Chapter 7

Stockholders’ Equity
 Financing is available in
two forms
Debt is borrowed capital from
banks or other creditors
Equity is capital invested by the
company’s owners through
issuing stock
Advantages of
Stock vs. Debt Financing
 Flexibility
Dividends on stock can be increased in profitable years and
reduced when the company is less profitable. Debt interest
is fixed.
 Exchanges facilitate trading
Large companies have ready markets for stock through the
stock exchange. Sometimes debt is not a widely traded.
 Return on investment
Stock generally provides a higher return in dividends and
in growth than interest on debt.
Disadvantages of
Stock vs. Debt Financing
 Control
Issuing stock involves giving voting rights to new
investors, resulting in less control of the company for
existing stockholders.
 Tax consequences
Interest on debt is tax deductible for the issuing company,
dividends on stock are not.
 Impact on ratios
Issuing stock decreases several important financial ratios,
including earnings per share.
Expanded Accounting Equation
Assets = Liabilities + Owners’ Equity

Assets = Liabilities + Stockholders’ Equity

Contributed Retained
Capital Earnings
 Retained Earnings Connects the
Income Statement and Balance Sheet
Income Statement
Revenues $ xxx
Less: Expenses xxx
Net Income $ inc

Statement of Retained Earnings

Retained Earnings, Beginning Balance $ xxx
Add: Net Income inc
Deduct: Dividends xxx
Retained Earnings, Ending Balance $ end

Balance Sheet
Total Assets $ xxx
Total Liabilities xxx
Stockholders’ Equity xxx
Retained Earnings end
Total Liabilities and Stockholders' Equity $ xxx
Stockholders’ Equity Components

Common Preferred
Stock Stock
Treasury
Stock

Retained
Additional Earnings
Paid-in
Capital
 Stockholders’ Equity
 Contributed Capital
 The amount the corporation has received
from the sale of the stock to the stockholders
 Normally carries voting rights

 Retained Earnings
• The amount of net income the corporation
has earned but not paid out as dividends
• Income the corporation retains and reinvests
 Contributed Capital
 Common stock
voting rights to elect the corporation’s officers and
establish its bylaws and governing rules
Often more than one class
 Preferred stock
Rights to receive dividends before common stock
holders.
 Additional paid in capital
The amount received for the issuance of stock in
excess of the par value of the stock
Number of Shares of Stock
Authorized Shares:
The maximum number of shares a corporation may issue as
indicated in the corporate charter.

Issued Shares:
The number of shares sold or distributed to stockholders.

Outstanding shares:
The number of shares issued less the number of shares held as
treasury stock. Shares actually in the stockholders’ hands.

*Treasury stock: Shares which have been repurchased by the

corporation, it is not part of the number of shares outstanding.
 Par Value
 “Legal capital”
 Amount stated on stock certificate
 Also called “stated value”
 Additional Paid-in Capital
 Amount received in excess of par when stock
was originally issued
 Retained Earnings
 Net income retained in the business (not paid out
as dividends) since its inception
 Reinvested in a variety of assets (not necessarily
liquid or cash)
 Preferred Stock
 Can tailor to specific needs of firm
 Stated dividend rate
 Percentage of the stock’s par value
 Per-share amount
 Often carries dividend preference over common
stock
 The greater the obligation to preferred stock, the
less attractive the common stock
 Preferred Stock Features
 Convertible : Allows preferred stock to be
exchanged for common stock.
 Redeemable: Allows stockholders to sell stock
back to the company
 Callable: Allows the firm to eliminate a class of
stock by paying the stockholders a specified
amount
 Participating: Allows preferred stockholders to
share on a percentage basis in the distribution of an
abnormally large dividend.
 Issuance of Stock
Stock may be issued for cash or for non cash assets.
Stock issued for cash:
When stock is issued for cash, the amount of its par value
should be reported in the stock account and the amount in
excess of par should be reported in the paid-in capital
account.
Cash (asset) increases and Common Stock and Additional-
Paid-in-Capital (both stockholders’ equity accounts) increase.
For on par stock there is no additional paid in capital account
Stock exchanged for noncash items:
Must be recorded at the fair market value of the stock or the
property, whichever is most readily determined.
 Stock Issued for Cash

