Hi, I’m getting a bit confused with the components of owner’s equity and need a bit of help… Contributed Capital Minority interest Retained earnings Treasury stock Accumulated comprehensive income a)Is Net income being counted twice??NI goes to retained earnings as well as gets added in Comprehensive income(as per definition). So is it being double counted?Am I missing something here? b)Schweser says that treasury stock is reacquired but not retired. What does retiring mean?CFA module is silent on the word. c)Does owner’s equity include dividends paid?Or is it a part of statement of changes in owner’s equity?How is it treated? Cheers, Nash
OCI = CI + net income. i dont think net inc gets counted twice i think retained earnings takes into acct dividends paid out. if you want to forecast RE for next yr, for example, it would be RE this year + next yrs net - next years expected div payout.
Thanks Daj…have a couple of doubts though. CI=NI+OCI as per the CFA modules and schweser. Will assume for now that year end NI does not get added to year end RE… As for the dividends paid bit, this is the text that I wanted clarity on… “At the end of each accounting period, the net income of the firm is added to stockholders’ equity through an account known as retained earnings. Therefore, any transaction that affects the income statement (net income) will also affect stockholders’ equity. However, not all accounting transactions are reported in the income statement. For example, issuing stock and reacquiring stock are transactions that affect stockholders’ equity but not net income. Dividends paid reduce stockholders’ equity, but they do not reduce in net income. Finally, transactions included in other comprehensive income affect equity but not net income.” If you’re referring to Schweser and turn to page 24-25 you’ll get what I’m driving at. The NI(29000=37500-8500) carried to retained earnings is net of dividend declared(8500). But the dividend paid as per CFI is 3500. The dividend payable on the BS is 6000(2008) on the basis of 1000(2007)+8500(2008)-3500(2008). So when the text says “Dividends paid reduce stockholders’ equity, but they do not reduce in net income” which component of equity do I see it in? Cheers, Nash
NI - Dividend PAID = Retained Earnings. (Rule 1) Retained Earnings is the linkage between the Balance Sheet and the Income Statement. And Retained Earnings is a part of the Stockholders equity. Thus, this equation above explains the statement below. “Dividends paid reduce stockholders’ equity, but they do not reduce in net income” Couple of other points: Dividend Payable is NOT equal to Dividend Paid. CFF is affected by Dividend Paid. Dividend Payable is a DISTRACTOR when it comes to calculating CFF. Hope this helps. CP
Minor edit to above post Retained Earnings Beginning + NI - Dividend PAID = Retained Earnings Ending. (Rule 1) This is the right equation. CP
Thanks C… It does clarify somewhat(the explanation of the “Dividends paid reduce stockholders’ equity, but they do not reduce in net income” statement was brilliant)… But does it mean that Dividends Declared=Dividends Paid? I’m just horribly confused about this thanks to the example on PG24-25 of Schweser’s FSA book. in that example, NI(37500)-Dividends declared(8500)=Retained earnings(29000). Cash Dividend in CFF = 3500 Dividend Payable in BS 2007(1000) and 2008(6000). Cheers, Nash
Dividend Declared = 8500 Dividend Paid = 3500 (Cash Dividend from Cash flow statement CFF) BS Dividend Payable for 2007 = 1000 (Beg Balance) Dividend Payable for 2008 = 8500 - 3500 = 5000 So BS Dividend Payable for 2008 = (Beg Balance) 1000 + 5000 (Change in Div Payable for 2008 ) = 6000 So a company decides it will pay .85$ per share on 10000 shares – 8500$ (Div Declared) But it decides to pay only 35c per share == 3500 (Div Paid) Difference goes into the Dividends payable bucket (5000$) This would be paid on a later date, as and when the company decides it is feasible to pay it. The part that moved the money 8500 from NI to Dividend Declared could be looked upon as Reduce NI 8500 Increase Dividend Paid 3500 Increase Dividend PAyable 5000 This is not in terms of debit / credit etc. but just to get a pictorial view of things. Hope this helps CP
CPK, Excellent explanation. Although shouldn’t your last statement read: " The part that moved the money 8500 from RETAINED EARNINGS to Dividend Declared could be looked upon as Reduce RETAINED EARNINGS 8500 Increase Dividend Paid 3500 Increase Dividend PAyable 5000 " Rather than " The part that moved the money 8500 from NI to Dividend Declared could be looked upon as Reduce NI 8500 Increase Dividend Paid 3500 Increase Dividend PAyable 5000 "
Chasing My response was in relation to "I’m just horribly confused about this thanks to the example on PG24-25 of Schweser’s FSA book. in that example, NI(37500)-Dividends declared(8500)=Retained earnings(29000). " Here Retained Earnings of 29000 is being deduced in this way, per Schweser. I was trying to explain that statement. It is to bring about a distinction of how things move between the Income statement and the Balance sheet – which you need to be aware of. Also to point out that Dividends Paid <> Dividends Declared and to also bring in the concept of Dividend Payable. So long as all of those are understood, and the relationships clear, you should be good.
Gotcha, thanks for clarifying. I’m not familiar with the notation you have on Divs Paid/Declared though particularly: Dividends Paid <> Dividends Declared Does that mean Dividends paid can be larger OR smaller than dividends declared? Thanks!
Not Equal To.
Agreed…that WAS a brilliant explanation!!!Thanks ever so much…it cleared up the entire Dividends Payable messup! The flow between Income Statement and the BS was amazingly explained…have already printed out this thread! My last doubt…should the statement logically read “Dividends DECLARED reduce stockholder equity but do not affect Net Income”? Cheers, Nash
The case is that dividend declared does not affect income statement directly but affects equity by reducing retained earnings. Therefore it is debited to equity and credited to dividend payable. As entity pays dividend in cash it debits dividend payable and credits cash. Summing up, the statement Dividends DECLARED reduce stockholder equity but do not affect income statement is true.
Bingo!!!Thanx A TON!!!