The balance sheet has three main sections. The discussion in this paper will focus on the stockholders’ equity section. Equity is the difference between total assets and liabilities. The paper seeks to analyze the various components of stockholders’ equity. Specifically, the paper will use the balance sheet for Lachlin Corporation to discuss the items that are recorded in the stockholders’ equity section.
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Number of outstanding common stock
Outstanding shares represent the stocks of an entity that are held by shareholders. A review of the balance sheet shows that Lachlin Corporation issued a total of 580,000 shares. Further, they bought back 6,000 (treasury stock). Therefore, the number of outstanding shares is the difference between issued shares and treasury stock. Thus, a total of 574,000 (580,000 – 6,000) common stock are outstanding.
The stated value of common stock
This is the value that is given to common stock in the balance sheet. It does not represent the market value, and it is only used for accounting purposes. The value is arrived at through the division of the total value of the common stock by the total number of stock issued. From the balance sheet, the value of common stock is $2,900,000, while the number of common shares issued is 580,000. Therefore, the stated value of common stock is $5 ($2,900,000 / 580,000).
Par value of preferred stock
The value is arrived at through the division of the total value of the preferred stock by the number of stock issued. Par value is similar to the face value of a stock. The total value of the preferred stock is $600,000, while the number of stocks issued is 6,000. Thus, the par value of preferred stock is $100 ($600,000 / 6,000).
The dividend rate on preferred stock
Dividends paid are often stated on a per-share basis or the total amount that is paid at the end of a financial year. The dividend rate can be calculated using either of the two values. In this case, the total amount paid is provided. Therefore, the dividend rate will be the quotient of the annual dividend ($36,000) by the value of the preferred stock that is issued and outstanding ($600,000). Thus, the dividend rate is 6% ($36,000 / $600,000 * 100).
Effect of dividend in arrears
Dividends in arrears are those that have been declared by an entity, and they have not been paid. The net income that is generated at the end of a financial year can either be paid out as a dividend or retained by a company. If a company pays dividends, then the value is deducted from the retained earnings balance. According to the cumulative dividend feature, preferred stockholders must be paid both current-year dividends, and any dividends in arrears before dividends to common shareholders are paid.
The calculations of retained earnings balance presented in the attached excel file are based on the assumptions that the dividends in arrears were declared and that there are no retained earnings restrictions. The resulting value of retained earnings after deducting dividends in arrears and current years’ dividend is $1,050,000. If the dividends in arrears have not been declared, then the retained earnings balance will not be reduced by the number of dividends in arrears.
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The discussion above reveals that Lachlin Corporation has 574,000 outstanding common shares, while the stated value of these shares is $5 per share. Further, the estimated par value for the preferred stock is $100, while the dividend rate is 6%. Finally, dividends on the preferred stock must be paid after they have been declared. Further, dividends in arrears on preferred stock are paid before the current year’s dividends. In addition, dividends on common stock are paid after those on preferred stock.