Accounting Lessons

What are Accounting Principles?

Accounting principles govern the accounting choices of management. It is important to know that the accounting process is governed by accounting principles that sometimes are very binding and sometimes provide some flexibility. Well known principles include International Financial Reporting Standards (IFRS) and U.S. GAAP (Generally Accepted Accounting Principles). Sometimes economic assets are not allowed to […]

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What is the Market to Book Ratio?

The market-to-book ratio, also called the price book ratio, shows the market value of the company relative to its accounting (book) value. In general, the book value of assets is below the market value of assets, since some assets may not be on the balance sheet (not recognized). When assets are recognized, but historic cost […]

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How to Make a Cash Flow Statement

The cash flow statement explains the change in cash by three activities: operating, investing and financing activities. Cash flow from operating activities is the change in cash as a result of the daily operations. It is the balance of money received from customers and cash paid to suppliers, personnel, etc. It also includes interest paid […]

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What is Dividend Preferred Stock?

Shares can have special rights, or other attributes that the ‘regular’ shares (common shares) do not have. If so, these shares are preferred shares. Here I will only consider preferred shares that receive dividend before the common shareholders do. Preferred (dividend) shares legally qualify as equity, but economically have more common with a loan. Preferred […]

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What is a Stock Split?

As the name suggests, with a share split the firm can reduce the share price by increasing the number of shares outstanding. For example, a 3 for 2 share split means that for every 2 shares an investor owns, a third share is issued for free. With a share split, the firm aims to keep […]

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What is a Stock Dividend?

A share dividend is a dividend in the form of extra shares. From the point of the investor, no ‘real’ dividend is received. Extra shares are issued that are given to existing shareholders. Thus, the value of the firm is spread out over an increased number of shares, thus decreasing the value per share. From […]

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What is a Cash Dividend?

When it is assumed that the firm pays a dividend on the same day it had decided to do so, accounting is straightforward. Cash is reduced, and a temporary T-accounts ‘dividends declared’ is used to record the decrease in retained earnings. At the end of the period, when the period is closed, dividends declared is […]

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What is Treasury Stock?

Treasury stock are shares that have been issued, but which the firm has repurchased from investors. Thus, treasury shares are no longer outstanding (but are still issued). Treasury shares can be resold to investors (and be outstanding again), or they can be cancelled (in that case they are no longer issued). Economically, treasury stock is […]

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What are Par Shares and No-Par Stock?

In section Double entry bookkeeping I mentioned that when a company issues shares for cash, that the T-account ‘paid-in capital’ is used to record the shares issued. Quick Navigation1 No-Par Value Stock Example2 Par Value Stock Example3 Par Value Stock Sale Example4 Par Value Stock Explained No-Par Value Stock Example The firm issues 1,000 shares for 50 cash each. […]

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What is Equity?

The firm can issue (additional) capital by issuing shares. Shareholders own the firm; they bear the most risk, and have the highest (potential) rewards. Investors usually pay cash to become a shareholder, but in principle, it is possible they pay for the shares in other ways. For example, by transferring ownership of a building, providing […]

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