BUS103: Introduction to Financial Accounting

Accountants credit amounts received in excess of the par or stated value of shares to a Paid-In Capital in Excess of Par (or Stated) Value – Common (or Preferred) account. They carry the amounts received in excess of par or stated value in separate accounts for each class of stock issued. Using the following assumed data, the stockholders' equity section of the balance sheet of a company with both preferred and common stock outstanding would appear as follows:

The total book value of a corporation's outstanding shares is equal to its recorded net asset value – that is, assets minus liabilities. Quite simply, the amount of net assets is equal to stockholders' equity. When only common stock is outstanding, companies compute the book value per share by dividing total stockholders' equity by the number of common shares outstanding. In calculating book value, they assume that (1) the corporation could be liquidated without incurring any further expenses, (2) the assets could be sold at their recorded amounts, and (3) the liabilities could be satisfied at their recorded amounts. Assume the stockholders' equity of a corporation is as follows:

When two or more classes of capital stock are outstanding, the computation of book value per share is more complex. The book value for each share of stock depends on the rights of the preferred stockholders. Preferred stockholders typically are entitled to a specified liquidation value per share, plus cumulative dividends in arrears, since most preferred stocks are preferred as to assets and are cumulative. In each case, the specific provisions in the preferred stock contract govern. To illustrate, assume the Celoron Corporation's stockholders' equity is as follows:

The preferred stock is 6 percent, cumulative. It is preferred as to dividends and as to assets in liquidation to the extent of the liquidation value of USD 100 per share, plus any cumulative dividends on the preferred stock. Dividends for four years (including the current year) are unpaid. You would calculate the book values of each class of stock as follows:

Notice that Celoron did not assign the paid-in capital in excess of par value – preferred to the preferred stock in determining the book values. Celoron assigned only the liquidation value and cumulative dividends on the preferred stock to the preferred stock.

Assume now that the features attached to the preferred stock are the same except that the preferred stockholders have the right to receive USD 103 per share in liquidation. The book values of each class of stock would be:

Book value rarely equals market value of a stock because many of the assets have changed in value due to inflation. Thus, the market prices of the shares of many corporations traded regularly are different from their book values.

An accounting perspective:

Business insight

The Wall Street Journal publishes the New York Stock Exchange (NYSE) Composite Transactions each Monday through Friday except when the exchange is closed. For each stock listed on the NYSE, it lists the following data. We use data for the Kellogg Company, which produces ready-to-eat cereals and other food products, as recently reported in The Wall Street Journal as an example:

52 Weeks

The first column reflects the stock price percentage change for the calendar year to date, adjusted for stock splits and dividends over 10 percent. The next two columns show the high and low price over the preceding 52 weeks plus the current week. The next two columns show the company name (Kellogg) and the NYSE's symbol (K) for that company. The Div column is the annual dividend based on the last quarterly, semiannual, or annual declaration. Yield percent is calculated as dividends paid divided by the current market price. The PE ratio is the closing market price divided by the total earnings per share for the most recent four quarters. The Vol 100s column shows the unofficial daily total of shares traded, quoted in hundreds. Thus, 995,700 shares of Kellogg's were traded that day. The next to last column shows the closing price for that day. The final column shows the change in the closing price as compared to the closing price of the preceding day.