Hello and welcome everyone to our lesson today. Today we are going to switch gears. Instead of talking about liabilities, we're going to talk about equity. If liabilities represent what the entity owes to creditors, suppliers, government employees, a lot of none owners. The shareholder's equity represent that residual interest which the owners can claim or have the right to claim. The discussions overall, when we talk about equity as a general idea, we'll focus on two branches. I'll focus on contributed equity versus earned equity. When we get to the contributed equity, we are concerned about the expansion of the earned capital by issuing stock or the contraction of the size of the capital by either retiring or simply by purchasing stock back, which we call it treasury stock. That's with respect to our contributed capital. What about earned capital? When we talk about earned equity, we are going to focus more on retained earnings. Whenever retained earnings is up to the discussion, then obviously distributions will be one of the topics that we'll hit hard. Cash dividends, property dividends, stock dividends, stock splits even is one of the concerns which we will discuss when we talk about earned equity. We will also introduce the concept of comprehensive income by introducing the elements that comprise other comprehensive income items. We'll briefly talk about those items in this lesson. We will delay a detailed discussion of the comprehensive income to other lessons. Let's get started. The process of incorporating a business is similar in most of the states in the US, the articles of incorporation, which sometimes are called corporate charter, described three main things. Number one, the nature of the firm's business activities. Number two, the shares to be issued and number three, the composition of the initial board of directors. You know that the board of directors establishes corporate policies and appoint officers who managed the corporation. I'll take this chance to distinguish between different types of shares that are very, very frequently referenced and referred to. We have the number of shares authorized, which is the maximum number of shares that a corporation is legally permitted to issue as specified in its articles of incorporation. The number of authorize shares is determined by the company's creation and can only be increased by a vote of the shareholders. At least some of the shares authorized by the articles of the incubation are sold at the inception of the corporation. When a corporation buys back its own stock, for whatever reason, the purchase back shares will be referred to as treasury shares or simply treasury stock. The difference between those that were issued and the treasury shares are referred to as outstanding shares. Then we have authorized number of shares, issued number of shares, outstanding number of shares, and then treasury shares, which referred to the ones that were purchasing. Shareholders, are the owners of a corporation. So if a corporation has only one class of shares, know designation of the shares is necessary by they typically are labeled common shares or shares of common stock. Ownership rights held by common shareholders unless specifically withheld by agreement with the stakeholders, are mainly the following. As you can see on the screen in front of you. First, the right to vote on matters that come before the shareholders. The second right is the right to share in profits when dividends are declared. Third, the right to share in distribution of assets if the company is liquidated, if it has to go out of business or is liquidated. Fourth, is the right to maintain once percentage share of ownership when new shares are issued. This last one is referred to as preemptive right, it is not uncommon for a firm to have more than one and perhaps several classes of shares, each with different rights and different limitations. If more than one class of shares are authorized by the article of the incorporation, the specific rights of each has to be specified. For instance, the right to vote, residual interests in assets, and the dividend rights. Also, some designation must be given to distinguish each class. Two of the main designations that we are going to use quite a lot popularly are basically common and preferred stock. This was an overview. Let's get to the structure of contributed equity versus earned equity. When we are going to discuss contributed equity will focus, as I said, on the expansion and the contraction of that contributed cup expansion, we referred to as depending on the designation of the common stock and as I said, I'm going to focus from now on two specific designations, common versus prefer. Actually sometimes class A, class B, you will see different references to different names. But I will focus on two main designations, common versus preferred. When shares are sold for cash, the capital stock account, whatever that is common or preferred. If you're issuing common, then we'll call it common stock. If you're issuing preferred then we're going to refer to it as preferred stock. This stock account is credited for the amount representing the stated capital. That is going to be the values stated on the stock. When shares have a designated pa value, which is the stated value on the stock, which also denotes the stated capital or the legal capital. Those proceeds in excess of this amount are credited to an account called paid-in capital in-excess of par value. I want to make a warning because that paid-in capital is actually additional paid-in capital in excess of par value. Because as I said, you take the stated value and credit it to common stock or preferred stock, and whatever exceeds that, you are going to credit another account in addition to the par value. We abbreviate it by PIC, paid-in-capital. Although the common stock and preferred stock is also paid-in capital, but when we refer to PIC, that we mean by that amount that was additional to the stated value or the par value. Let's go to the contraction of the capital of the company, buying back treasury stock. When a company's management feels that the market price of its stock is undervalued, it may attempt to support the price by decreasing the supply of the stock in the market place. Also, shares might be reacquired to distribute in a stock dividend, or a proposed merger, or even a defense against a hostile takeover. Whatever the reason for which the shares are repurchased, a company has two alternative when accounting for those shares. The first one, we refer to as the shares can be formally retired, and we'll talk about that in details later, or the shares can be referred to as treasury stock. Treasury stock, I'm buying that stock waiting for reissuing of the stock again, this is contributed equity. Let's give a brief overview on earned equity. As I said, the focus on earned equity, retained earnings in specific. In general, retained earnings represent a corporation's accumulated undistributed net income or net loss. It's the net accumulation of all the gains and losses that the company have accumulated over the year. A more descriptive title used for some companies is actually reinvested earnings. Those are the earnings that the company has accumulated and now I'm deciding to reinvest them instead of distributing them to the owners. A credit balance in this account indicates a dollar amount of assets previously earned by the firm, but not distributed as dividends to the shareholders. We've referred to a debit balance in the retained earnings as a deficit as you know. The other component of earned equity, which is not paid attention to a lot, which is accumulated other comprehensive income, it's a designation that has a lot of tension when we account for it. We will talk about those in details later. Comprehensive income provides a more expansive view of the change in stockholders' equity than does the traditional net income. It is the total non-owner change in equity for a reporting period. The non-owner changes other than those that are part of the traditional net income are the ones reported as other comprehensive income. Comprehensive income extends our view of income beyond net income reported in an income statement, to include four types of gains and losses not included on the income statement. Those what we refer to as other comprehensive income. I'm just going to list them, the four, the main ones and obviously the discussion and the details of those will be actually discussed in other lessons. The first type is the net holding gains and losses on available-for-sale investments in debt securities. Second; gains and losses from the amendments to pension and post-retirement benefit plans. Third; the deffered gains and losses on derivatives, and finally the fourth one are the gains and losses resulting from the adjustments from foreign currency translation. Just as net income is reported periodically in the income statement and also on cumulative basis and the retained earnings, same thing with OCI. OCI is reported periodically in the statement of comprehensive income or the stockholders' equity statement, and also on an accumulated basis as comprehensive income in the balance sheet along with the retained earnings. In other words, we report two attributes of the OCI and this is important. One; the components, the individual items of other comprehensive income during the reporting period and the comprehensive income on accumulative basis over the current and prior periods. Please note that each component of OCI is reported net of its related income tax or income tax benefit. In summary, and as overall, with this brief overview of all the components, I wanted to distinguish between two basic sources for shareholders. The whole purpose of this lesson is to identify contributed equity, earned equity. Within the contributed equity, we focus on the issuance and the purchase back of the stock; expansion, contraction. While within the earned equity, we distinguished between the net income reported on the income statement versus the other comprehensive income reported on the stockholders' equity. We've also focused on the dividend distributions, and we will talk about the different types of distributions. Thank you very much.
