11: Stockholders' equity

Question 1

Authorized shares

Answer 1

The maximum number of shares a corporation may issue as indicated in the corporate charter.

Question 2

Issued shares

Answer 2

The number of shares sold or distributed to stockholders.

Question 3

Outstanding shares

Answer 3

The number of shares issued less the number of shares held as treasury
stock.

Question 4

Common stock

Answer 4

A share of a company

Question 5

Preferred stock

Answer 5

Preferred stock: A share of a company with special attributes, which could include some of the following:

• Convertible feature: Allows preferred stock to be exchanged for common stock.
• Redeemable feature: Allows stockholders to sell stock back to the company.
• Callable feature: Allows the firm to eliminate a class of stock by paying the stockholders a specified amount
• Cumulative feature: The right to dividends in arrears before the current-year dividend is distributed.
• Participating feature: Allows preferred stockholders to share on a percentage basis in the distribution of an abnormally large dividend.

Question 6

Treasury stock

Answer 6

Stock issued by the firm and then repurchased but not retired. This is done by using assets, decreasing stockholders’ equity. It does not affect the income statement.

Question 7

Stock split

Answer 7

The creation of additional shares of stock with a reduction of the par value of the stock. This will lower the market price of the stock, making it available to more investors.

Question 8

Par value

Answer 8

An arbitrary (made up) amount that represents the legal capital of the firm. It does not represent the price of the share or how much it is worth. It is just a number made up for legal reasons.

Question 9

Dividend payout ratio

Answer 9

The annual dividend amount divided by the annual net income.

Question 10

Stock dividend

Answer 10

The issuance of additional shares of stock to existing stockholders. This could be done for a number of reasons; it does not require cash, it reduced the market price of the stock, it is not taxable income, thus being attractive to some wealthy investors, etc.

Question 11

Statement of stockholders’ equity

Answer 11

Reflects the differences between beginning and ending balances for all accounts in the Stockholders’ Equity category of the balance sheet. It may be relevant to some shareholders to understand the exact reasons for changes in stockholders’ equity.

Question 12

Comprehensive income

Answer 12

Total change in net assets from all sources except investments by or distributions to the owners.

Question 13

Book value per share

Answer 13

Total stockholders’ equity divided by the number of shares of common stock outstanding.

Question 14

Market value per share

Answer 14

The selling price of the stock as indicated by the most recent transactions.