STOCKHOLDERS’ EQUITY

Stockholders’ equity consists of two parts: common stock and retained earnings. Companies record as common stock the investments of assets into the business by the stockholders. They record as retained earnings the income retained for use in the business. These two parts, combined, make up stockholders’ equity on the balance sheet. In  Illustration 2-2 , Franklin Corporation reported common stock of $14,000 and retained earnings of $20,050.

ALTERNATIVE TERMINOLOGY

Common stock is sometimes called capital stock.

DO IT! 1b

Balance Sheet Classifications

The following financial statement items were taken from the financial statements of Callahan Corp.

1. ________ Salaries and wages payable

2. ________ Service revenue

3. ________ Interest payable

4. ________ Goodwill

5. ________ Debt investments (short‐term)

6. ________ Mortgage payable (due in 3 years)

7. ________ Investment in real estate

8. ________ Equipment

9. ________ Accumulated depreciation—equipment

10. ________ Depreciation expense

11. ________ Retained earnings

12. ________ Unearned service revenue

Match each of the items to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA.”

1. Current assets (CA)

2. Long‐term investments (LTI)

3. Property, plant, and equipment (PPE)

4. Intangible assets (IA)

5. Current liabilities (CL)

6. Long‐term liabilities (LTL)

7. Stockholders’ equity (SE)

Action Plan

✓ Analyze whether each financial statement item is an asset, liability, or stockholders’ equity item.

✓ Determine if asset and liability items are current or long‐term.

SOLUTION