Chapter 5: Q5DQ (page 564)

If common stockholders are the owners of the company, why do they have the last claim on assets and a residual claim on income?

Short Answer

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The common stockholders get the last claim on the organization’s assets and income as the other investors are paid fixed income based on the contracts signed at the time of providing the capital and the remaining income is usually distributed to the owners.

Step by step solution

Step 1:Meaning of owners of the company

The equity shareholders are the owners of the company.The capital invested by the equity shareholders provides them with the ownership share of the company and they also get voting powers to make decisions for the ccompany.

The reason that stockholders have the last claim on the assets and residual income

The owners of the organization have the last claim on its assets and residual income. The other investors receive a fixed income based on their contracts but the common stockholders have a claim on the income that is left after fulfilling all the obligations. If the organization is generating high profits, then the owners will get more income and vice-versa.

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Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder’s equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder’s equity	\)15,680,000
Total liabilities and stockholder’s equity	\(28,650,000

If common stockholders are the owners of the company, why do they have the last claim on assets and a residual claim on income?

Short Answer

Step by step solution

Step 1:Meaning of owners of the company

The reason that stockholders have the last claim on the assets and residual income

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