Lecture Notes: Chapter 11 – Reporting and
Interpreting Stockholders' Equity
Based on Financial Accounting, 11th Edition by Libby, Libby, and Hodge
1. Introduction
Stockholders' equity represents the owners' claim to the assets of a corporation after liabilities are
settled. It is a key section of the balance sheet and is comprised of several components, including
common and preferred stock, retained earnings, and additional paid-in capital. This chapter
explains the role of stock in corporate financing, details stock transactions, and introduces
essential ratios and disclosures.
2. The Role of Stock in the Capital Structure
A corporation's capital structure consists of debt and equity:
Debt is borrowed money with a fixed repayment obligation (e.g., bonds, loans).
Equity is raised by issuing stock, giving investors ownership in the company.
Common stock is the most basic form of ownership. Equity financing avoids interest obligations
and provides flexibility but dilutes ownership.
3. Earnings Per Share (EPS)
EPS is one of the most widely used indicators of a company’s profitability. It tells how much
profit is earned for each share of common stock.
Formula:
Example:
, Net Income = $600,000
Preferred Dividends = $50,000
Average Shares = 100,000
The company earned $5.50 per share during the period.
4. Common Stock: Characteristics and Transactions
4.1 Characteristics
Voting rights on major decisions
Right to dividends (if declared)
Residual claim on assets after debts are settled
4.2 Issuance of Common Stock
When stock is issued at a price above par:
Example:
Issued 1,000 shares at $20 per share, par value $1:
Dr. Cash $20,000
Cr. Common Stock $1,000
Cr. Additional Paid-in Capital $19,000
4.3 Treasury Stock Transactions
When a company repurchases its own stock:
Example:
Buy back 500 shares at $25:
Dr. Treasury Stock $12,500
Cr. Cash $12,500
If reissued above cost (e.g., at $30):
Dr. Cash $15,000
Cr. Treasury Stock $12,500
Interpreting Stockholders' Equity
Based on Financial Accounting, 11th Edition by Libby, Libby, and Hodge
1. Introduction
Stockholders' equity represents the owners' claim to the assets of a corporation after liabilities are
settled. It is a key section of the balance sheet and is comprised of several components, including
common and preferred stock, retained earnings, and additional paid-in capital. This chapter
explains the role of stock in corporate financing, details stock transactions, and introduces
essential ratios and disclosures.
2. The Role of Stock in the Capital Structure
A corporation's capital structure consists of debt and equity:
Debt is borrowed money with a fixed repayment obligation (e.g., bonds, loans).
Equity is raised by issuing stock, giving investors ownership in the company.
Common stock is the most basic form of ownership. Equity financing avoids interest obligations
and provides flexibility but dilutes ownership.
3. Earnings Per Share (EPS)
EPS is one of the most widely used indicators of a company’s profitability. It tells how much
profit is earned for each share of common stock.
Formula:
Example:
, Net Income = $600,000
Preferred Dividends = $50,000
Average Shares = 100,000
The company earned $5.50 per share during the period.
4. Common Stock: Characteristics and Transactions
4.1 Characteristics
Voting rights on major decisions
Right to dividends (if declared)
Residual claim on assets after debts are settled
4.2 Issuance of Common Stock
When stock is issued at a price above par:
Example:
Issued 1,000 shares at $20 per share, par value $1:
Dr. Cash $20,000
Cr. Common Stock $1,000
Cr. Additional Paid-in Capital $19,000
4.3 Treasury Stock Transactions
When a company repurchases its own stock:
Example:
Buy back 500 shares at $25:
Dr. Treasury Stock $12,500
Cr. Cash $12,500
If reissued above cost (e.g., at $30):
Dr. Cash $15,000
Cr. Treasury Stock $12,500
