We've worked our way down the balance sheet over the last several weeks, covering assets and liabilities, both current and noncurrent. Finishing up tonight, we'll look at the final few items that you'll encounter in this section of a quarterly report. There's a light at the end of the tunnel, as they say. Let's hope it's not a train.
Owners' Equity is the owners' stake in the company. If you look at a company from a balance sheet perspective, it belongs to two parties: its owners and its creditors. Therefore, when you subtract the creditors' equity (liabilities) from total assets, what's left over is owners' equity. Owners' equity includes preferred stock, common stock, additional paid-in capital, treasury stock, retained earnings, appropriated retained earnings, and foreign currency translation adjustment.
Preferred Stock represents ownership in a corporation and gives the holder a claim prior to the claim of common stockholders on earnings. In the event of liquidation, preferred stockholders are paid off before common stockholders, so they get first dibs after liability holders are taken care of.
Preferred stock generally pays a fixed dividend, which usually must be paid before dividends are paid on common stock. These dividends are also cumulative -- any missed dividends must be made up prior to paying dividends to common stockholders.
These securities, which carry no voting rights, are priced on dividend yield and trade much like long-term corporate bonds. Some agreements carry an option that allows preferred stock to be exchanged for a set number of common shares. Companies will issue preferred stock to increase their equity and reduce financial leverage.
Common Stock represents shares that have no preference to dividends or any distribution of assets. Common stock normally carries voting rights and its holders are the residual owners of a corporation in that they have a claim to what remains after every other party has been paid. Common stock of mature companies often pays quarterly dividends.
Additional Paid-In Capital is what occurs when proceeds from issuing common stock exceed par value. Par value is an arbitrary amount assigned to stock, which has little meaning in the present day where securities regulations are much different from bygone years.
Treasury Stock are shares that have been issued and then repurchased. Treasury stock is not considered in paying dividends, voting, or calculating earnings per share. It may be reissued at some point or retired completely.
Treasury stock is not an asset. Companies cannot create an asset by holding stock in itself. The amount of treasury stock held is recorded as a reduction in shareholders' equity.
Retained Earnings is the income that has been retained for reinvestment in the business rather than being paid in dividends to shareholders. Income that is retained can be used to acquire additional income-earning assets, resulting in greater future profits. Retained earnings represent the maximum amount that could be distributed to shareholders if the company wished to do so.
Appropriated Retained Earnings are earnings that have been earmarked by the company as not available for dividend payment. Let's say a company decides to take on a major project and wants to reserve a portion of earnings for that project. It can limit the dividend by appropriating some of its retained earnings for other uses.
Companies will sometimes appropriate retained earnings in order to decrease the perceivable earnings available for dividends, wages, benefits, etc. Appropriated retained earnings may be unappropriated at any time.
Foreign Currency Translation Adjustments occur when assets and liabilities of foreign subsidiaries are translated into U.S. currency at end-of-period rates of exchange. Income, expense, and cash flows are translated at weighted-average rates of exchange. These adjustments are recorded on the balance sheet as a part of shareholders' equity.
I hear that faint "clonking" noise again that tells me heads are losing consciousness and colliding with computer monitors -- a good indication that I should wrap things up for this week. We'll have fun with numbers next week and look at a the quick ratio, current ratio, and working capital.
Drip on, Fools!
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