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