ACCT 2010 May 22

ACCT 2010 May 22 - 5/22/08 CHAPTER 11 OWNERS' EQUITY...

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5/22/08 CHAPTER 11 OWNERS' EQUITY Advantages of Financing with Stock: 1. Flexibility: Dividends on stock can be increased in profitable years and reduced when the company is less profitable. Debt interest is fixed. (Advantage for issuing company) 2. Exchanges facilitate trading: Large companies have ready markets for stock through the stock exchanges. (Advantage for issuing company and investors) 3. Return on Investment: Stock generally provides a higher return in dividends and in growth than interest on debt. (Advantage for investors) Disadvantages of Financing with Stock: 1. Control: Issuing stocks involves giving voting rights to new investors, resulting less control of the company for existing stockholders. (A disadvantage for issuing company) 2. Tax consequences: Interest on debt is tax deductible (results in lower taxes) for the issuing company, dividends on stock are not. (A disadvantage for issuing company) 3. Impact on ratios: Issuing stock decreases several important financial ratios, including earnings per share. (A disadvantage for issuing company) Total Owner's Equity = Contributed Capital + Retained Earnings How Income and Dividends Affect Retained Earnings: The retained earnings account serves as a link between the income statement and the balance sheet. Income Statement Statements of Retained Earnings Balance Sheet 1 Revenues Expenses Net Income Retained Earnings Beginning Balance + Net Income - Dividends Retained Earnings Ending Balance Assets ---- ---- Total Assets Liabilities ---- ---- Stockholders' Equity ---- Retained Earnings Total Liabilities and Stockholders' Equity
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5/22/08 Identifying the Components of the Owners' Equity Section of the Balance Sheet There are two categories of stock: 1. Common Stock 2. Preferred Stock 3. Treasury Stock 4. Deferred Compensation 5. Accumulated Other Comprehensive Income 6. Retained Earnings 7. Additional Paid-in Capital Common Stock normally carries voting rights. 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:
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This note was uploaded on 06/05/2008 for the course ACCT ACCT 2010 taught by Professor Olvera during the Spring '08 term at North Texas.

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ACCT 2010 May 22 - 5/22/08 CHAPTER 11 OWNERS' EQUITY...

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