Companies may issue common stock as a way of financing their business activities. Common stockholders have the ability to vote on company issues and select the corporation’s board of directors, as explained by AccountingCoach.com. A balance sheet is a statement of a company’s financial position at a specific point in time. A corporation’s balance sheet contains assets, liabilities and shareholders’ equity. Assets consist of items like cash and inventory that hold a future benefit to the business. Stockholders’ equity represents the shareholder investment in the business, while liabilities include items like unearned revenue and accounts payable. Liabilities place an obligation on a company to pay debts.
1. Read the company’s balance sheet. The balance sheet indicates a company’s financial positions as of the date listed on the balance sheet heading. Notice that sssets appear on the left side of the balance sheet because assets have a normal debit balance. This means assets increase by debiting the account, while liabilities and shareholders’ equity increase as a result of a credit. The liabilities and shareholders’ equity sections appear on the right side of the balance sheet.
2. View the stockholders’ equity section of the balance sheet. This section contains information such as the amount of dividends paid to shareholders of the business and the amount of money reinvested in the company in the form of retained earnings. Notice that the balance sheet reflects the accounting equation: assets equal liabilities plus shareholders’ equity. This means shareholders’ equity should equal assets minus liabilities.
3. Locate the capital stock section of the stockholders’ equity section. The capital stock section indicates the type of stock the company has the authority to issue. The capital stock section should be the first section in the stockholders’ equity section of the balance sheet. Common stock is listed first, if the company has not issued preferred stock. However, if a corporation has issued preferred and common stock, then common stock will appear after preferred stock. Observe the par value of the common stock, the number of common stock shares the corporation has the authority to issue, the number of shares outstanding and the number of common stock shares issued.
Items you will need
- Balance sheet
- BananaStock/BananaStock/Getty Images