Example:
Common Stock $ 10,000
1,000 shares of ( $10 par value × 1,000 shares)
$10 par value
stock
sold for $15 per Additional Paid-In Capital $5,000
share ([$15 – $10] × 1,000 shares)
 Stock Issued for Cash
To record the issuance of 1,000 shares of $10 common stock at $15
per share:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses
Equity
Cash 15,000 = Common Stock 10,000
Additional Paid in Capital 5,000

Cash 15,000
Common Stock 10,000
Additional Paid in Capital 5,000
To record the issuance of 1,000 shares of $10 common stock at $15 per
share
 Exercise 11-5 Stock Issuance
The following transactions are for Weber Corporation in 2012:
a) On March 1, the corporation was organized and received
authorization to issue 5,000 shares of 8%, $100 par value preferred
stock and 2,000,000 shares of $10 per value common stock.
b) On March 10, Weber issued 5,000 shares of common stock at $35
per share.
c) On March 18, Weber issued 100 shares of preferred stock at $120 per
share.
d) On April 12, Weber issued 10,000 shares of common stock at $45
per share.
Required:
1. Prepare the appropriate journal entries
2. Prepare the Stockholders’ Equity section of the balance sheet as of
December 31, 2012.
3. Does the balance sheet indicate the market value of the stock at
year-end? Explain
1. a. Journal entry not required.
b. Cash 175,000
Common Stock 50,000
Additional paid in capital – common stock 125,000
To record issue of common stock

c. Cash 12,000
Preferred Stock 10,000
Additional paid in capital – Pref. Stock 2,000
To record issue of Preferred stock

d. Cash 450,000
Common Stock 100,000
Additional paid in capital – Common Stock 350,00
To record issue of common stock
2.
8% Preferred stock, $100 par value, 5,000 shares authorized,
100 shares issued and outstanding 10,000
Common stock, $10 par value, 2,000,000 shares authorized,
15,000 shares issued and outstanding 150,000
Additional paid-in capital—preferred stock 2,000
Additional paid-in capital—common stock 475,000
Total contributed capital $637,000
3.
The balance sheet does not indicate the market value of the stock.
Market value is a function of the demand for the stock at various
economic indicators such as interest rates and inflation.
 Stock Issued for Noncash
Consideration
 Record at fair market value of consideration
given or received, whichever is more readily
determinable
Common or
Building Preferred
Stock
Example 11-2 Recording stock for
noncash consideration
Assume that on July 1, a firm issued 500 shares of $10 per
preferred stock to acquire a building. The stock is not widely
traded, and the current market value of the stock is not
evident. The building has recently been appraised by an
independent firm as having a market value of $12,000. In this
case, the issuance of the stock should be recorded as follows:

Building 12,000
Preferred Stock 5000
Additional paid in capital – Pref. Stock7,000
To record the issuance of preferred stock for building
Example 11-6 Stock Issuance
Horace Company had the following transactions
during 2012, its first year of business.
Issued 7,000 shares of common stock on May 1 to
acquire a factory building from Barkley Company.
Barkley had acquired the building in 2008 at a
price of $150,000. Horace estimated that the
building was worth $175,000 on may 1, 2012. Par
value of the common stock is $5.
Required Journal Entry
Building 175,000
Common Stock 35,000
Additional paid in capital 140,000
To record issued 7,000 common stock for factory building. 
 Exercise: 6 Stock Issuance
Horance Company has the following transactions during 2012, its first year
of business.
a. Issued 5,000 shares of $5 par common stock for cash at $15 per share.
b. Issued 7,000 shares of common stock on May 1 to acquire a factory
building from Barley Company. Barley had acquired the building in
2008 at a price of $150,000. Horance estimated that the building was
worth $175,000 on May 1, 2012.
c. Issued 2,000 shares of stock on June 1 to acquire a patent. The
accountant has been unable to estimate the value of the patent but has
determined the Horance’s common stock was selling $25 per share on
June 1.
Required:
Record an entry for each transaction.
Determine the balance sheet amounts for common stock and additional
paid-in capital.
 Treasury Stock
 Company buys back its own stock
 Contra-equity account (reduces stockholders’
equity)
 Not outstanding (no voting rights)

