As part of a Careers in Accounting program sponsored by accounting organizations
ID: 2385028 • Letter: A
Question
As part of a Careers in Accounting program sponsored by accounting organizations and supported by our company, you will be taking a group of high-school students through the accounting department in your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Stockholders Equity section of a recent balance sheet.Write a short response explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings.
Explanation / Answer
Common stock:It is a type of stock that represents the ownership in the issuing corporation. The rights of common stockholders include
1) Right to vote
2) Receipt of Dividends
3) Salvage rights
Common stockholders are the direct owners of the corporation. As a corporation expands and generates more profits the shareholders will directly benefit by an increase in share price.
Additional paid-in-capital: The account that represents excess paid by an investor over the par value price of a stock issue. Additional paid-in-capital can arise from either preferred stock or common stock.
The difference between the current market price and the par value is the additional paid-in-capital paid by investors. Common or preferred with zero par value has no additional paid-in-capital when sold at the current market price. The entire sales amount is transferred to the Company's common stock issued account.
Retained earnings:Profita generated by a company that are not distributed to stockholders as dividends but are either reinvested in the business or kept as a reserve for specific objectives.
A balance sheet figure under the heading retained earnings is the sum of all profits retained since the company's inception. Retained earnings are reduced by losses, and are also called accumulated retained earnings, accumulated profits, accumulated income or undivided profits.
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