital.
2. The stockholders’ equity section of a corporation’s balance sheet consists of:
a. Paid-in (contributed) capital. Paid-in capital is the total amount of
cash and other assets paid in to the corporation by stockholders in
exchange for capital stock. When a corporation has only one class
of capital stock, it is common stock.
b. Retained earnings. Retained earnings is net income that a corpo-
ration retains for future use. It is often referred to as earned capital.
G. Accounting for Stock Transactions.
1. The primary objectives in accounting for the issuance of common stock
are to:
a. Identify the specific sources of paid-in capital.
b. Maintain the distinction between paid-in capital and retained earnings.
2. When the company records issuance of common stock for cash, it credits
par value.
those for par value stock.
credits the entire proceeds to Common Stock.
5. When stock is issued for services (compensation to attorneys or consultants)
consideration received, whichever is more clearly determinable.
H. Accounting for Treasury Stock.
for, and reacquired, but not retired.
2. Companies generally account for treasury stock by the cost method.
3. When the selling price of treasury stock is greater than its cost, the
company credits the difference to Paid-in Capital from Treasury Stock.
ACCOUNTING ACROSS THE ORGANIZATION
Reebok at one time bought back nearly a third of its shares which dramatically
reduced its available cash. Critics suggested that Reebok’s management was
Reebok.
What signal might a large stock repurchase send to investors regarding man-
agement’s belief about the company’s growth opportunities?
opportunities.
I. Preferred Stock.
1. To appeal to more potential investors, a corporation may issue an additional
class of stock, called preferred stock.
2. Preferred stock has contractual provisions that give it some preference
priority as to:
a. Distributions of earnings (dividends).
b. Assets in the event of liquidation.
3. Preferred stock dividend preferences may be classified as:
a. Cumulative—preferred stockholders must be paid both current-year
dividends and any unpaid prior-year dividends before common
stockholders receive any dividends.
the amount of dividends in arrears.
J. Dividends.
1. A dividend is a corporation’s distribution of cash or stock to its stockholders
on a pro rata (proportional) basis.
2. Dividends can take four forms:
a. Cash.
b. Property.
d. Stock.
K. Cash Dividends.
a. Retained earnings.
b. Adequate cash.
c. A declaration of dividends.
3. Three dates are important in connection with dividends:
a. The declaration date: the date the board of directors formally declares
tained by the corporation supply this information.
c. The payment date: the date the company mails the dividend checks
to the stockholders and records the payment of the dividend.
4. Preferred stock has priority over common stock in regard to dividends.
Preferred stockholders must be paid any unpaid prior-year dividends before
common stockholders receive dividends if the preferred stock is cumulative.
L. Stock Dividends.
1. A stock dividend is a pro rata distribution to stockholders of the corporation’s
own stock.
2. A stock dividend results in a decrease in retained earnings and an increase
in paid-in capital. Unlike a cash dividend, a stock dividend does not decrease
total stockholders’ equity or total assets.
3. If a company issues a small stock dividend (less than 25% of the cor-
poration’s issued stock), the value assigned to the dividend is the fair
value per share. If a company issues a large stock dividend (greater
than 20–25%) the value assigned to the dividend is the par or stated
value.
4. Stock dividends have no effect on the par or stated value per share, but
the number of shares outstanding increases.
M. Stock Splits.
balances in any stockholders’ equity accounts.
N. Retained Earnings.
corporation.
2. When a company has a net loss, it closes this amount to retained earnings.
3. A debit balance in Retained Earnings is identified as a deficit and is reported
as a deduction in the stockholders’ equity section.
O. Retained Earnings Restrictions.
balance currently unavailable for dividends.
2. Restrictions result from one or more of the following causes:
a. Legal restrictions. Many states require a corporation to restrict retained
earnings for the cost of treasury stock purchased.
b. Contractual restrictions. Long-term debt contracts may restrict retained
earnings as a condition for a loan.
expansion).
3. Companies generally disclose retained earnings restrictions in the notes
to the financial statements.
P. Prior Period Adjustments.
1. A prior period adjustment is the correction of an error in previously issued
financial statements.
Q. Retained Earnings Statement.
1. The retained earnings statement shows the changes in retained earnings
earnings account.
2. Prior period adjustments may either increase or decrease retained
earnings, while both cash dividends and stock dividends decrease retained
earnings.
R. Statement Presentation and Analysis.
Within paid-in capital, two classifications are recognized
3. Instead of presenting a detailed stockholders’ equity section in the
balance sheet and a retained earnings statement, many companies
prepare a stockholders’ equity statement. This statement shows the
changes in each stockholders’ equity account that have occurred during
the year.