Greetings all,
Would be great if any financial statement gurus out here can help out with a technical question.
On the Stockholders' Equity portion of the balance sheet, why are the funds that the company receives from shareholders split into the par value of shares line item and the additional paid-in capital line item?
Further, how/why do firms assign the par value of the shares, when in my observation it seems to have no correlation to the share price at which the firm has raised equity from investors?
Also, can anyone point me to online tutorials that give a good plain English explanation and/or examples on Stockholders' Equity and Financial Statements more broadly?
Thanks,
kayslay
Yea its pretty basic accounting principles. The Par Value is pretty arbitrary when assigned and has no indication as to the actual market value of the shares. It is more just for the legal aspect of corporations.
Additional Paid-in Capital can be accumulated in numerous ways, for instance if a company buys back 100 shares at $10/share than they now hold Treasury Stock of $1,000 value (100x10=1000). When they go to sell this back into the market and now get $15/share they do a journal entry that looks something like this:
Dr. Cash 15,000 Cr. Treasury Stock 10,000 Cr. Additional Paid-in Cap 5,000
It is almost a way of showing a gain on the sale but instead of going into your Net Income it just accumulates in Stockholder's Equity. There are about 10 other ways Additional PIC can accumulate.
Thanks for the quick reply.
2 Follow-up questions:
On your journal entry example, if the company had to raise equity and let's say they could only get $5 per share, which of the following would we do?
Debit Cash: $5K Credit Treasury Stock: $10K Debit APIC: $5K
or
Debit Cash: $5K Credit Treasury Stock: $5K Credit APIC: $0
2nd Question: In the BS I'm looking at, there's a line item under shareholder's equity called "Common stock reserved for issuance", what does this represent? Not sure I understand how it's reserved for issuance if there is already a value attached to it?
Again, Thanks for all responses.
To your first question,
Dr. Cash 5,000 Dr. Additional PIC 5,000 (this account is continuously accumulating so you can have subtractions and additions to it) Cr. Treasury Stock 10,000
So in this example instead of recording an expense (or a loss on sale) to Net Income you are just decreasing your Stockholder's Equity (which has the same effect).
For number 2,
I believe that is the Common Stock they have already filed with the SEC and gotten approval to issue. For example when a company does an IPO generally they will get much less cash for their equity because Investment Banks tend to be conservative and underprice. So the company will get approval to issue 500,000 shares and in their IPO they will sell 250,000 of them for, say, $5/share and within the first month after the IPO the company's stock is already at $15/share. The true, value of the firm has been discovered through market demand and now they can issue those other 250,000 shares for the higher Market Price than the Original IPO Price. SO now they issue those remaining 250,000 shares and get 3x the cash for the same amount of equity that they did with their IPO.
But again there are probably 10-100 reasons why a company would keep Common Stock for Issuance
Just curious: So on the BS, when you sum up the CS @ par value with the associated APIC for CS you get the book value of that specific class of equity?
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