BUSI 2160U Lecture Notes - Lecture 4: Retained Earnings, Investment, Net Income

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Chapter 10
Owners’ Equity
Common Shares
Represent the residual ownership of the company
Common shareholders elect board of directors
No guaranteed dividend
Opportunity to share in company profits entitled to what is left over after obligations to
debt holders and preferred shareholders
Can have different classes
Preferred Shares
Have rights that must be satisfied before common shareholders
Usually have specified dividend rate
o Must be paid before dividend can be paid to common shares
Preferred treatment on distribution of assets on winding up
No participation in “upside” of company
Certain features MAY be offered
o Cumulative as to dividends
o Convertible into common shares
o Redeemable at discretion of company
o Retractable as discretion of shareholder
o Participating in profits
Features are negotiated prior to issue
Retained Earnings
All profits less dividends declared over life of corporation
Profits reinvested into corporation
Represents indirect investment by shareholders
Usually no direct entries to retained earnings (limited exceptions)
Dividends
When declared, classified as a liability
3 important dates
o Date of declaration
o Date of record
o Date of payment
Stock Splits
Divides an entity’s shares into a larger number of units
Like a large stock dividend
No accounting entries made
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