 Hello and welcome to the session. This is Professor Farhad and the session would look at accounting for issuing common stocks. This topic is covered introductory accounting course, intermediate accounting, and of course the CPA exam. As always I would like to remind you to connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I cover including many CPA questions. If you like my recording, please like them, share them, subscribe, put them in playlists. If they benefit you, it means they might benefit other people. Follow me on Instagram. On my website you will find additional resources to supplement your accounting education and add additional points to your CPA exam so you can pass the exam and move on with your life. I strongly suggest you check out my website. Stock certificate and stock transfer. In the prior session we talked about a stock certificate and we said each unit represent a stock. So if you own one stock of a company, one stock that's equal to one share. Now let's assume the company has 100 shares in total and you happen to own one stock. It means you own one over 100 or you own one percent. So a stock certificate serves as a proof that a stockholder has purchased a share. So this is how the stocks are used. So in the grand scheme of things, if you happen to own 10 shares of that company, 10 out of 100, you own 10 percent and you have ownership of 10 percent. It means you have voting power of 10 percent as well. Let's talk about basics of capital stock. You need to be familiar with certain terminology that appear on the balance sheet for the equity section of all companies. Shares that are authorized, issued and outstanding. Every time the company prepared their balance sheet, prepared their financial statements, they have to tell you how many shares are authorized. What is this number? Well, think about the word authorized, authorized to do what? They are authorized to sell them. For example, this company here that we're looking at, they have 250 million shares. So they have 250 million shares that they can issue of these shares issued and outstanding. It means they sold them and they sold them to the public of the 250. They have 92.5, I'm just going to round it, 0.5 million shares issued and outstanding. It means the remaining, whatever the remaining is, it's still not yet came to life. It's the remaining shares, whatever 250 million minus 92.556, the remaining just simply did. They don't have them yet. Now, what else do we need to know? When the company has, when they issue stocks, they might have a power value. For example, the power value here is a penny, 0.01 of a stock. Now, what is the power value? We're going to talk about the power value in a moment, but simply put, if you take the power value, which is, if you take and write this down, this is important. If you take the power value times the number of shares, number of shares, that's going to give you the account called common stock. For our example here, if we take 92.556.295 times 0.01, it's going to give us this number 925,563 rounded. So this is what you need to know. The number of shares, and I'm going to talk about this in a moment. Number of shares, number of shares times the power value gives us common stock. This number here, this number common stock, which we're going to be talking about today. And I'm going to talk about this quite a bit in a moment. So this is the balance sheet for Johnson & Johnson. Let's look at the shareholders' equity. Let's look at their common stock. The power value is a dollar. They have authorized shares 4.32 billion, 4.32, issued an outstanding 3.119 billion. And notice if we take the number of shares issued, notice if we take the number of shares issued times the power value, it's going to give us this number common stock. Also here, let's look at Netflix just for the sake of illustration. And notice here, the power value is not 0.01, it's 0.001. So what is the power value? You're going to see the power value is an arbitrary amount assigned to the stock. I'm sorry. It's this one. This is the common stock, 0.001. They have 4.99 billion shares authorized and of which 436 million issued. So just give you an idea that the power value could be anything. Now what is the power value? There we go. The power value is an arbitrary amount. Notice in one example for Johnson & Johnson, the power value was a dollar. And another example for Netflix was 0.001. So the power value could be any amount. It could be assigned to the stock. And we'll see in a moment that also a company, they could have no power value. They could have a stock and they don't want to have a power value for it, okay? So you don't have to have a power value. But if you do have a power value, you're going to see how we will be using the power value. So it's an arbitrary amount assigned to a stock when it's authorized. It's different than the market price. What is the market price? The market price is how much the stock is selling at. For example, Johnson & Johnson could be selling right now for $123 or $125. I don't know the amount is, I should because my wife works there, but that's beside the point. So the power value is an arbitrary amount to the arbitrary amount assigned to the stock. We really don't worry about the market price. Just the market price changes every day. So we have stocks with power value, stocks with no power value, and inserting state, we have stocks that has rather than a power value, they have something called the stated value. Power value, basically the same as the stated value. It's an arbitrary amount assigned to the stock. Basically the same thing. Now the stockholders equity section of the corporation consists of two main component. One and two, and you need to understand what these two components are. The first component, they go by different name in the real world, but I'm just going to have to explain it to you. It's called paid and capital. This is the amount, paid and capital, that's the amount that's contributed by who? Contributed by the stockholders. Remember the stockholder owns the company? All the money that the stockholders contribute money or other assets, usually money, it's parked into the paid and capital. So cash and other assets received in exchange for stocks, received from whom? From the stockholders. Then we have another account, and those are to be more specific. These are the two main accounts, the two accounts that represent the largest component of equity. Capital is one, two is retained earning. What is retained earning? Retained earning is a cumulative account. What is a cumulative? It means it accumulate over the years. So this is retained earnings and retained earnings will have a credit balance. Every time we have net income, retained earning goes up. Every time we have a net loss, retained earning goes down. Every time we pay dividend, retained earning goes down. So this is down, down, and this is plus. Those are the three main things that affect retained earning. Is there other things that affects retained earning? Yes, we'll see later on. There are other other transactions that affects retained earnings, but those are the three main accounts. So retained earning is a cumulative. In other words, it's the balance stays from year to year, from year to year. When we have net income, it goes up. When we have net loss, it goes down. When we have dividend, it goes down. So let's take a look at Johnson and