Copyright © Cengage Learning. All rights reserved. Chapter 11 Contributed Capital.

Copyright © Cengage Learning. All rights reserved.

Chapter 11

Contributed Capital

Copyright © Cengage Learning. All rights reserved. 11-2

Contributed Capital

• Refers to stockholders’ investments in a corporation.

• Is a major means of financing a corporation.• Include new funds raised by issuing new common

stock and preferred stock.


Equity Financing

• A share of stock is a unit of ownership in a corporation.– A stock certificate is issued to the owner.

– Stockholders can transfer their ownership at will.


Par Value

An arbitrary amount assigned to each share of stock.

• Usually bears little or no relationship to the market value or book value of shares.

• Constitutes the legal capital of the corporation.


Initial Public Offering (IPO)Initial offering of capital stock by a company.

• Often, an underwriter is used for an IPO– Intermediary between the corporation and the investing

public.– Guarantees the sale of the stock for a fee.

• Usually less than one percent of the selling price.

• The corporation records the net proceeds of the offering.– Amount paid by public less underwriter fees, legal and

printing expenses and any other direct costs of the offering.


Dividends

Distributions to stockholders of a corporation’s assets that are generated by earnings.

• Stockholders receive assets in proportion to their ownership (or the number of shares they own).

• Dividends are not guaranteed to stockholders.


Dividend Dates• Declaration Date

– Date on which the board of directors formally declares that a dividend will be paid.

– Retained Earnings is debited; Dividends Payable is credited.

• Record Date – Date on which the ownership of the stock is determined.– No journal entry required.

• Date of Payment – Date on which the payment is made to stockholders of

record.– Dividends Payable is debited; Cash is credited.


Dividend Dates• Between Record and Payment Date the Stock is said

to be Ex Dividend• If the holder of record sells the stock during this

period, he will still receive the dividend.


Repurchase of a company’s own stock off the open market.

Reduces stockholders’ equity

Increases return on equity

Treasury Stock


Components of Stockholders’ Equity

• Objective 2– Identify the components of stockholders’ equity.


Represents owners’ claims to a business

Stockholders’ Equity

• Contributed Capital– Investments made by stockholders– Provides information about the corporation’s stock.

• Types; par value; number of shares authorized, issued, and outstanding

• Retained Earnings– Earnings since inception, less any losses, dividends, or transfers to

contributed capital– Earnings reinvested in the corporation– Represent stockholders’ claims to the assets from earnings reinvested in

the company.

• Treasury Stock – Shares of its own stock that the corporation has bought back on the open

market.


Contributed Capital

• Common stock– The company’s residual equity

• In case of liquidation, all creditors and usually preferred stockholders’ claims to the company’s assets rank ahead of common stockholders’ claims.

– Carries voting rights• A means of controlling the corporation.

• Preferred stock– Has preference over common stock in one or more ways.

Copyright © Cengage Learning. All rights reserved. Chapter 11 Contributed Capital.

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