Journal Entry
Treasury Stock XXX
Cash XXX
To record the purchase of … shares of treasury stock
Reasons for Repurchasing Stock
 Provide for employee bonuses or benefit plans
 Maintain a favorable market price
 Improve financial ratios
 Maintain control of ownership
 Prevent unwanted takeover or buyout attempts
Presentation of Treasury Stock
Common stock, $10 par value, 1,000
shares issued, 900 outstanding $10,000
Additional paid-in capital—Common 12,000
Retained earnings 15,000
Total contributed capital and
retained earnings 37,000
Less: Treasury stock, 100 shares
at cost ($25 per share) 2,500
Total stockholders’ equity $34,500
 Resale of treasury stock
At greater than cost
Create additional paid-in-capital – Treasury stock account
Cash XXX
Treasury stock XXX
Additional paid-in-capital – Treasury stock XXX

At less than cost

deduct from additional paid-in- capital – Treasury stock
If it does not exist, deduct from retained earnings
Additional paid-in-capital – Treasury stock can never have a negative balance
Cash XXX
Additional paid-in-capital or retained earning XXX
Treasury stock XXX
No income statement accounts affected in treasury stock transactions,
only stockholders’ equity account.
 Exercise 11-8 Treasury Stock
The stockholders’ Equity category of Bradford Company’s balance sheet on
January 1, 2012, appeared as follows:
Common stock, $10 par, 10,000 shares
Issued and outstanding $100,000
Additional paid-in capital 50,000
Retained Earnings 80,000
Total stockholders’ equity 230,000

The following transaction occurred during 2012:

a. Reacquired 2,000 shares of common stock at $20 per share on July 1.
b. Reacquired 400 shares of common stock at $18 per share on August 1.
Required:
c. Record the entries in journal form.
d. Assume that the company resold the shares of treasury stock at $28 per share
on October 1. Did the company benefit from the treasury stock transaction?
If so, where is the “gain” presented on the balance sheet?
1. a Treasury Stock 40,000
Cash 40,000
To record the purchase of 2,000 shares of treasury stock at $ 20
per share.
b. Treasury Stock 7,200
Cash 7,200
To record the purchase of 400 shares of treasury stock at $ 18 per
share.

2. Resale price of treasury stock (2,400 × $28) $67,200

Less: Cost of treasury stock ($40,000 + $7,200) 47,200
Excess of selling price over cost $20,000

  This “excess,” or “gain,” is shown on the balance sheet as an increase

in the Additional Paid-in Capital—Treasury Stock account.
 Retirement of Stock
 When the stock is repurchased with no intention of
reissuing at a later date.
 Company may wish to eliminate a particular class of stock
or group of stockholders.
 Remove from capital stock account at original issue price
 Remove any paid-in capital that resulted from the original
issue
 If retired at less than its price, reflect the difference is
Paid-In Capital from stock Retirement Account
 If retired at more than its issue price, the difference
reduces retained earnings
 No income statement accounts are affected by the
retirement
Dividends: Distribution of Income
to Shareholders
Cash dividends
Stock dividends
 Cash Dividends
 Reduce retained earnings when declared
 Create liability, Dividend Payable, on the date they
are declared
 Payment reduces liability, does not affect retained
earnings
 Requires sufficient cash, and adequate balance of
retained earnings
 A dividend is not an expense on the income
statement
Company Policy: Dividend Payout
Ratio

