Retained Earnings-3-15-2024

Lesson 16-2

By Heather Failla

Preparing a Statement of Stockholder's Equity

Lesson 16-1 was how to prepare an Income Statement, today we will focus on the Statement of Stockholder's Equity

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Some text here about the topic of discussion

Stockholders' Equity Information

To prepare: info from several sources:

1. Current Year's Income Statement

   1. summarizes the change in retained earnings

2. ​ General Ledger

   1. provides beginning balance / activity​

3. ​Adjusted Trial Balance

   1. provides current balances

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Multiple Choice

To obtain the current balances, which source would you refer to?

• The current year's income statement

• The general ledger

• The adjusted trial balance

There are two major sections:

1. Capital Stock

2. Retained Earnings

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Term to Know

Par Value

A value assigned to a share of stock and printed on the stock certificate.

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*When issuing shares of stock, a corporation can assign any par value allowed by laws in the state in which it incorporates.​

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Quick check on your terms to know

Multiple Choice

The operating revenue remaining after cost of merchandise sold has been deducted is . . .

• gross profit

• cost of mdse. sold

• net sales

• total sales

Multiple Choice

A financial statement that reports the amount of dividends is

• an income statement

• a balance sheet

• a statement of stockholders' equity

• none of these

Multiple Choice

The financial statement that reports the par value of the stock is

• an income statement

• a balance sheet

• a statement of stockholders' equity

• none of these

Retained Earnings

Retained earnings section is prepared using amounts on the

​1. Adjusted Trial Balance

• beginning balance of retained earnings

• amount of dividends declared

​2. Income Statement

• Net Income after federal income taxes

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Stocks

WHAT ARE STOCKS AND DIVIDENDS?

Multiple Choice

A bond's interest rate

• Coupon Rate

• Maturity

• Par Value

• Yield

Multiple Choice

The length of a bond

• Coupon Rate

• Maturity

• Par Value

• Yield

Multiple Choice

Bonds issued by local governments for improvement projects

• Municipal

• Savings

• Treasury

• Junk

Multiple Choice

Type of stock owned by non-voting members

• Income

• Growth

• Preferred

• Common

Multiple Choice

Type of stock owned by voting members

• Income

• Growth

• Preferred

• Common

Multiple Choice

When stock prices decrease as investors fear their ability to make a profit

• Bull Market

• Bear Market

• Shares Market

Multiple Choice

When stock prices increase steadily as investors anticipate their ability to earn a profit

• Bull Market

• Bear Market

• Dividends

• Liquidity

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WHAT ARE STOCKS?

The idea of an investment is to use money to create more money. There are many different types of investments. One type of investment is buying stocks. Stocks come in the form of what are called shares. One share of stock represents part ownership of a company. When you own a share or shares of a company you are called a shareholder. The more shares you own the more you own of the company. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own 10% of the company.

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There are two main types of stock, common and preferred. Most companies issue   common stock.

Common stock gives you the right to vote at shareholders’ meetings and to receive dividends.


Owners of preferred stock don’t get the right to vote but receive dividends and have priority to any dividends.

​Stocks

WHERE CAN YOU BUY AND SELL STOCKS?

WHAT DETERMINES THE PRICE OF A STOCK?

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WHERE CAN YOU BUY AND SELL STOCKS?

Most stocks are bought and sold in a stock market or what is referred to as a stock exchange.  A stock exchange doesn’t own shares; instead, the stock exchange acts as a market where buyers and sellers can connect. The two main 

stock markets in the U.S. are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASDAQ).

In most cases, in order to buy or sell stocks you need to use a brokerage house. A brokerage house is licensed to buy and sell stocks and often has stockbrokers that assist clients in making stock trades. Brokerage houses range in terms of services they provide and fees they charge. On the expensive-end, there are full-service brokers; these stockbrokers provide guidance and recommendations for clients. On the inexpensive end, you have discount brokers. Discount stockbrokers don’t provide advice but will help you sell or buy stock. Today, there are many online discount brokerage houses, where people can easily, quickly, and inexpensively trade stocks with just a click of mouse.  

