Page 497 - Accounting Principles (A Business Perspective)

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capital stock and from certain other transactions discussed in Chapter 13. As stated earlier, retained earnings is
the part of stockholders' equity resulting from accumulated net income, reduced by dividends and net losses. Net
income increases the Retained Earnings account balance and net losses decrease it. In addition, dividends declared

to stockholders decrease Retained Earnings. Since Retained Earnings is a stockholders' equity account and
represents accumulated net income retained by the company, it normally has a credit balance. We discuss retained
earnings in more detail in Chapter 13.
The following illustration shows the proper financial reporting for preferred and common stock. Assume that a
corporation is authorized to issue 10,000 shares of USD 100 par value, 6 per cent, cumulative, convertible preferred
stock (five common for one preferred), all of which have been issued and are outstanding; and 200,000 shares of
USD 10 par value common stock, of which 80,000 shares are issued and outstanding. The stockholders' equity

section of the balance sheet (assuming USD 450,000 of retained earnings) is:
Stockholders' equity:
Paid-in capital:
Preferred stock – USD 100 par value, 6 per
cent cumulative, convertible (5 common for 1
preferred); authorized, issued, and
outstanding, 10,000 shares $ 1,000,000
Common stock – USD 10 par value; authorized,
200,000 shares; issued and outstanding 80,000
shares 800,000
Total paid-in capital $ 1,800,000
Retained earnings 450,000
Total stockholders' equity 2,250,000
Notice that the balance sheet lists preferred stock before common stock because the preferred stock is preferred
as to dividends, assets, or both. The company discloses the conversion rate in a parenthetical note within the
description of preferred stock or in a footnote.

An accounting perspective:

Business insight

WHX corporation in its 1999 annual report provided the following presentation of preferred stock
in the stockholders' equity second of its balance sheet:

1999

Stockholders' equity:
Preferred stock—$.10 par value:
authorized 10,000 shares; issued
and outstanding: 5,883 shares $588.3M
Stock issuances for cash
Each share of common or preferred capital stock either has a par value or lacks one. The corporation's charter

determines the par value printed on the stock certificates issued. Par value may be any amount—1 cent, 10 cents, 16
cents, USD 1, USD 5, or USD 100. Low par values of USD 10 or less are common in our economy.
As previously mentioned, par value gives no clue as to the stock's market value. Shares with a par value of USD 5
have traded (sold) in the market for more than USD 600, and many USD 100 par value preferred stocks have
traded for considerably less than par. Par value is not even a reliable indicator of the price at which shares can be
issued. New corporations can issue shares at prices well in excess of par value or for less than par value if state laws

Accounting Principles: A Business Perspective 498 A Global Text