Annual Dividend Amount

Annual Net Income

The % of
earnings paid
as dividends
 Dividends
Entry required to record:
(1) dividends declared
(2) dividends paid

12/31/08 1/15/09

Pay
Reduce dividends
retained
earnings
 Cash Dividends
Date of Paid Stockholders Payment
on
declaration to on date of record date

Declaration of cash dividends

Retained Earnings XXX
Cash dividends payable XXX
To record the declaration of a cash dividend

Payment of cash dividends

Cash dividends payable XXX
Cash XXX
To record the cash dividends payment
Allocation of Cash Dividends
1. Distribute dividends in arrears, if any, to
preferred

2. Distribute current year’s dividends to

preferred

3. Distribute remainder to common (or to both if

preferred is participating)
 Cash Dividends Example
 In 2008, Stricker Company declares a
$70,000 dividend (no dividends were paid in
2006 and 2007).
There are 10,000 shares of $10 par, 8%
preferred stock and
40,000 shares of $5 par common stock
outstanding.
 Cash Dividends Example
Noncumulative Preferred Stock
To Preferred To Common
Step 1: Distribute current-year dividend
to preferred (10,000 shares × $10 par ×
8% × 1 year) $8,000
Step 2: Distribute remaining dividend to
common ($70,000 – $8,000) $62,000
Total allocated $8,000 $62,000

$0.80 $1.55
per per
share share
 Cash Dividends Example
Cumulative Preferred Stock
To Preferred To Common
Step 1: Distribute dividends in arrears
to preferred (10,000 shares × $10 par ×
8% × 2 years) $16,000
Step 2: Distribute current-year dividend
to preferred (10,000 shares × $10 par ×
8% × 1 year) 8,000
Step 3: Distribute remainder to common
($70,000 – $24,000) $46,000
Total allocated $24,000 $46,000

$2.40 $1.15
per per
share share
 Problem 11-3 Dividends for
Preferred and Common Stock
The Stockholders’ Equity category of Greenbaum Company’s balance sheet as of December
31, 2012, appeared as follows
Preferred stock, $100 par, 8%, 1,000 shares $ 100,000
Common stock, $10 par, 20,000 shares $ 200,000
Additional paid-in capital $ 250,000
Total Contributed Capital $ 550,000
Retained Earnings $ 450,000
Total Stockholders’ Equity 1,000,000
The notes to the financial statements indicate that dividends were not declared or paid for
2010 and 2011. Greenbaum wants to declare a dividend of $59,000 for 2012.
Required:
Determine the total and the per-share amounts that should be declared to the preferred
and common stockholders under the following assumptions:
1. The preferred stock is noncumulative, nonparticipating.
2. The preferred stock is cumulative, nonparticipating.
 Stock Dividends

 Issue of additional shares proportionately to

existing stockholders
 Reasons:
 Insufficient cash
 Market price reduction
 Nontaxable to recipients
 Cash to be retained for other purposes

 Declared and paid in manner similar to cash

dividend
 Small Stock Dividends
 Stock dividend usually less than 20 – 25% of
stock
 Recorded at market value of stock on date of
declaration
 Common Stock dividend distributable is not a
liability (no assets will be required to satisfy it),
but is merely part of equity on company’s
balance sheet
 Reclassifies amounts from retained earnings to
paid-in capital, with no effect on total
stockholders’ equity
 Small Stock Dividends
When stock dividends are declared
Retained Earning XXX
Additional Paid-in Capital – Common Stock XXX
Common stock dividend distributable XXX
To record the declaration of stock dividend

When stock dividends are distributed

Common stock dividend distributable XXX
Common Stock XXX
To record the distribution of a stock dividend
Small Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000 +
Additional paid-in capital—Common 30,000 45,000 +
Retained earnings 70,000 –
50,000
Total stockholders’ equity $150,000 $150,000

