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The Corporate Finance Institute Accounting
More Share Terminology
A few more terms are important in accounting for share-related
transactions. The number of shares authorized is the number of shares
that the corporation is allowed to issue according to the company’s
articles of incorporation. The number of shares issued refers to the
number of shares issued by the corporation and can be owned by either
outsiders or by the corporation itself. Finally, the number of shares
outstanding refers to shares that are owned only by investors while
shares owned by the issuing corporation are called treasury shares.
The relationship can be visualized as follows:
Shares Authorized ≥ Shares Issued ≥ Shares Outstanding
Where the difference between the shares issued and the shares
outstanding is equal to the number of treasury shares.
Retained Earnings
Retained Earnings (RE) are a business’ profits that are not distributed as
dividends to stockholders (shareholders) but instead are allocated for
investment back into the business. Retained Earnings can be used for
funding working capital, fixed asset purchases or debt servicing, among
other things. To calculate retained earnings, the beginning retained
earning balance is added to the net income or loss and then dividend
payouts are subtracted. A summary report called a statement of
retained earnings is also maintained, outlining the changes in retained
earnings for a specific period.
The Retained Earnings formula is as follows:
Retained Earnings = Beginning Period Retained Earnings + Net
Income/Loss – Cash Dividends – Stock Dividends
Dividend Payments
Dividend payments by companies to its stockholders (shareholders) are
completely discretionary. Companies have no obligation whatsoever to
pay out dividends until they have been formally declared by the board.
There are four key dates in terms of dividend payments, two of which
require specific accounting treatments in terms of journal entries.
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