Achievable CMA Part 1

1. External financial reporting decisions

1.2. Financial transactions

1.2.10. Equity transactions

Our CMA Part 1 course is currently in development and is a work-in-progress.

Definitions

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Definitions

Equity: This is the residual interest in a company’s assets after deducting its liabilities. It represents the owners’ claim on the company’s assets, measured at book (carrying) amounts. It is not necessarily what owners would receive if the company were liquidated, because assets may sell for more or less than their book values.

Although it has a residual definition, it also has typical components:

Common stock	XX
Preferred stock	XX
Additional paid-in capital (APIC)	XX
Retained earnings	XX
Accumulated other comprehensive income (AOCI)	XX
Less: treasury stock	(XX)
Total stockholders’ equity attributable to the parent	XX
Non-controlling interests	XX
Total equity	XX

IFRS statements often call this “preference shares” and “share capital”; the classification is the same.

AOCI and non-controlling interests were discussed in previous chapters and will not be covered in this section. We will focus on the transactions affecting the following equity items:

Paid-in capital
Retained earnings

Paid-in capital

This consists of items that directly resulted from the contributions of owners. This covers transactions affecting the company’s

Common stock
Preferred stock
APIC
Treasury stock

Treasury stock is the company’s own shares that it has bought back. It is a contra-equity account that reduces total equity (it is not an asset), which is why it appears as a deduction in the table above.

The next chapter, Transactions affecting paid-in capital, walks through the journal entries for each of these, including stock issuances and treasury stock repurchases.

Retained earnings

This consists of items that result from a company’s operations, also referred to as the company’s undistributed earnings. Retained earnings equals cumulative net income minus cumulative net losses and dividends declared. Owner contributions never pass through retained earnings. An appropriation only restricts part of the balance; it does not change total retained earnings. This covers transactions affecting the retained earnings account such as:

Appropriation of retained earnings
Dividends

The next chapter, Transactions affecting retained earnings, covers the journal entries for dividends and appropriations in detail.

Equity overview

Residual interest: assets minus liabilities, at book/carrying value (not liquidation value)
Typical components: common stock, preferred stock, APIC, retained earnings, AOCI, less treasury stock = total equity attributable to parent; plus non-controlling interests = total equity
IFRS uses “share capital”/“preference shares” but classification is equivalent

Paid-in capital

Represents owner contributions: common stock, preferred stock, APIC, treasury stock
Treasury stock = company’s repurchased shares; contra-equity (not an asset), reduces total equity
Transactions (issuances, repurchases) covered in next chapter

Retained earnings

Reflects cumulative results of operations: cumulative net income − cumulative net losses − dividends declared
Owner contributions never flow through retained earnings
Appropriation restricts/earmarks part of balance but doesn’t change total retained earnings
Key transactions: dividends and appropriations (detailed in next chapter)

Next | 1.2.10.3 Transactions affecting paid-in capital

Definitions

Equity: This is the residual interest in a company’s assets after deducting its liabilities. It represents the owners’ claim on the company’s assets, measured at book (carrying) amounts. It is not necessarily what owners would receive if the company were liquidated, because assets may sell for more or less than their book values.

Although it has a residual definition, it also has typical components:

Common stock	XX
Preferred stock	XX
Additional paid-in capital (APIC)	XX
Retained earnings	XX
Accumulated other comprehensive income (AOCI)	XX
Less: treasury stock	(XX)
Total stockholders’ equity attributable to the parent	XX
Non-controlling interests	XX
Total equity	XX

IFRS statements often call this “preference shares” and “share capital”; the classification is the same.

AOCI and non-controlling interests were discussed in previous chapters and will not be covered in this section. We will focus on the transactions affecting the following equity items:

Paid-in capital
Retained earnings

Paid-in capital

This consists of items that directly resulted from the contributions of owners. This covers transactions affecting the company’s

Common stock
Preferred stock
APIC
Treasury stock

The next chapter, Transactions affecting paid-in capital, walks through the journal entries for each of these, including stock issuances and treasury stock repurchases.

Retained earnings

Appropriation of retained earnings
Dividends

The next chapter, Transactions affecting retained earnings, covers the journal entries for dividends and appropriations in detail.

Key points

Equity overview

Residual interest: assets minus liabilities, at book/carrying value (not liquidation value)
Typical components: common stock, preferred stock, APIC, retained earnings, AOCI, less treasury stock = total equity attributable to parent; plus non-controlling interests = total equity
IFRS uses “share capital”/“preference shares” but classification is equivalent

Paid-in capital

Represents owner contributions: common stock, preferred stock, APIC, treasury stock
Treasury stock = company’s repurchased shares; contra-equity (not an asset), reduces total equity
Transactions (issuances, repurchases) covered in next chapter

Retained earnings

Reflects cumulative results of operations: cumulative net income − cumulative net losses − dividends declared
Owner contributions never flow through retained earnings
Appropriation restricts/earmarks part of balance but doesn’t change total retained earnings
Key transactions: dividends and appropriations (detailed in next chapter)

Definitions

Equity: This is the residual interest in a company’s assets after deducting its liabilities. It represents the owners’ claim on the company’s assets, measured at book (carrying) amounts. It is not necessarily what owners would receive if the company were liquidated, because assets may sell for more or less than their book values.

Although it has a residual definition, it also has typical components:

Common stock	XX
Preferred stock	XX
Additional paid-in capital (APIC)	XX
Retained earnings	XX
Accumulated other comprehensive income (AOCI)	XX
Less: treasury stock	(XX)
Total stockholders’ equity attributable to the parent	XX
Non-controlling interests	XX
Total equity	XX

IFRS statements often call this “preference shares” and “share capital”; the classification is the same.

AOCI and non-controlling interests were discussed in previous chapters and will not be covered in this section. We will focus on the transactions affecting the following equity items:

Paid-in capital
Retained earnings

Paid-in capital

This consists of items that directly resulted from the contributions of owners. This covers transactions affecting the company’s

Common stock
Preferred stock
APIC
Treasury stock

The next chapter, Transactions affecting paid-in capital, walks through the journal entries for each of these, including stock issuances and treasury stock repurchases.

Retained earnings

Appropriation of retained earnings
Dividends

The next chapter, Transactions affecting retained earnings, covers the journal entries for dividends and appropriations in detail.