Stockholders’ Equity Section Of The Balance Sheet Grading

Stockholders’ Equity Section of the Balance Sheet Grading Guideacc291

The purpose of this assignment is to help you become familiar with examining the stockholders’ equity section of the balance sheet. Using the Lachlin Corporation Balance Sheet (partial), answer the following questions in approximately 1,050 words:

• How many shares of common stock are outstanding?
• Assuming there is a stated value, what is the stated value of the common stock?
• What is the par value of the preferred stock?
• If the annual dividend on preferred stock is $36,000, what is the dividend rate on preferred stock?
• If dividends of $72,000 were in arrears on preferred stock, what would be the balance reported for retained earnings?

Paper For Above instruction

The analysis of a company’s stockholders’ equity section provides vital insights into its financial health, ownership structure, and dividend policies. For Lachlin Corporation, these components can be deduced based on the comprehensive examination of the partial balance sheet, projected data points, and standard accounting principles.

Determining the Number of Shares of Common Stock Outstanding

The first step is to identify the number of shares of common stock issued and outstanding, which is often explicitly listed in the stockholders’ equity section of the balance sheet. Typically, this figure is presented as "Common Stock, $X par value, Y shares issued and outstanding." If this figure is not explicitly stated, it can be calculated by dividing the total common stock value by the par or stated value per share. For Lachlin Corporation, assuming the balance sheet indicates a total value of common stock equal to $500,000 and a stated value of $5 per share, then the number of shares outstanding can be calculated as:

Number of shares outstanding = Total common stock / Stated value per share = $500,000 / $5 = 100,000 shares

This calculation helps stakeholders understand the ownership distribution and market capitalization relative to the number of issued shares.

Stated Value of the Common Stock

The stated value is a legal or accounting designation assigned to each share of stock, similar to par value but often used by corporations that do not assign a formal par value. If the balance sheet mentions a stated value, it is normally listed under the common stock section. Assuming the documented stated value of common stock on Lachlin’s balance sheet is $5, the total value of the common stock can be cross-verified by multiplying the number of shares outstanding by this stated value, ensuring consistency. The stated value acts as a baseline for accounting purposes, especially in stock issuance and capital stock accounting.

Par Value of the Preferred Stock

Preferred stock generally carries a fixed par value, which is crucial for calculating dividend rates and legal capital. The balance sheet typically states the total preferred stock and its par value per share. For instance, if the preferred stock has a total value of $200,000, and the number of preferred shares issued is 4,000, then the par value per preferred share is calculated as:

Par value per preferred share = Total preferred stock / Number of preferred shares = $200,000 / 4,000 = $50

This par value is essential in dividend calculations and legal capital maintenance.

Dividend Rate on Preferred Stock

Given the annual dividend on preferred stock is $36,000, and the total preferred stock outstanding is known, the dividend rate can be calculated as a percentage of the par value. Using the previous example where the total preferred stock is $200,000 with a par value of $50, the dividend rate is:

Dividend rate = Annual dividend / Total preferred stock value = $36,000 / $200,000 = 0.18 or 18%

Alternatively, if preferred stock dividends are specified as a fixed rate per share, the dividend rate per share can be directly calculated as:

Dividend per preferred share = Annual dividend / Number of preferred shares = $36,000 / 4,000 = $9 per share

Thus, aligning with the fixed dividend rate of 18% based on the preferred stock’s par value.

Balance Reported for Retained Earnings in the Case of Dividends in Arrears

Dividends in arrears represent accumulated but unpaid dividends on preferred stock, which do not reduce the retained earnings balance unless dividends are declared and paid. Therefore, in accounting records, dividends in arrears are disclosed separately as a note or a contra-equity account but do not directly decrease retained earnings until dividends are declared.

Assuming dividends of $72,000 are in arrears, and they relate solely to preferred stock, the reported retained earnings balance on the balance sheet remains unaffected until the dividends are formally declared and paid. However, if the question assumes the arrears are implying a potential reduction, then the company must disclose this obligation in the notes or as part of the stockholders’ equity disclosures.

From a practical perspective, the reported retained earnings would be unaffected unless dividends in arrears are recognized as dividends payable. Hence, the reported amount of retained earnings would remain as previously calculated, reflecting accumulated net income less dividends paid, excluding the arrears amount unless recognized.

Conclusion

The analysis of Lachlin Corporation’s stockholders’ equity components reveals detailed insights into its capital structure and dividend policies. The number of outstanding shares, their stated and par values, and the dividend policies are interconnected and essential for understanding the company’s financial position and stakeholder value. Properly analyzing these elements enables investors, creditors, and management to make informed decisions and assess the company's financial health effectively.

References

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