Crucial factors/characteristics of liabilities.
Define the term “liabilities.” Be sure to include the three crucial factors/characteristics of liabilities.
What is capital stock, and on which financial statement would you find information about it?
What is the difference between common stock and preferred stock?
What is the difference between “authorized stock” and “issued and outstanding stock”?
What is the difference between a par value stock and nonpar value stock?
What is meant when stock is issued at par? At a Premium? And at a Discount?
What is the difference between a stock dividend and a stock split?
What is the difference between cumulative preferred stocks and non-cumulative preferred stocks?
What is a cash dividend?
What are the journal entries for 1) declaring and 2) subsequently paying a dividend?
Sample Solution
Liability can be defined as a legally enforceable debt or obligation owed by an individual to another entity (Spiceland & Sepe, 2018). Liabilities are typically divided into two main categories based on their regard to the current period; current liabilities and long-term liabilities. Current liabilities represent debts that must be paid within one year while long-term liabilities are obligations due over a longer period of time (Weygandt et al., 2020). In either case, all liabilities have three key characteristics; they involve a debtor and creditor relationship, the transfer of economic resources from one party to another, and the presence of future sacrifices or benefits(Weygandt et al., 2020).
Capital stock is also known as issued shares or equity capital. It refers to stocks issued by corporations that represent ownership in the business and gives shareholders voting rights and potential dividend payments (Kimmel et al., 2019). Capital stock can often be found under shareholder’s equity on both the balance sheet and income statement of a company (Kimmel et al., 2019). On the balance sheet, it usually appears as ‘common stock’ or ‘preferred stock’ depending on which type was issued by the company. On the income statement it will appear under ‘net extended shares/equity changes’ along with any other share related activities such as repurchase, issuance etc.(Kimmel et al., 2019)
In summary, liability involves a debt between two parties that requires some sort of economic exchange in order for it to be fulfilled while capital stock represents ownership in a business. Information regarding both items can often be found on financial statements although their exact location may vary depending on their nature.
