All of the following are components of Shareholder's equity EXCEPT ________.
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A. B. C. D.B
Dividends declared are part of equity.
Shareholders' equity, also known as owners' equity or stockholders' equity, represents the residual interest in the assets of a company after deducting liabilities. It represents the portion of a company's total assets that is claimed by its shareholders. Shareholders' equity is a vital component of the balance sheet and provides insights into the company's financial health and value.
Now, let's analyze each answer choice to determine which one is NOT a component of shareholders' equity:
A. Par value: Par value refers to the nominal value assigned to each share of stock at the time of issuance. It represents the minimum price at which shares can be issued. Par value is typically a very small amount and does not reflect the true market value of the shares. While par value is relevant for legal and accounting purposes, it is not considered a component of shareholders' equity. Therefore, par value is a component of shareholders' equity and is not the correct answer.
B. Dividends paid: Dividends represent a portion of a company's earnings that is distributed to its shareholders. Dividends are typically paid in cash but can also be paid in the form of additional shares or other assets. Dividends are an important way for companies to share their profits with shareholders. However, dividends paid are not considered a component of shareholders' equity because they represent an outflow of funds from the company to its shareholders. Therefore, dividends paid are a distribution to shareholders and are not the correct answer.
C. Retained earnings: Retained earnings represent the accumulated profits of a company that have not been distributed to shareholders as dividends. It is the cumulative net income of the company since its inception, minus any dividends paid. Retained earnings are a component of shareholders' equity because they reflect the reinvestment of profits back into the company, thereby increasing the shareholders' claim on the assets. Therefore, retained earnings are a component of shareholders' equity and are not the correct answer.
D. Capital contributed in excess: Capital contributed in excess, also known as additional paid-in capital or share premium, represents the amount of money received from shareholders in excess of the par value of the shares. When shares are issued at a price higher than their par value, the excess amount is recorded as capital contributed in excess. This represents the additional investment made by shareholders above the nominal value of the shares. Capital contributed in excess is considered a component of shareholders' equity because it represents the additional capital provided by shareholders, which increases their ownership stake in the company. Therefore, capital contributed in excess is a component of shareholders' equity and is not the correct answer.
After analyzing each answer choice, it can be concluded that the correct answer is B. Dividends paid. Dividends paid are not considered a component of shareholders' equity because they represent a distribution of profits to shareholders, rather than a claim on the company's assets.