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Chapter 11

Chapter 11


Department
Accounting
Course Code
ACC 100
Professor
Else Grech
Chapter
11

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Chapter 11 – Shareholders’ equity
An overview of shareholders’ equity
Equity as a source of financing
When company needs to raise money, it must choose from the alternative financing
sources that are available
Financing divides into 2 general categories
Debt – borrowing from banks or other creditors
Equity – issuing shares
Issuing shares is a popular method of financing because
Its flexible
Provides advantages for the issuing company and the investors (shareholders)
Investors are concerned with the return on their investment
With shares, the return may be in the form of dividends paid to the investors but may also
be the price appreciation of the shares
Shares are popular among creditors because
Provide a higher rate of return
But also higher degree of risk
Shares are popular with issuing companies because
Dividends on them can be adjusted according to the company’s profitability
Higher dividends can be paid when the firm is profitable and lower dividends
when it is not
Several disadvantages of issuing shares
Shares have voting rights and issuing shares allows new investors to vote so
existing investors may not want to share the control of the company with new
shareholders
From issuing companies opinion, there is tax disadvantage to shares versus debt
Dividends on shares are not tax deductible and do not result in tax savings to the
issuing company
Shareholders’ equity on the balance sheet
SE is viewed as a residual (remaining) amount
Owners of a company have a claim to all assets after the claims represented by
liabilities to credits have been fulfilled
SE has 2 major parts
Total SE = Contributed Capital + RE
Contributed capital is the amount the company has received from the sale of
shares to shareholders
RE is the amount of net income that the company has earned but not paid as
dividends but company retains and reinvests the income

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How income and dividends affect retained earnings
RE is a link between the I/S and B/S
Identifying the components of the shareholders’ equity section of the balance sheet
2 categories of shares
Common shares
Has voting rights
Shareholders elect the officers of the company and make the laws and
rules
Has more than 1 type of common shares, each with different rights
Preferred shares
Has preference rights to dividends or liquidation over common shares
Number of shares
Corporate B/S report the number of shares in 3 categories
Authorized shares – the maximum number of shares a corporation may
issue as indicated in the corporate charter
When companies become incorporated, it must show the
maximum number of shares that it will be allowed to issue
Issued shares – the number of shares sold or distributed to shareholders
Shares that have been issued by the corporation and then
repurchased are counted as shares issued
Outstanding shares – the number of shares issued less the number of
shares held as treasury stock if any
It indicates shares actually in the hands of the shareholders
Companies repurchase their own shares as treasury stock
Par value shares
Par value is an arbitrary (random) amount stated on the face of the share certificate
representing the legal capital of the corporation
It is not the share value or the amount that is received when share is sold but a
random amount that fulfills legal requirements
Additional paid-in capital is an amount received that is greater than the par value of the
shares when shares were issued
Retained earnings is the net income that has been made by the company but not paid out
as dividends
Company retain income because they have other needs than paying dividends
It could be purchase of assets, paying off debt
What are preferred shares?
Preferred shares have advantages
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