$40 market value deducted from retained

earnings; allocated between Common Stock
(initially Common Stock Dividend Distributable)
and Additional Paid-in Capital.
 Small Stock Dividend Example

Before After
Stockholders’ Equity:
Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000 +
Additional paid-in capital—Common 30,000 45,000 +
Retained earnings 70,000 –
50,000
Total stockholders’ equity $150,000 $150,000

Total S/E is unchanged

 Large Stock Dividends
 Stock dividend usually greater than 20
– 25% of stock
 Likely to affect stock price, but exact
amount is not known
 Recorded at par value rather than
market price
 Still no effect on total equity, only on
components
 Large Stock Dividends
When stock dividends are declared
Retained Earning XXX
Common Stock Dividend distributable XXX
To record the declaration of stock dividend

When stock dividends are distributed

Common stock dividend distributable XXX
Common Stock XXX
To record the distribution of a stock dividend
Large Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par, 10,000 shares $ 50,000 $100,000 +
Additional paid-in capital—Common 30,000 30,000
Retained earnings 70,000 20,000 –
Total stockholders’ equity $150,000 $150,000

Dividend deducted from retained earnings and

recorded in the Common Stock account at par.
Additional Paid-in Capital account is unaffected.
Large Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par, 10,000 shares $ 50,000 $100,000 +
Additional paid-in capital—Common 30,000 30,000
Retained earnings 70,000 20,000 –
Total stockholders’ equity $150,000 $150,000

Total S/E is unchanged

 Problem 11-4 Effect of Stock Dividend
Favre Company has a history of paying cash dividends on its common
stock. However, the firm did not have a particularly profitable year in
2012. At the end of the year, Favre found itself without the necessary
cash for a dividend and therefore declared a stock dividend to its
common stockholders. A 50% stock dividend was declared to
stockholders on December 31, 2012. The board of directors is unclear
about a stock dividend’s effect on Favre’s balance sheet and has
requested your assistance.
Required:
1. Write a statement to indicate the effect the stock dividend has on
the financial statements of Favre Company.
2. A group of common stockholders has contracted the firm to
express its concern about the effect of the stock dividend and to
question the effect the stock dividend may have on the market
price of the stock. Write a statement to address the stock holders’
concerns.
 Problem 11-4: Solution
1. The effect of the stock dividend on the financial statement are as follows:
a. A stock dividend does not change the total stockholders’ equity amount.
b. A stock dividend does reduce the balance of Retained Earnings and transfers the
amount of the stock dividend to the contributed capital component of stockholders’
equity.
c. A stock dividend results in additional shares of stock outstanding. Therefore, it
affects the financial ratios of the firm. For example, book value per share and
earnings per share decline as a result of the stock dividend.
 
2. The statement to the stockholders should stress the following points:
a. Each stockholder has the same proportionate ownership of the company after the
dividend as before the dividend.
b. A stock dividend is likely to cause the market price per share of the stock to
decline. The additional shares received by the stockholder should offset the decline
in the per share price and leave the stockholder at least as well off as before the
dividend.
c. What happens to the stock price after the stock dividend is dependent on the
company’s profitability and a wide variety of industry and economic factors.
 
 Stock Splits
 Creation of additional shares of stock with a
reduction of the par value of the stock
 Increase the number of shares
 An accounting transaction not recorded
 Reduce market price per share
 Make stock accessible to more investors
 Disclosed in notes
 Stock Splits
Differences:
 Legal differences: a stock split affects par value per share
of stock, stock dividend does not
 Accounting difference: stock dividend requires a journal
entry, a stock split requires no entry, no equity accounts
are affected
# footnote required to disclose additional shares and
new par value
 Does not affect total par value of the stock
 2-for-1 Stock Split Example
Stockholders’ Equity:
Before Split
Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Additional paid-in capital—Common 30,000
Retained earnings 70,000
Total stockholders’ equity $150,000

