Accounting & auditingLesson 2 of 2 in the course Financial Statements

Corporate Equity Accounts, Dividends, and Changes in Equity

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

Save course
Lesson progress
0 / 5

Your progress is kept in this browser only.Sign up to save it

Summary

This lesson explains what equity represents, distinguishes contributed capital from earned capital, and explores how dividends affect retained earnings. These ideas help you understand the ownership portion of a firm’s financial position and the changes that the statement of owner’s equity reports.

The accounting equation groups a firm’s resources and claims into three parts: assets, liabilities, and equity. Equity represents the owners’ interest in the firm. The statement of owner’s equity focuses on this final part of the equation by showing the components of equity and how they change during a period.

All flashcards

What is equity?
Equity is the owners’ interest in a firm. It is the ownership portion of the accounting equation, alongside assets and liabilities.
How do contributed capital and earned capital differ?
Contributed capital consists of amounts invested by owners. Earned capital consists of amounts generated through business operations and retained in the firm.
What is additional paid-in capital?
Additional paid-in capital is the amount received for stock above its par value. For example, issuing a $5-par share for $20 results in $15 of APIC.
What are treasury shares?
Treasury shares are previously issued shares that the corporation has repurchased but not retired. They remain issued but are not outstanding.
How do dividends affect retained earnings?
Declaring a dividend decreases retained earnings, whether the distribution is cash, additional shares, or property. Only outstanding shares receive dividends.

Quiz questions

  1. Which financial statement explains changes in equity accounts over a period?Answer: The statement of owner’s equity.
  2. How does the statement of owner’s equity generally present its balances?Answer: Beginning balances first, period activity next, and ending balances last.
  3. Which description best fits preferred stock?Answer: It has priority over common stock in specified respects.
  4. A corporation’s common stock balance increases during a period. What does this generally indicate?Answer: The corporation issued additional common stock.
  5. How are dividends treated when calculating a corporation’s net income?Answer: They are distributions to owners, not business expenses.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

More in Accounting & auditing

All Accounting & auditing lessons
Accounting & auditingIncome Statement Analysis: From Sales to EBITDA5 flashcards · 5 quiz questions · 4 gamesPlay free →Accounting & auditingDepreciation: Cost Allocation, Methods, and Tax Treatment5 flashcards · 5 quiz questions · 4 gamesPlay free →Accounting & auditingOperating Efficiency Ratios: Receivables, Assets, and Inventory5 flashcards · 5 quiz questions · 4 gamesPlay free →Accounting & auditingInternal Auditing: Governance, Risk, Controls, and Professional Practice5 flashcards · 5 quiz questions · 4 gamesPlay free →Accounting & auditingIncome Statements: Sales, Profit Calculation, and Cash-Flow Distinctions5 flashcards · 5 quiz questions · 4 gamesPlay free →Accounting & auditingFIFO and LIFO as Inventory Cost-Flow Assumptions5 flashcards · 5 quiz questions · 4 gamesPlay free →