Accounting for Financial Modeling

Equity
 Common Stock

Preferred stock - no voting rights, fixed dividends, priority over common stock

Selling the common stock is the main source of capital, especially for younger companies

Common stock - security that represents the ownership in the company

Common stock traditionally has a par value (nominal value), and the value in excess of the par value is
called additional paid-in capital or APIC

Treasure stock - value of shares repurchased by the company (reduces shares outstanding)
 Common Stock

1. Suppose that we sold 100 shares at $10 each at the beginning

of year 1;
Period Year 1 Year 2 Year 3

2. Par value $1 - per share; Cash balance BS 1000 1000 850

Common stock par value BS 100 100 100

3. At the end of year 3, we repurchased 10 shares at $15; APIC BS 900 900 900

Treasury stock BS 0 0 (150)

4. Show cash balance from sale of common stock, par value, Total shareholder equity BS 1000 1000 850
APIC, treasury stock, and total equity;

5. Assume that cash balance only affected by operations with

common stock.
 Retained Earnings

Retained earnings represented accumulated earnings (net income) of the company net of dividends
paid

Retained earnings link the income statement to balance sheet

Revenue increases retained earnings through net income

Expenses decrease retained earnings by decreasing net income

 Retained Earnings

Retained Net Income Retained

Earnings Earnings
Beginning Dividends Ending
Balance (preferred, Balance
common)
 Retained Earnings Example

1. Suppose that our company had a net income of 100 in year 1, Period Year 1 Year 2 Year 3 Year 4
500 in year 2, and loss of 300 in year 3 and 4;
Retained earning opening balance -- 0 100 500 100

2. The company paid dividend of 100 in year 2, 3 and 4 to the Net income (loss) IS 100 500 -300 -300
holders of common stock ;
Dividend CFS 0 -100 -100 -100

3. Show retained earning balance, assume retained earning Retained eanings balance BS 100 500 100 -300
balance is 0 in year 1.
 Other Comprehensive Income

Other comprehensive income (OCI): revenue, expenses, gains and losses that do not appear on the income
statement

OCI include foreign currency translation, unrealized gain (loss) on investment or derivative securities,
pension plan gains or losses

Only unrealized items are recorded as other comprehensive income