5. Statement of Changes in Equity and the Balance Sheet

Question 1

Which accounts are typically presented in the statement of changes in equity?

Answer 1

Preferred Stock

Common Stock

Additional Paid-in Capital

Treasury Stock

Retained Earnings

Accumulated Other Comprehensive Income

Non-Controlling Interest

Question 2

Explain the effect on the financial statements of the repurchase of treasury stock and the resale of treasury stock.

Answer 2

Purchase of Treasury Stock: Treasury stock (a contra equity account) increases for the cost of the shares, which reduces equity.

Resale of Treasury Stock: When stock is resold for greater than the repurchase price of the stock, the cost is taken from treasury stock and the excess is added to additional paid-in capital. When stock is resold for an amount lower than the repurchase price, the difference is taken from additional paid-in capital and retained earnings if there is not sufficient additional paid-in capital from previous resales of treasury stock.

Question 3

Explain the events of stock splits and stock dividends.

Answer 3

Stock Split: Does not impact the equity accounts as long as the par value is changed to reflect the new share size.

Stock Dividends: A small stock dividend is less than 20–25% of the number of outstanding shares. Retained earnings is reduced for the fair value of stock, common stock is increased for the par value, and the difference is included in additional paid-in capital. For large stock dividends (greater than 20–25%), retained earnings is reduced and common stock is increased for the par value of the stock issued in the dividend.

Question 4

Explain:

Three major sections included on a balance sheet

Footnote disclosures

Answer 4

Assets: The resources available to the organization for carrying out its purpose. Divided into a current and non-current portion.

Liabilities: Represent third-party claims to the assets of an organization. Divided into a current and non-current portion.

Equities: Represent the owner claims to the assets of the organization.

Footnote Disclosures: The disclosures help investors understand key assumptions and methods used to better compare financial statements between organizations.