The Statement of
Stockholders’ Equity
Module 5
Statement of Shareholders’
Equity
Documents changes in balance sheet equity
accounts from one accounting period to the
next
Provides an important link between the
balance sheet and the income statement
Company may report info in note or
supplementary schedule rather than formal
statement if desired….(many do!)
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Statement of S/E
In a nutshell, it simply explains how
each account got from the balance at
the beginning of the period to the
balance at the end of the period and
describes “events” that caused the
balances to change
Federal Express Statement of Changes
in Stockholders' Equity
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Retained Earnings
Changes in R/E account are primarily
result of net income/loss and dividends
Balance can also be affected by prior
period adjustments and some changes
in accounting principles
Changes in R/E are watched by
analysts and the details on what caused
the changes are documented in the
Statement of Stockholders’ Equity
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Ownership of a Corporation
Owners of common stock generally
receive the following rights:
– Voting (in person or by proxy).
– Distributions of profits (in the form of Dividends).
– Distributions of assets in a liquidation.
– Offers to purchase shares of a new stock
issue (pro rata basis).
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Authorized, Issued, and
Outstanding Capital Stock
Authorized
Shares
The maximum number
of shares of capital
stock that can be sold
to the public is called
the authorized number
of shares.
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Authorized, Issued, and
Outstanding Capital Stock
Authorized
Shares
Issued Unissued
shares
shares
have
have been
sold.
never been
sold.
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Authorized, Issued, and
Outstanding Capital Stock
Authorized
Shares
Issued
Shares
owned by stockholders.
Outstanding
Shares
Unissued
Shares
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Authorized, Issued, and
Outstanding Capital Stock
Authorized
Shares
Issued
Shares
owned by stockholders.
Outstanding
Shares
Treasury
Shares
Unissued
Shares
reacquired by the
corporation.
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Sale and Issuance of Capital
Stock
An initial public offering (IPO) is the very
first time a corporation sells stock to the
public.
SEC's IPO Information
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Common Stock
Basic voting stock of the corporation
Ranks after preferred stock for dividend
and liquidation distribution.
Dividend rates are determined by the
board of directors based on the
corporation’s profitability
and other factors.
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Par Value and No-par Value
Stock
Par value
– Is a nominal value per share of capital
stock specified in the charter.
– Has no relationship to market value.
– Serves as the basis for legal capital.
Legal capital is the amount of capital,
required by the state, that must remain
invested in the business.
– It serves as a cushion for creditors.
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Par Value and No-par Value Stock
No-par value is capital stock that does
not have an amount per share specified
in the charter.
When no-par stock is issued by a
corporation, the amount of legal capital
is defined by the state.
Stated value is an amount per share
that is specified by the corporation when
it issues no-par stock.
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Preferred Stock
Has dividend and liquidation preference
over common stock.
Cumulative preferred stock has a
preference for all past dividends over any
paid to common shareholders.
Generally does not have voting rights.
Usually has a par or stated value.
Usually has a fixed dividend rate that is
stated as a percentage of the par value.
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Special Features of Preferred
Stock
Convertible preferred stock may be
exchanged for common stock. (It’s up
to the stockholder to decide.)
Callable preferred stock may be
repurchased by the corporation at a
predetermined price. (It’s
the company’s choice.)
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Accounting for Capital Stock
Transactions
Two primary sources of stockholders’ equity:
– Contributed capital
Par or stated value of issued stock.
Additional paid-in capital in excess of par or
stated value.
– Retained earnings
The cumulative net income earned by the
corporation less the cumulative dividends
declared by the corporation.
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Accounting for the Issue of
Common Stock
When stock is issued, the equity
account Common Stock is credited
(increased) for the par or stated
value of the stock.
If the stock sold for more than par,
the additional amount is credited
(increased) to the equity account
Paid in Capital in Excess of Par,
Common Stock.
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Treasury Stock
A corporation’s own stock that had been
issued but was subsequently reacquired
and is still being held by that corporation.
Why would a corporation reacquire its
own stock?
– To reduce the shares outstanding.
– Because the market price is low.
– To increase earnings per share, if shares
won’t be reissued soon.
– To use in employee stock option programs.
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Treasury Stock
is considered issued stock but not
outstanding stock.
has no voting or dividend rights.
is a contra equity account.
reduces total stockholders’ equity on the
Balance Sheet.
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Accounting for Cash Dividends
Dividends must be declared by the board of
directors before they can be paid.
The corporation is not legally required to
declare (and subsequently pay) dividends.
Once a cash dividend is declared, a liability
(Dividends Payable) is created.
