Thursday, 4 February 2016

2.3 Equities

Introduction

Equities is the owner’s claim of the company assets after minus out the liabilities. Revenue that reinvested back into the company will be part into equity as well.

Component of Equities

Equities can be separated into four large components as follows:
2.3.1               Capital Contributed by the owners
This is the amount contributed by the owner through common shares. Usually capital contributed is multiply of the par value of the common share par value by number of share outstanding.

2.3.2               Preferred Shares
Preferred shares work like bonds but have lower priority to claim the company assets than bond when the company dissolve. Preferred share promised to pay the owner a certain percentage of dividends annually. Only non-redeemable can be classified as equity. On the other hand, the redeemable preferred shared are classified as liability.

2.3.3               Treasury Shares
Shares that had brought back by the company and not cancelled are called the treasury shares. Treasury shares does not had voting right and reduce the outstanding shares of the company.

2.3.4               Retained earning
Every year the management can decide to distribute the profit after tax to owners through dividend or reinvests it back into the company. The reinvested amount are called the retained earnings and can accumulated through the years.

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