Define The Term Liabilities Be Sure To Include The Three Cru

Define The Term Liabilities Be Sure To Include The Three Crucial Fa

Define the term “liabilities.” Be sure to include the three crucial factors/characteristics of liabilities. What is capital stock, and on which financial statement would you find information about it? What is the difference between common stock and preferred stock? What is the difference between “authorized stock” and “issued and outstanding stock”? What is the difference between a par value stock and nonpar value stock? What is meant when stock is issued at par? At a premium? And at a discount? What is the difference between a stock dividend and a stock split? What is the difference between cumulative preferred stocks and non-cumulative preferred stocks? What is a cash dividend? What are the journal entries for 1) declaring and 2) subsequently paying a dividend?

Paper For Above instruction

Liabilities are defined as present obligations of a business arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits, typically cash payments, to settle the obligations. Three crucial characteristics or factors define liabilities: they are present obligations, they are the result of past transactions or events, and their settlement will likely require the transfer of assets, such as cash or services, from the company to external parties (Kieso, Weygandt, & Warfield, 2019). These features distinguish liabilities from other commitments or claims against an organization, emphasizing that liabilities are binding obligations that impact a company's financial position and must be settled in the future.

Capital stock, often found on the balance sheet under shareholders' equity, represents the amount of capital contributed by shareholders in exchange for ownership in the company. It reflects the total value of shares issued to investors and is integral to understanding a company's equity financing. The primary difference between common stock and preferred stock lies in their rights and privileges. Common stockholders have voting rights and may receive dividends, but they are last in line during liquidation. Preferred stockholders generally do not have voting rights but have a higher claim on dividends and assets, often receiving dividends at a fixed rate (Ross, Westerfield, & Jaffe, 2020).

The terms “authorized stock” and “issued and outstanding stock” refer to different stages in a company's equity issuance process. Authorized stock is the maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. Issued stock comprises the shares that have actually been distributed to shareholders. Out of these issued shares, the outstanding stock includes all shares currently held by shareholders, excluding any treasury stock that the corporation has repurchased (Brigham & Ehrhardt, 2019).

Par value stock is stock assigned a nominal face value per share, which is recorded in the company's books. Nonpar value stock has no assigned face value; instead, its value is determined by the issuing company's discretion. When stock is issued at par, it means shares are sold at their face value. Stock issued at a premium is sold for more than its par value, providing additional paid-in capital to the company. Conversely, stock issued at a discount is sold below par value, which is less common and may involve additional legal considerations (Brown & Davis, 2011).

A stock dividend involves the distribution of additional shares to shareholders proportionally, without transferring cash. It normally results in a transfer within shareholders’ equity accounts, increasing the number of shares outstanding but not affecting total shareholders' equity. A stock split, however, involves dividing existing shares into multiple new shares to lower the stock price, with no change in the total value of shares held by shareholders. Stock splits increase the number of shares outstanding, whereas stock dividends distribute additional shares.

Cumulative preferred stocks guarantee the payment of all or part of missed dividends in previous periods before dividends can be paid to common stockholders. Non-cumulative preferred stocks do not have this guarantee, and missed dividends are not payable in subsequent periods. This feature influences the risk and dividend preference of preferred stockholders (Gordon, 2010).

A cash dividend is a distribution of a portion of a company's earnings to shareholders in cash. The journal entry to record the declaration of a dividend involves a debit to Dividends (or Dividends Declared) and a credit to Dividends Payable. When the dividend is subsequently paid, the entry involves debiting Dividends Payable and crediting Cash. These entries reflect the recognition of the obligation when declared and the settlement when paid.

References

• Brown, P. H., & Davis, J. D. (2011). Financial Accounting (8th ed.). McGraw-Hill Education.
• Gordon, R. (2010). Preferred Stock and Dividends. Financial Management Review, 34(2), 45-52.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
• Ross, S. A., Westerfield, R., & Jaffe, J. (2020). Corporate Finance (12th ed.). McGraw-Hill Education.
• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice (15th ed.). Cengage Learning.