Cash dividends require sufficient cash and
retained earnings, but NOT necessarily Net
Income in the current year, to cover the
dividend.
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Dividend Dates
Date of declaration
Date of record
Date of actual payment to shareholders
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Some interesting side trips…
Dividend calendar McGraw Hill
Dividends are not always straightforward
Dividend advice
DRIPs
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Dividends on Preferred Stock
Current preferred dividends must be paid before
paying any dividends to common stock.
If a preferred dividend is not paid, the unpaid
amount is either cumulative (a dividend in
arrears) or noncumulative.
– Cumulative: Unpaid dividends must be paid
before common dividends.
– Noncumulative: Unpaid dividends are lost.
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Calculating Preferred and
Common Dividends
ABC Co. has 10 shares of $100 par, 6%
cumulative preferred stock outstanding.
Assume that NO dividends were paid in
19X1.
At the end of 19X2, the Board of Directors
declares a total of $200 worth of dividends
for its preferred and common shareholders.
How much will go to the preferred
shareholders?
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Preferred Shareholders
get their dividends first:
Cumulative means that the preferred shareholders
get all the past dividends that they were not paid
(called “dividends in arrears” which must be
footnoted, but NOT reported as a liability on the
balance sheet) before common stockholders can
receive a dividend.
10 preferred shares x $100 par x .06 = $60/year
They get a total of $120: $60 for 19X1 dividends in
arrears and $60 for 19X2 current year dividend.
Common shareholders get the remaining $80.
($80/30 shares outstanding=$2.67 per share.)
[31 shares issued - 1 still in Treasury = 30 shares outstanding.]
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Cash Dividends
What’s needed to pay cash dividends?
– retained earnings
– cash (but, could borrow cash to pay dividend)
– no restrictions from outsiders
Effects of cash dividends on financial
statements
– decreases Assets (when they are actually
paid) and Retained Earnings (dividends).
– NO EFFECT on Net Income.
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Accounting for Stock Dividends
Stock dividends are distributions to
stockholders of additional shares of stock,
NOT CASH!
Why issue a stock dividend?
Low on cash (but want to “reward”
stockholders)
To decrease market price of stock. Why?
To increase number of stockholders
(assuming some of the newly issued
stock will be sold).
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Accounting for Stock Dividends
All stockholders receive the same percentage
increase in the number of shares they own (pro
rata basis).
No change in total stockholders’ equity.
No change in par values.
Effect on financial statements?
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Retained Earnings
Appropriating (or Restricting) Retained
Earnings
– Board of Directors can restrict (imposed by
outsiders) or appropriate (company’s choice)
portions of retained earnings.
It is a way of communicating why more
dividends are not being paid.
Does NOT change TOTAL Ret. Earnings.
An appropriation (or “restriction”) only separates the
retained earnings into two categories, unappropriated
and appropriated. (Must have Unappropriated or
Unrestricted R.E. to declare dividends.)
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Accounting for Stock Splits
Distributions of 100% or more of
stock to stockholders.
Decreases par value per share of
stock, but total par value stays the
same.
Increases number of outstanding
shares.
No change in total stockholders’
equity.
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Stock Split: example
XYZ Co. has 1000 shares outstanding.
Each share has a $10 par value, but is selling
on the NYSE for $80 per share.
The Company declares a 4 for 1 stock split.
Complete the following:
# shares outstanding
Par value per share
Total par value
Total stock market value
Market value per share
Before
After
1,000
4,000
$10
$2.50
$10,000 $10,000
$80,000 $80,000
$80
$20
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Stock Split: example continued
XYZ Co. has 1000 shares outstanding.
Each share has a $10 par value, but is selling
on the NYSE for $80 per share.
The Company declares a 4 for 1 stock split.
Ms. Smith owned 100 shares before the split.
Complete the following for Ms. Smith’s stock:
Before
After
100
400
# shares owned…………...
4,000
Total company shares…... 1,000
10%
10%
% of stock owned………...
Total market value of
$8,000
Ms. Smith’s stock……. $8,000
Remember, the stock price dropped from $80 to $20 per share.
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Retained Earnings
Represents the net income that has been
earned less dividends that have been
declared since the first day of operations
for the company.
Example (amounts assumed)
Balance January 1, 20X1
$ 500,000
+ Net income for 20X1
30,000
- Dividends for 20X1:
Cash dividends
(10,000)
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Retained Earnings
What affects Retained Earnings?
– net income (through closing entries)
– cash dividends
– stock dividends
– prior period adjustments
Accounting ERRORS made in previous
years that are being corrected now.
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The End
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