6 Statement of Changes in Equity
Linking the Income Statement to the Statement of Financial Position
Jacqueline Gagnon
Common Shares
Common shares are the ownership stake in a company. It is money that shareholders have paid to the company to own part of the company. A company can sell shares or buy back shares of the company. When a company issues shares, their accountant will enter this journal entry:
Issuance of Shares
| DR | Cash | |||
| CR | Common Shares |
The company will have more contributed capital from shareholders, and more cash. In addition to the financial statement impact, in dollars or other monetary currency, there will be more shares outstanding.
A repurchase of shares is just the opposite. When a company repurchases shares, their accountant will enter this journal entry:
Repurchase of Shares
| DR | Common Shares | |||
| CR | Cash |
But why would a company buy back its own shares? A company will repurchase shares if it has extra cash that it doesn’t need for operations. Shareholders take repurchases as good news because it signals that the company’s management is aware of excess cash and has an effective strategy to manage cash. Remember each shareholder is entitled to earnings based on the percentage of shares that they own. So if the number of shares go down, all remaining shareholders own a bigger portion of the company and are entitled to a larger share of the earnings. Maybe you can see that there’s some strategy at play in equity transactions…
Let’s Practice
The next few questions ask you to calculate the number and dollar value of common shares, and practice journal entries.
- My Turn:
- The following transactions affect Grammar Ltd.’s common shares:
-
- 01 January 20X1:
- Grammar Ltd. is planning to expand their operations and needs to raise capital. At this time, Grammar issues 500 shares and receives $15,000 cash.
- 31 December 20X2:
- The expansion has been successful and Grammar Ltd. has excess cash. The company decides to repurchase 250 shares at this time at $10 per share.
- There were 1,000 no par value common shares outstanding at 01 January 20X1 at a total value of $10,000.
- Required:
- For each transaction, determine the balance in the common shares account and number of shares outstanding.
01 January 20X1:
| Common shares, prior to issuance | 10,000 |
|---|---|
| Proceeds on issuance | 15,000 |
| Common shares, after issuance | 25,000 |
There are now 1,500 shares of Grammar Ltd. outstanding at a total book value of $25,000.
31 December 20X2:
| Common Shares, prior to repurchase | 25,000 | |
|---|---|---|
| Payment for repurchase | (250 shares × $10 per share) | (2,500) |
| Common Shares, after repurchase | 22,500 |
There are now 1,250 shares of Grammar Ltd. outstanding at a total book value of $22,500.
Here’s one for you to try. You’ve got this!
Good progress; you’re doing great. Here’s one more to try!
Great work! Notice that the common shares account is directly affected by issuance and repurchase transactions. The balance in common shares changes, meaning that the trial balanceTrial Balance:
A list of company accounts organized by financial statement starting with the Statement of Financial Position, then the Income Statement. Accounts are listed in order as seen on the financial statement: current asset, non-current asset, current liability, non-current liability, equity, sales revenue, cost of goods sold, operating expenses, peripheral expenses, income tax expense. The trial balance is exactly what it sounds like: a trial to test if all the debits and credits balance. See also: Post-closing trial balance. reflects the ending balance of common shares. Seems obvious, right? But we will see in the next section that this is not the case with retained earnings.