Stockholders in a company all own a share of the firm's profits. When a company makes a net income, which means its revenues exceed its losses, each common stockholder receives a fraction of the income as dividends. The fraction that each stockholder receives depends on the fraction of the company's equity that the investor has contributed. The net income also, however, includes the value of a different set of dividends. The company pays fixed preferred dividends to preferred stockholders before dividing its profits among common stockholders.
Divide a stockholder's dividends by the amount of equity that he or she has invested. For example, if an investor has put $150 into a company and received $25 in dividends, divide $25 by $150, giving 0.167.
Multiply this ratio by the company's total equity. For example, if the firm has received $60,000 from investors, multiply 0.167 by $60,000, giving $10,000.
Add this value to the company's obligation to preferred stockholders, which exists independent of net income. For example, if the company has issued preferred stock and has promised its owners $4,000 in dividends, add $10,000 to $4,000, giving $14,000. This is the firm's net income during the period.
- "Cornerstones of Financial & Managerial Accounting..."; Jay S. Rich et. al.; 2009
- "Principles of Accounting"; Belverd E. Needles; 2010
- "Financial and Managerial Accounting"; Carl S. Warren et. al.; 2008
- Jacksonville State University: Dividend Transactions
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