Shares, Dividends, and Stock Splits

Authorized Shares – The total number of shares that a corporation can legally sell.

Issued Shares – Shares that a corporation sold at any time in the past, even if some of were later reacquired.

Treasury Shares – Shares that a corporation previously sold, later reacquired, and still holds.

Outstanding Shares – Shares currently owned by investors. These are the only shares that pay dividends and give holders the right to vote for the board of directors.

Example: The charter of November, Inc. authorizes the issuance of 125,000 shares of common stock. In total, the company has sold 48,000 shares over the years, but 10,000 were later bought back and are still held by the corporation. How many shares does the corporation have outstanding?

38,000 outstanding shares. This amount is calculated by subtracting the 10,000 shares of treasury stock from the 48,000 issued shares.

Example: The charter of October, Inc. authorizes the issuance of 200,000 shares of common stock. In total, the company has sold 90,000 shares over the years, but 9,000 were later bought back and are still held by the corporation. How many shares does the corporation have outstanding?

81,000 outstanding shares. This amount is calculated by subtracting the 9,000 shares of treasury stock from the 90,000 issued shares.

Copyright 2021 – Kei G. Gauthier, CPA, MSTax, Longmeadow, MA – All rights reserved. orchardguides.com Cash Dividend Prerequisites – Before a corporation can distribute a cash dividend, 1. the company must have retained earnings of at least as much as the dividend, 2. the company must have enough cash to pay the dividend, and 3. the company’s board of directors must vote to approve the dividend.

Dates associated with the payment of a cash dividend in chronological order : • Date of Declaration – The day when the board of directors votes to approve the payment of a cash dividend. • Date of Record – The date on which shareholders must own corporate stock to receive a cash dividend. • Date of Payment – The day when dividend checks get distributed to the shareholders who owned the stock on the date of record.

“Cutting a pie into lots of pieces doesn’t make the pie bigger. It makes the pieces really small,” Kei G. Gauthier, CPA, MSTax.

In a stock split, corporations replace each share of their outstanding stock with multiple shares of new stock. For instance, a corporation might replace every outstanding share with 2 new shares, so if you owned 10 shares before the split, you would own 20 shares after the split.

Imagine that we have a company that is worth $100,000. If there are 100 shares of stock outstanding, each share would be worth approximately $1,000.

$100,000 value of company ÷ 100 outstanding shares = $1,000

If the corporation issues a 2 for 1 stock split, the business does not become more valuable, but the company now has 200 shares outstanding.

100 shares x 2 = 200 shares outstanding

This means that each of the 200 shares would only be worth only about $500.

$100,000 value of the company ÷ 200 shares = $500