​A dividend is money paid by a company to its shareholders. Dividends are often paid quarterly. The total amount a company pays on one share of its stock for the entire year (annually) is called the dividend rate.


For instance, if a company like Cat Coffee decides to pay shareholders a dividend of $1 each quarter then for each share a person owns they would earn a dividend rate $4 annually. If the one share of Cat Coffee is worth $100, then the dividend yield, which is the percentage money earned to the value of the stock, would be 4%. In the end, it is more important to look at the dividend yield than the rate when determining if a stock is paying a good or higher dividend. The higher the dividend yield, the better return for the shareholder.  

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WHAT ARE DIVIDENDS?

WHAT DETERMINES THE PRICE OF A STOCK?

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The price of a company’s stock is always changing. This is because the price of the stock is determined by the supply and the demand for the stock. The price of a stock is not necessarily based on its actual value. When there is large demand for a stock, its price will often rise. When there are more sellers than buyers, the price of the stock will often fall.  Hence, people’s emotions, information, and rumors have a powerful influence on moving the price of a stock. 

​WHY DO COMPANIES ISSUE STOCK?

WHY DO PEOPLE BUY STOCK?

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The main reason why companies choose to issue stock is in order to raise money. There are several reasons why a company may need to raise money. First, a company may need more money to expand their business and/or to develop new products. Also, a company may need to raise money in order to deal with a large amount of debt that is hurting their company. A company can raise money by either issuing (selling) some of its stock or by borrowing money from the bank. 

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If a company borrows money, there can be several drawbacks.  Borrowing money can be expensive and must be paid back. Large amounts of debt for a company hurts their ability to survive or grow. On the other hand, a company can decide to sell some of its common stock to raise money. The advantage of selling common stock is that the company can raise money without going into debt.

​WHY DO PEOPLE BUY STOCK?

​Most people buy stock as an investment. They are interested in earning good returns on their money. Stock investors can profit from stocks in two ways, from income or growth. They can earn a steady income by purchasing stocks that pay healthy dividends. Investors also have the opportunity to earn a return on their investment by benefiting from an increase in the stock price. Companies that are growing their business and/or increasing their profits usually see an increase in their stock price. For instance, if you purchase a share of Cat Coffee at $40 and the company shows rapid growth over the next six months which help lift the stock to $60, you would have realized a gain of $20 or 50% return.  

Dropdown

What is the purpose of buying stocks?

Select answer

Multiple Choice

What is the difference between common and preferred stock?

• Common stock gives voting rights, while preferred
• Preferred stock gives voting rights, while common stock receives dividends

• Common stock has priority to dividends, while preferred stock has a higher dividend yield

• Preferred stock has priority to dividends, while common stock has a higher dividend yield

Dropdown

What are dividends?

Select answer

Dropdown

What does one share of stock represent?

Select answer

Dropdown

Where can you buy and sell stocks?

Select answer

Select answer

Dropdown

What determines the price of a stock?

Select answer

Select answer

Dropdown

Why do companies choose to issue stock?

Select answer

Dropdown

Why do people buy stock as an investment?

Select answer

Select answer

Multiple Choice

What is the advantage of selling common stock to raise money?

• The company can raise money without going into deb
• The company can increase the value of the stock

• The company can provide steady income to shareholders

• The company can receive priority to any dividends

Dropdown

How can stock investors profit from stocks?

Select answer

Select answer

Dropdown

What happens to the price of a stock when there is large demand?

Select answer

Dropdown

What happens to the price of a stock when there are more sellers than buyers?

Select answer

Multiple Choice

What is the dividend rate?

• The total amount a company pays on one share of its stock annually

• The percentage money earned to the value of the stock

• The amount of money paid by a company to its shareholders quarterly

• The value of the stock compared to the dividend yield

Multiple Choice

What is the dividend yield?

• The percentage money earned to the value of the stock

• The total amount a company pays on one share of its stock annually

• The amount of money paid by a company to its shareholders quarterly

• The value of the stock compared to the dividend rate

Dropdown

How can a stock investor earn a higher return?

Select answer