Stockholders’ equity is the difference between the reported amount of a corporation’s assets and its reported amount of liabilities.
Stockholders’ equity can be thought of as a source (along with the liabilities) of the corporation’s assets. Often stockholders’ equity is referred to as the stockholders’ residual claim after the liabilities are satisfied (paid).
Lenders and other creditors are interested in the amounts of the existing liabilities and how these amounts compare to the stockholders’ equity in the corporation.
Other users of the financial statements include the existing stockholders, potential stockholders, financial analysts, large customers needing assurance that the corporation can fill future orders, government agencies, and others. All the users expect that the corporation’s financial statements will be in compliance with the generally accepted accounting standards (rules).
It is important to understand stockholders’ equity since it is a key part of a corporation’s financial statements.
Expect questions on par value, no-par stock, paid-in capital in excess of par, issuing shares for cash and noncash items, stock splits, and stock dividends. You'll need to understand the journal entries and how these transactions affect stockholders' equity.
Expect questions on the characteristics of preferred stock including cumulative, callable, dividends in arrears, and the preferences it enjoys.
Expect questions on acquiring treasury stock, accounting for treasury stock using the cost method, reissuing treasury stock at more than cost, and the effects of treasury stock on stockholders' equity and the number of shares outstanding.
Expect questions on how net income and dividends affect retained earnings, appropriations of retained earnings, accumulated deficits, and the relationship between retained earnings and cash.
Expect additional questions on the components of stockholders' equity, including the book value per share, accumulated other comprehensive income, earnings per share calculation, and how items are reported on a corporation's balance sheet.
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