Cumulative amount of assests contributed by owners in exchange for stock certificates

(1 of 2 sections of Stockholder's Equity)

Cumulative amount of assets from earning net income, minus assets given to stockholders as dividends

(1 of 2 parts of S.E.)

1. Vote

2. Receive share of dividends declared by company

3. Receive proportionate share of any assets remaining after company pays off its liabilities in liquidation

4. Purchase additional shares of new issue prior to non-stockholders

(allows existing holders to maintain same amount of ownership)

Gives up right to vote and preemptive rights

but

receives a preference over common stockholders to dividends and in liquidation

Convertible: gives stockholders option to convert into common stock

Cumulative: if preferred holders fail to receive some of their annual entitlement, the unpaid amount carriers over to the next year and must be paid along with the following year's entitlement before any dividend is paid to common stockholders

NOTE: Unless otherwise specified, assume preferred stock is cumulative.

Number of shares currently held by stockholders

Outstanding shares =

total # issued - total # acquired and held by company
                      (referred to as treasury stock)

When stock is issued in exchange for a noncash asset,

GAAP says the cost of the noncash asset should be the market value of the stock issued, provided it does not exceed the fair market value of the asset received.

NOTE: When reporting, company reports lower of either:

1) Fair market value of asset

or

2) fair market value of stock

When company purchases its own capital stock and holds the stock.

NOTE: Corporations do not recognize a gain/loss on transactions in their own capital stock

1) Compaines usually reacquire own stock to give to employees as compensation. Sometime reacquire to retire the stock but this is uncommon

2) Treasury Stock is a contra-equity account, shown in the Stockholder's Equity section as a deduction from the total Stockholder's Equity.

2nd major section of S.E. portion on balance sheet

Net Income = increases R.E.

Dividends = decreases R.E.

*If retained earnings has a negative balance, it's referred to as a deficit.

Corporate assets (usually cash) given to stockholders.

Declaration of a dividend is accounted for as a reduction to R.E. and increase in liabilities (dividends payable).

NOTE: To make a cash dividend declaration and payment a company needs:

1) sufficient cash

2) sufficient retained earnings

3) board of directors' declaration

Date that the company's board of directors approves the dividend, amount of cash per share to be paid, the record date, and the date the dividend is paid.

After this date, the company is legally obligated to pay the declared dividend.

Distribution of additional shares of a corporation's capital stock to stockholders in proprtion to the amount they already own.

Two Types:

1) Small (less than 20-25%) of stock outstanding:

  R.E. debited for FMV of stock, common stock credited

  for par value of stock, and difference is credited to

  paid-in capital

2) Large (greater than 25%) outstanding:

   Common stock is credited for par value of stock

Distribution of additional shares of company's capital stock in proportion to amount they already own:

Total # of shares issued and outstanding is increased

Par value per share is simultaneously reduced pro rata

Total par value remains unchanged and stockholder's equity remains unchanged

Preferred stock a company is obligated to retire at a fixed date in the future, at a fixed contractual amount per share.

Reported as a long-term liability

Book value per common share.

BVS =

(Total S.E. - Preferred Equity)

÷

# of Common Shares Outstanding

where

Preferred Equity =

Redemption value of preferred stock

+

Preferred dividends in arrears

What the common stock of the company sells for on the stock exchange.

*It is the most important value to investors*

Most evaluations of a company's profit performance begin with this ratio:

ROA =

(Net Income + Interest Expense)

÷

Average Total Assets

Measures profit performance independent of the source of financing.

Profitability measure

ROE =

(Net Income - Preferred stock dividends)

÷

Average common stockholder's equity

ROE is the return on the investment made by the common stockholders.

Stockholder's want ROE > ROA