Corporations: Paid-in Capital, Retained Earnings, Dividends, and Treasury Stock

Read this chapter, which outlines the different sources of paid-in capital and how they are presented on the balance sheet. This chapter also covers treasury stock, dividends, stock splits, and price-per-share and price-per-earnings ratios.

Statement of stockholders' equity

Most corporations include four financial statements in their annual reports: a balance sheet, an income statement, a statement of stockholders' equity (in place of a statement of retained earnings), and a statement of cash flows (discussed in Chapter 16). A statement of stockholders' equity is a summary of the transactions affecting the accounts in the stockholders' equity section of the balance sheet during a stated period. These transactions include activities affecting both paid-in capital and retained earnings accounts. Thus, the statement of stockholders' equity includes the information contained in a statement of retained earnings plus some additional information. The columns in the statement of stockholders' equity reflect the major account titles within the stockholders' equity section: the types of stock issued and outstanding, paid-in capital in excess of par (or stated) value, retained earnings, and treasury stock. Each row indicates the effects of major transactions affecting one or more stockholders' equity accounts.

Look at Exhibit 26, a statement of stockholders' equity. The first row indicates the beginning balances of each account in the stockholders' equity section. This summary shows that Larkin Corporation issued 10,000 shares of common stock, declared a 5 percent stock dividend on common stock, repurchased 1,200 shares of treasury stock, earned net income of USD 185,000, and paid cash dividends on both its preferred and common stock. After the transactions' effects are indicated within each row, Larkin added or subtracted each column's components to determine the ending balance in each stockholders' equity account.