ACG 2021 ACG2021 StudyGuide-1 – Chapter 11 – Everest College

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ACG 2021 ACG2021 StudyGuide-1 – Chapter 11 – Everest College

Chapter 11

Stockholders’ EquityAfter studying this chapter, students should be able to:

Understand the concept of stockholders’ equity and identify the components of the Stockholders’ Equity category of the balance sheet and the accounts found in each component (LO1).

Understand the characteristics of common and preferred stock and the differences between the two classes of stock (LO2).

Determine the financial statement impact when stock is issued for cash or for other consideration (LO3). Describe the financial statement impact of stock treated as treasury stock (LO4).

Compute the amount of cash dividends when a firm has issued both preferred and common stock (LO5). Understand the difference between cash and stock dividends and the effect of stock dividends (LO6). Understand the difference between stock dividends and stock splits (LO7).

Understand the statement of stockholders’ equity and comprehensive income (LO8).

Understand how investors use ratios to evaluate stockholders’ equity (LO9).

Explain the effects that transactions involving stockholders’ equity have on the statement of cash flows (LO10). Describe the important differences between the sole proprietorship and partnership forms of organization versus the corporate form (LO11) (Appendix).

An Overview of Stockholders’ Equity

Financing is available in two forms:

Debtfinancing is borrowing from banks or other creditors

Equity financing is the issuing of stock Advantages of issuing stock: (Exhibit 11-1)

Flexibility

Stock usually provides a higher return to investors, but also a higher degree of risk than can be obtained by creditors who receive interest. Dividends paid to investors Appreciation of the stock

Dividends can be adjusted according to the company’s profitability. Interest on debt financing is generally fixed and a legal liability. Disadvantages of issuing stock: (Exhibit 11-1)

Control of the company is more widely distributed since stock generally has voting rights.

Tax disadvantage to the company since dividends are not tax deductible, whereas interest on debt can be deducted Additional capital stock decreases certain key ratios, such as earnings per share. Stockholders’ Equity on the Balance Sheet

Remember the accounting equation is stated as Assets = Liabilities + Owners’ EquityOwners’ equity is viewed as a residual amount. Owners have a claim to all assets after the liabilities to creditors have been satisfied.

Stockholders are owners of a corporation Owners’ equity for a corporation is called stockholders’ equity.For a corporation: Assets = Liabilities + Stockholders’ Equity

Stockholders equity has two major components: contributed capital and retained earningsContributed capital represents the amount the corporation received from the sale of stock to the stockholders.

ACG 2021 ACG2021 StudyGuide-1 – Chapter 11 – Everest College

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