Page 492 - Accounting Principles (A Business Perspective)

12. Stockholders' equity: Classes of capital stock

The board of directors of a corporation issuing no-par stock may assign a stated value to each share of capital
stock. Stated value is an arbitrary amount assigned by the board to each share of a given class of no-par stock. The
board may set this stated value, like par value, at any amount, although some state statutes specify a minimum

amount, such as USD 5 per share. If not specified by applicable state law, the board may establish stated value
either before or after the shares are issued.
Other values commonly associated with capital stock

Market value is the price of shares of capital stock bought and sold by investors in the market; it is the value of
greatest interest to investors. Market price is directly affected by (1) all the factors that influence general economic
conditions, (2) investors' expectations concerning the corporation, and (3) the corporation's earnings.
Book value per share is the amount per share that each stockholder would receive if the corporation were
liquidated without incurring any further expenses and if assets were sold and liabilities liquidated at their recorded
amounts. A later section discusses book value per share in greater detail.
Liquidation value is the amount a stockholder would receive if a corporation discontinued operations and

liquidated by selling its assets, paying its liabilities, and distributing the remaining cash among the stockholders.
Since the assets might be sold for more or less than the amounts at which they are recorded in the corporation's
accounts, liquidation value may be more or less than book value. If only one class of capital stock is outstanding,
each stockholder would receive, per share, the amount obtained by dividing the remaining cash by the number of
outstanding shares. If two or more classes of stock are outstanding, liquidation value depends on the rights of the
various classes.
A corporation issues certain capital stock with the stipulation that it has the right to redeem it. Redemption

value is the price per share at which a corporation may call in (or redeem) its capital stock for retirement.
Capital stock authorized and outstanding
The corporate charter states the number of shares and the par value, if any, per share of each class of stock that
the corporation is permitted to issue. Capital stock authorized is the number of shares of stock that a

corporation is entitled to issue as designated in its charter.
A corporation might not issue all of its authorized stock immediately; it might hold some stock for future
issuance when additional funds are needed. If all authorized stock has been issued and more funds are needed, the
state of incorporation must consent to an increase in authorized shares.
The authorization to issue stock does not trigger a journal entry. Instead, companies note the authorization in
the capital stock account in the ledger (and often in the general journal) as a reminder of the number of shares
authorized. Capital stock issued is the number of shares of stock sold and issued to stockholders.

Capital stock outstanding is the number of authorized shares of stock issued and currently held by
stockholders. The total ownership of a corporation rests with the holders of the capital stock outstanding. For
example, when a corporation authorized to issue 10,000 shares of capital stock has issued only 8,000 shares, the
holders of the 8,000 shares own 100 per cent of the corporation.
Each outstanding share of stock of a given class carries rights and privileges identical to any other outstanding
share of that class. Shares authorized but not yet issued are referred to as unissued shares (the previous example
had 2,000 unissued shares). No rights or privileges are attached to these shares until they are issued; they are not
entitled to dividends, nor can they be voted at stockholders' meetings.

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