Corporations – Paid-In Capital, Retained Earnings, Dividends, and Treasury Stock
This chapter identifies the different sources of paid-in capital and how to present them on a balance sheet, and explains accounting for a cash dividend, a stock dividend, a stock split, and a retained earnings appropriation. It covers acquiring and reissuing treasury stock, discontinued operations and extraordinary items, prior period adjustments, and earnings per share.
Sources of paid-in capital
Paid-in capital comes from more than the sale of common and preferred stock at par or stated value; it can also arise from amounts received above par, from donations to the corporation, and from other capital transactions, and each source is presented separately in the paid-in capital section of the balance sheet. Together with retained earnings, these accounts make up total stockholders’ equity.
Dividends, stock splits, and treasury stock
A cash dividend reduces both cash and retained earnings once declared, while a stock dividend distributes additional shares and transfers an amount from retained earnings to paid-in capital without changing total stockholders’ equity; a stock split, by contrast, only increases the number of shares outstanding and reduces par value per share, leaving all equity accounts unchanged. Treasury stock, a corporation’s own shares reacquired but not retired, reduces total stockholders’ equity when purchased and is accounted for separately from unissued shares.
Unusual items and analyzing results
Discontinued operations, extraordinary items, and changes in accounting principle each receive specific, separate treatment in the financial statements so a reader can distinguish continuing operating performance from one-time or accounting-driven effects, and prior period adjustments correct errors from earlier years directly through retained earnings rather than through current income. Analysts use earnings per share and the price-earnings ratio to relate a corporation’s profitability and market price to its shares outstanding.