Assume Shah Company declares 2-for-1 stock split

 2-for-1 Stock Split Example
Before After
Stockholders’ Equity:
Common stock, $5 par, 10,000 shares $ 50,000 $ 50,000
Additional paid-in capital—Common 30,000 30,000
Retained earnings 70,000 70,000
Total stockholders’ equity $150,000 $150,000

All accounts are unchanged

Only disclosures
are affected
 Problem: 11-5 Dividends and stock splits
On January 1, 2012, Frederiksen Inc’s Stockholders’ Equity category appeared as follows:
Preferred Stock, $80 par value, 7%, 3,000 $240,000
Common Stock, $10 par value, 15,000 shares $150,000
Additional Paid-in capital – Preferred $ 60,000
Additional Paid-in capital – Common $225,000
Total Contributed Capital $675,000
Retained Earnings 2,100,000
Total Stockholders’ Equity 2,775,000

The preferred stock is noncumulative and nonparticipating. During 2012, the following transactions
occurred:
a. On March 1, declared a cash dividend of $16,800 on preferred stock. Paid the dividend on April 1.
b. On June 1, declared a 5% stock dividend on common stock. The current market price of the
common stock was $18. The stock was issued on July 1.
c. On September 1, declared a cash dividend of $ 0.50 per share on the common stock; paid the
dividend on October 1.
d. On December 1, issued a 2 for 1 stock split of common stock when the stock was selling for $50 per
share.
Required:
1. Explain each transaction and effect on the stockholders’ equity accounts and the total stockholders’
equity.
2. Develop the Stockholders’ Equity Category of the December 31, 2012, balance sheet. Assume that
the net income for the year was $650,000
 Problem: 11-5 Dividends and stock splits
1. March 1 Retained Earnings and total stockholders’ equity decrease.
April 1 Total stockholders’ equity remains unchanged.
June 1 Common Stock Distributable increases by $7,500 (15,000 × 5% ×
$10). Additional Paid-in Capital—Common Stock increases by $6,000
(15,000 × 5% × $8). Retained Earnings decrease by $13,500. Total
stockholders’ equity does not change.
July 1 Common Stock Distributable decreases and common stock
increases by $7,500.
Sept. 1 Retained Earnings and total stockholders’ equity decrease by
$7,875 [(15,000 + 750) × $0.50].
Oct. 1 Total stockholders’ equity does not change.
Dec. 1 The par value of common stock changes from $10 to $5 as the number
of shares issued and outstanding doubles from 15,750 to 31,500, but the total
par value does not change. The total stockholders’ equity also does not
change.
 Problem: 11-5 Dividends and stock splits
2. The stockholders’ equity category as of December 31, 2007, would appear as
follows:
FREDERIKSEN’S INC.
PARTIAL BALANCE SHEET
DECEMBER 31, 2012
 Stockholders’ Equity
 Preferred stock, $80 par, 7%, 3,000 shares issued and outstanding $240,000
Common stock, $5 par, 31,500 shares* issued and outstanding 157,500
Additional paid-in capital—preferred stock 60,000
Additional paid-in capital—common stock 231,000**
Total contributed capital 688,500
Retained earnings 2,711,825***
Total stockholders’ equity $3,400,325
 *(15,000 + 750 stock dividend) × 2 (stock split) = 31,500
**$225,000 + $6,000 stock dividend = $231,000
***$2,100,000 – $16,800 cash dividend – $13,500 stock dividend – $7,875 cash dividend +
$650,000 net income = $2,711,825
Statement of Stockholders’ Equity
 Explains all the reasons for the difference between
the beginning and the ending balance of each of
the accounts in the Stockholders’ Equity category
of the balance sheet

Statement of Retained Earnings

Beginning retained earnings
Add: Net earnings
Subtract: Dividend(s) declared
= Ending retained earnings
Statement of Stockholders’ Equity
Fun Fitness Inc.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2012
(dollar amounts in million)
Common Stock Paid in Retained
Stockholders' Equity
Shares Amounts Capital Earnings
Balance, December 31, 2011 1,000,000.00 50.00 350.00 400.00
Net earning 64.00
Cash dividend declared (25.00)
Issuance of stock 100,000.00 5.00 39.00
Balance, December 31, 2012 1,100,000.00 55.00 389.00 439.00
 Comprehensive income
The total change in net assets from all sources
except investments by or distributions to the
owners.

