Module 9 notes - Module 9 EQUITY(Reporting and Analyzing...

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Module 9  EQUITY (Reporting and Analyzing Owner Financing) Stockholders Equity (SE) is defined as  Assets - Liabilities Usually accounted for at historical cost Made up of two parts: Contributed Capital Earned capital (retained earnings and accumulated other comprehensive income  (AOCI)) Contributed Capital is made up of : Common stock Preferred stock Additional paid-in capital (APIC) (Treasury Stock)—reduction in equity All corporations have common stock. Most firms have only one class of common stock. Common stock has voting rights, dividend rights and liquidation rights Voting—to elect board of directors Dividend—if corporation pays a dividend, they have the right to get some (after preferred  stock) Liquidation—stockholders have the right to participate in liquidation (after creditors and  preferred stockholders) Common stock usually has a par value (some states have no par stock)—par value is an  arbitrary value that is usually very small ( $0.01, $0.05, $1, $3 etc) and has no meaning with  respect to the worth of the stock or its market value. Preferred stock is called preferred because it has PREFERENCE in dividends and liquidation.  This means preferred stockholders get distributions before the common stockholders. Preferred stock also has  a par value.  Both the par and the market values of preferred stock are  usually higher than that of the same firm’s common stock. Preferred stock holders usually do NOT have voting rights. Preferred stock has a set dividend, expressed as a % of par value.  So if you have 6% $10 par  preferred stock, the dividend per share is .06 x $10 = $0.60 per share.
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Preferred stock may be CUMULATIVE.  This means that, in years dividends are not declared  and paid, the preferred stock dividends build up and these DIVIDENDS IN ARREARS  must be  paid next time dividends are declared. Preferred stock may also be convertible into a fixed number of shares of common stock. All stock has a number of shares AUTHORIZED (In the corporate charter they indicate the total  number of shares they may sell.  They cannot issue more shares than they are authorized to  issue.) All stock has a number ISSUED.  This is the number they sold to the public. All stock has a number of shares OUTSTANDING.  This is the number issued that are still held  by the public (as opposed to those shares the firm bought back, which are either in treasury or  retired.) Additional paid-in capital (APIC) is the amount in excess of par value that a firm receives when it  issues stock.  There is usually a separate APIC account for each class of stock.   Example: Bleep Corporation issues 10,000 shares of $1 par common stock when the market price is $7.
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