Forensic accountants must know the key components of the stockholders' equity. Each share of stock has rights and privileges restricted only by special contract at the time shares are issued. The forensic accountant must examine the articles of incorporation, stock certificates, and the provisions of the state law to ascertain such restrictions on or variations from the standard rights and privileges.
Stockholders' equity is the difference between the assets and the liabilities of the enterprise. It represents the cummulative net contributions by stockholders plus earnings that have been retained. Stockholders' equity in a corporation is generally made up of a large number of shares. Shares are exactly equal to every other share within a given class of stock. At least, each share carries the following rights:
- To share proportionately in profit and losses
- To share proportionately in management, right to vote for directors
- To share proportionately in corporate assets upon liquidation
- To share proportionately in any new issues of stock of the same class, which is called preemptive righ.
Other names for Owner's Equity, in a corporation are: stockholders' equity, shareholders' equity, orcorporate capital. Capital stock and additional paid-in capital constitute contributed or paid-in capital while retained earnings represents the earned capital of the entity.
It is very important to know the relationship between authorized, issued, outstanding, and subscribed shares. For example, the Corporation Doe Inc. has the following data regarding its common stock as of December 31, 2009:
|Common Stock at December 31, 2009|
|Computing the Number of Outstanding Shares|
The number of shares outstanding is determined by subtracting the Treasury Shares from the Issued Shares.Authorized shares are either issued or unissued and issued shares are either Outstanding Shares or Treasury Shares. It is important to keep in mind that Treasure Shares are issued shares but the are not outstanding.