Components of Comprehensive income:

Net income.
Other comprehensive income items: Gains and
losses which bypass income statement and
are reported directly in the stockholders’
equity of the balance sheet statement.
 Comprehensive income
Examples of “other comprehensive income” items:
1. Unrealized gains (losses) from valuation of
investments.
2. Gains (losses) of foreign currency translation
adjustments.
3. Unrealized gains and losses associated with
derivatives.
4. Gains (losses) from amendments to pension
plans.
 Statement of
Comprehensive Income
Income Statement Statement of Comprehensive Income
For Year Ended December 31, 20XX For Year Ended December 31, 20XX
Revenues xxx Net income xxx
Foreign currency translation
Expenses xxx adjustment xxx
Other gains and losses xxx Unrealized holding gains/losses xxx
Income before tax xxx Delayed recognition of
Income tax expense xxx pension items xxx
Net income xxx Comprehensive income xxx

Comprehensive income – the total change in net assets from all

sources except investments by or distributions to the owners
 Analyzing Owners’ Equity
 Book value per share
 Rights that each share of common
stock has to the net assets of
corporation

 Market value per share

 Price at which stock is currently selling
 Book Value per Share
Total Stockholders’ Equity
Number of Shares of Stock Outstanding

 Amount per share of net assets to which the

company’s common stockholders have the
rights
 Does not indicate the price that should be
paid by those who want to buy or sell the
stock on the stock exchange
If Preferred Stock is Present
Deduct Redemption value of Preferred Stock from total stockholders’
Equity
Deduct any Preferred dividends in arrears
Remainder belongs to common stockholders

Total Stockholders Equity XXX

Less; Redemption value of the Preferred Stock -XXX
Less; Any dividends in arrears on cumulative Pref. Stock -XXX
Common Stockholders’ Equity: XXX

Common Stockholders’ Equity

Book Value per Share = No of common stock outstanding
 Market Value per Share
 The selling price of the stock as indicated by the
most recent transactions
 Usually stated in a 52-week high and low
 More meaningful measure of the value of the stock
than book value

52-week Daily
High Low Sym High Low Last Change
68.17 39.17 GE 43.3 42.01 42.93 +0.48 (1.13%)
Stockholders’ Equity Items on
the Statement of Cash Flows
Operating Activities
Net income xxx
Investing Activities
Financing Activities
Issuance of stock +
Retirement or repurchase of stock –
Payment of dividends –
 Appendix
Accounting Tools:
Unincorporated Businesses
 Sole Proprietorships
 A business with a single owner
 Not a separate legal entity so owner has
unlimited liability
 Must keep personal and business records
separate
 Business income is declared on the owner’s
personal tax return and taxed at personal tax
rate
 Sole Proprietorships
 Drawing or withdrawal and income
summary accounts are closed to the
owner’s capital account
 Owner’s Equity section of the balance sheet
consists of the capital account:
Beginning balance $ 0
Plus: Investments 10,000
Net Income 4,000
Less: Withdrawals (6,000)
Ending balance $ 8,000
 Partnerships
 A business owned by two or more individuals
 Unlimited liability
 Limited life – partnership agreements can
and do end
 Not taxed as a separate entity
 Partnerships
Distribution of income:
 Equal distribution
 Stated ratio
 Other allocation
 For example, based on salaries, interest on
invested capital, and a stated ratio
End of Chapter 7