Johnson balance sheet again. This common stock and retained earnings represent the largest component of shareholders' equity. Now you may not understand shareholders' equity here. You may say, how come 110 plus 3,000, we end up with 59? It's because we have treasury stock. Treasury stock gets subtracted. So this number is less. So that's why the number equal to 59. Usually the largest two components are retained earnings and common stock, what the owner invested and common stock. Let's take a look at Netflix, the same thing, common stock and retained earnings. Those are the two largest components of stockholders' equity. We have other accounts. We have accumulated other comprehensive loss. It could be accumulated other comprehensive gain. We could have treasury stock, but the other accounts are minor. We don't talk about them in financial accounting. We discuss them more in intermediate accounting. Let's take a look at few transactions in common stock to see how common stock comes to life and how is it presented on the financial statements. On June 5th, Dylan, Inc. issued. Issued means sold. So what happened is the corporation sell stocks and they receive in return cash. So this is the company. They sell stocks and those are the investors. The investor gets the stocks and the company gets the cash. So Dylan issued, sold 30,000 shares, the power value for the stock is $10 and received $300,000. Let's record this transaction. You have to understand that if we received $300,000 in cash, we are going to debit cash $300,000. Once we issue common stock, we're going to have to credit common stock. How much do we credit common stock? Write this down. This is an important computation. We just write common stock again. Write this down. Common stock is, I told you this before, but let me write it again, number of shares times the par value. In this example, the number of shares are 30,000. The par value is $10, happens to be 300,000. Therefore the entry is debit cash 300,000, credit common stock 300,000. Let's look at another transaction. On June 5th, Dylan Snowboards issued means sold 30,000 shares, $10 par value for $12 each. So now they sold 30,000 shares times $12. That's going to give them cash 360,000. Therefore they debit cash 360,000. They issued common stock. Therefore we have to credit common stock. How much do we credit common stock? Well, simple. The number of shares times the par value, that's 300,000. Now we have 60,000 remaining. What do we credit for the 60,000? We credit an account called paid in capital. It's the money it contributed from the investors in access of par value common stock. It means we received $60,000 in access to the par value. Simply put, if you really want to think about it, those two accounts are the same. It's the money invested by the investors, okay? The investors gave us 360,000, 300,000. It's under common stock and the remaining is under, the remaining 60,000 is under paid in capital in access of par value, 360. Now on the balance sheet, this is how we show things. We have common stock of 300,000, $10 par value, 50,000 shares authorized for this company of which 30,000 are issued. This 30,000 issued times $10 will give you 300,000, paid in capital is 60, and we have retained earning of 65,000. This is how things are presented on the balance sheet. Let's assume we issued a no par value stock. It means there is no par. Remember, sometime we have stocks with no par. The company decides not to have a par. On June 5th, Dylan Snowboard issued 1,000 shares, no par value for $40. We sold 1,000 shares at $40, that's $40,000 in cash, credit common stock $40,000. In other words, we have no paid in capital in access of par. Why not? We have no par, so you cannot have access of par if you have no par. So it's simple, no par value. Let's assume the problem read. On June 5th, we issued 1,000 shares of $40, stated value for $50. Remember, when you hear the word stated value, it's the same thing as par value. So stated value, same as par, same as par. What does that mean? It means you take 1,000. It means you take $1,000, 1,000 shares, I'm sorry, times $40. You debit cash or 1,000 times 50 for cash. Common stock is $40 times 1,000, which is $40,000 and anything in access, which is $10,000. It's called paid in capital and access of stated value. It's the same thing as, let me show you here, it's the same thing as this example except we use the term here par value and access of par value. In this example, we use the term and access of stated value. In other words, the stated value and the par value are the same thing. Now we could also issue stocks for non-cash. What does that mean? It means we want to buy something. We have no cash. What we tell the seller if they're willing to accept stocks, let's take a look at an example. On June 10th, 4,000 shares of $20 par value, stock exchange for land valued at 105. We did now, we gave 4,000 shares. In return, we got a land that's worth 105. How do we record this transaction? Well, we received the land. We know the value of the land is 105. We issued 4,000 shares with a par value of 20. Well, 4,000 times 20 is 80,000. Therefore we credit common stock, 80,000. The remaining is 25,000. What do we call this number? Paid and capital and access of par. So this is the basically issuing stock to buy an asset. Issuing stocks for non-cash, for something other than cash. Let's take a look at another example. We issued 600 shares of $15 par value for 12,000 of organizing work. What is organizing work? Usually that means when we incorporate, what happened is we pay someone to help us incorporate like lawyers, accountant, and consultant before we start the company. We call this organizing work or organizational cost. In other words, it's an expense. So now what happened is we owed them 12,000. We don't have the money to pay them. So what we did is we gave them 600 shares with a par value of $15. Well, what's going to happen is we're going to debit organization expense $12,000. So what we're doing here is we're issuing stocks for expense rather than an asset. We're issuing the stock for expense. Now we credit common stock. How much do we credit common stock? We credit common stock for 600 shares times 15, 600 times 15, and that's going to give us $9,000. And that's going to keep us for 3,000. It's called paid in capital and access of par value, par value, and to be more specific, common stock. So this is the entry. So notice we can issue stocks for cash. That's usually what happens, something like this. We issue stocks for cash, or like this. We issue stocks for cash. Or we can issue stocks for other assets. We issue stocks for other assets. Or we can issue stocks for, let me just delete everything here so you can see it, we issue stocks for expenses. So notice we can issue stocks for many other things. And sometime we could issue stocks. You will see later on an intermediate accounting for liability. So if we cannot pay off the loan, we issue the stock and we pay off the loan. If you like this recording, please click on the like button. You can visit my website for additional resources, especially if you're studying for your CPA exam. And if you would like to supplement your accounting education, you're going to invest once for your CPA. It's a lifetime investment. Take it seriously. Invest, study hard. And the next session we would look at cash dividend. Study hard, stay safe, and good luck.