Owners Equity Flashcards
(24 cards)
Define Owners Equity.
Amount that owners have invested in a company for the company to buy assets.
What is Paid in Capital (aka capital stock or capital contributions)?
- Amount that owners take out of personal savings and invest in their business
- Direct investment
What are Dividends?
Profits distributed to owners of a business.
What is the formula for calculating Owners Equity?
Paid in capital + Retained Profits = Owners Equity
What constitutes Owners Equity?
Net Assets = Total assets - Liabilities
Define Equity in the context of company ownership (3)
- Sole proprietorship
- Partnership
- Corporation
What evidence of ownership do owners receive when they invest money in a corporation?
Shares of stock (stock certificates)
What are the possible trading methods for shares of stock? (3)
- Privately traded amongst owners
- Privately sold to new owners
- Traded publicly on a stock exchange
What does the balance sheet reflect?
Value of NET ASSETS or the company’s book value.
What causes the discrepancy between book value and market value? (2)
- Many assets are recorded at purchase cost not market value
- Not all assets are included (intangible factors such as employees)
True or False: A company’s book value is always greater than its market value.
False
What is Treasury stock?
- Company repurchases its own shares of stock
- Subtract from total owners equity
Treasury stock is a way to distribute cash to stockholders, but cash is not distributed evenly. Why is this?
- Cash only goes back to stockholders who terminate ownership by selling back their shares
- With dividends, cash is distributed equally to all stockholders and all stockholders maintain ownership
List reasons for stock repurchase (2)
- Shows confidence in value of shares
- Ways to distribute unneeded excess cash
How does Treasury stock appear on the balance sheet?
As a deduction from shareholders’ equity.
What does the income statement show?
A company’s revenues, expenses, and profits over a period.
What is Accumulated Other Comprehensive Income (AOCI)? What are some examples? (2)
- Market related gains and losses not included in the net income computation
- Includes changes in equity of foreign subsidiaries, change in value of investment securities and derivatives
Where is AOCI reported?
In the equity section of the balance sheet.
What is the relationship between AOCI and net income?
AOCI reflects gains and losses that haven’t been realized and are not included in the income statement.
The balance sheet (does or does not) reflect the current value of a company
Does not
Why does shares reduce the total equity of the company in the balance sheet?
The company spent CASH to buy them back
Why does treasury stock not show up in the income statement?
Treasury stock doesn’t affect profits or losses so it doesn’t appear
Paid in capital is the Portion of owner’s equity in exchange for?
Stock Shares
How are changes in value reported as for treasury stock?
direct adjustments to equity
