Chapter 10 – Stockholder’s Equity
What does Stockholder’s Equity represent in the Accounting Equation?
The Owners’ residual claims
Stockholder’s Equity-3 sections
1. Paid in Capital – amount owners have invested
2.
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Chapter 10 – Stockholder’s Equity
What does Stockholder’s Equity represent in the Accounting Equation?
The Owners’ residual claims
Stockholder’s Equity-3 sections
1. Paid in Capital – amount owners have invested
2. Retained Earnings – amount of earnings the corporation as kept in the
company (retained). What accounts increase/decrease Retained Earnings?
3. Treasury Stock – Corporations stock that the company has repurchased on
the secondary market
Assets= Liabilities (creditors’ claim) + Stockholders Equity (owners’
To become corporation:
File articles of incorporation with the state that list nature of firms business, # of shares
of stock to be issued, list initial board of directors.
Can then sell stockor ownership in the corporation
1) Founder friends family
2) Outside angel investors/ venture capital firms
3) Go public: sell on a public market: NYSE or nasdaq or otc (seo is seasoned
equity offerings.) stockholders may have right to vote, right to dividends, right to
share in dividend of assets if corporation is dissolved, preemptive right (right to
keep your proportional share)
Stockholders may have the right to vote, the right to dividends, the right to share in
dividend of assets if corporation is dissolved, and the preemptive right.
Advantages and disadvantages of a corporation
disadvantages: government regulation is cumbersome and expensive; double taxation
advantages: stockholders have limited liability because corp is separate entity, can raise
more money, continuous life
What are authorized vs issued vs outstanding shares?
Stock - share of ownership in company, may have par value, stated value, or be no-par
stock. The par and stated values are for the most part meaningless these days,
however they change the journal entry when stock is sold to investors
Issuing stock - initial offer of stock is to either an underwriter (who sells to investors) or
directly to investor. This is called primary market, after issued its traded among
investors in secondary market. Once stock is traded in secondary market there is no
direct financial impact on corporation.
Issue price - amount stock is sold for
Authorized shares - # of sahres authorized by board of directors
Issued shares - # of shares that have been sold/issued to investors
Outstanding shares - # of shares held by investors (only differes from outstanding
shares if share repurchases (treasury shares)).
What is the difference between Common Stock and Preferred Stock?
Common stock - represents ownership (class A comes with voting rights)
Preferred stock - receive dividends before common stockholdrs, dividends paid are
specified (for example 9 bucks a year) do not recieve anyting more. Similar to loan in
that payments are specified but no rights to ownershp. Dying breed.
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