Corporate Ownership and Stockholders' Equity

Study Notes

Represents the ownership interest in a company
Classified into two types:
- Common Stock: represents ownership and voting rights
- Preferred Stock: has priority over common stock in terms of dividend payments and asset distribution

Also known as shareholders' equity or net worth
Represents the residual interest in a company's assets after deducting liabilities
Calculated as: Total Assets - Total Liabilities
Components:
- Capital Stock: par value of common and preferred stock
- Retained Earnings: accumulated profits reinvested in the business
- Treasury Stock: shares repurchased by the company

Profits reinvested in the business rather than distributed to shareholders as dividends
Increases stockholders' equity and represents a source of internal financing
Can be used to:
- Finance expansion or modernization
- Reduce debt
- Invest in new projects or businesses

Importance of comparability in corporate ownership:
- Enables investors to evaluate performance and make informed decisions
- Facilitates comparison between companies within the same industry
- Allows for assessment of a company's financial health and position
Factors affecting comparability:
- Accounting methods: differences in accounting principles and practices (e.g., GAAP vs. IFRS)
- Industry differences: unique characteristics and practices within specific industries
- Size and complexity: differences in company size, complexity, and organizational structure

Represents ownership and voting rights
Has no priority over other types of stock in terms of dividend payments and asset distribution

Has priority over common stock in terms of dividend payments and asset distribution
Typically has a fixed dividend rate and a higher claim on assets and earnings

Also known as shareholders' equity or net worth
Represents residual interest in a company's assets after deducting liabilities
Calculated as: Total Assets - Total Liabilities
Components:
- Capital Stock: par value of common and preferred stock
- Retained Earnings: accumulated profits reinvested in the business
- Treasury Stock: shares repurchased by the company

Profits reinvested in the business rather than distributed to shareholders as dividends
Increases stockholders' equity and represents a source of internal financing
Can be used to:
- Finance expansion or modernization
- Reduce debt
- Invest in new projects or businesses

Accounting methods: differences in accounting principles and practices (e.g., GAAP vs. IFRS)
Industry differences: unique characteristics and practices within specific industries
Size and complexity: differences in company size, complexity, and organizational structure