Accounting Portfolio Part 3: Shares, Dividends, and Retained Earnings

This accounting portfolio, part 3, provides a comprehensive analysis of shares, dividends, retained earnings, and related financial concepts. It begins by defining shares, differentiating between ordinary and preferential shares, and exploring various forms of preference shares, including convertible, cumulative, participating, redeemable, and non-redeemable types. The document then highlights key differences between ordinary and preferred shares, such as voting rights and dividend priorities. It further examines the disparity between the book value and market value of shares, using the Coca-Cola Company as a real-world example. The portfolio delves into the factors considered by boards of governors before declaring dividends, including company growth, tax implications, and cost factors. It also explains retained earnings, share splits, and stock dividends, their purposes, and their effects on company finances. The assignment references key academic sources to support its analysis.

Accounting portfolio part 3
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Accounting portfolio part 3
Shares
Shares or stock refer to the units of ownership in a company. Shares exist in two forms ordinary
shares and preferential shares (Tenase & Calota, 2014). Preferential shares are shares that hold a
preference in the payment of share dividends. This means that the dividends of preferential
shares are paid out before the dividends of ordinary shares or common stock are paid out to
shareholders. Preferential shares can exist in many forms. The first form of existence is either as
convertible or non-convertible preference shares. Convertible preference shares are shares that
hold the option of being converted into ordinary shares upon the fulfillment of certain company
conditions. However non-convertible preference shares cannot be converted into ordinary shares.
The second form of preference shares is the cumulative preference shares and the non-
cumulative preference shares. Cumulative preference shares accumulate unpaid dividends over
the years which must be paid before ordinary share dividends are paid out. However, not all
preference shares have the option of accumulating dividends and these form the non-cumulative
preference shares. The third form of preference shares is the participating preference shares
which have an additional claim on top of dividends to participate in the distribution of company
profits. According to Tenase & Calota (2014), this simply means that participating shares receive
additional benefits derived from the company profit on top of preferred dividends. However, it is
important to note that not all preferred shares have the participating rights. The final form of
preferred stock is redeemable and non-redeemable. Redeemable preference shares can be
claimed upon maturity and redeemed upon maturity whereby the dividends and capital invested
is returned to shareholders of preferred redeemable stock. Irredeemable preference shares remain
part of the capital of a company as long as it exists as they do not have a maturity date.

There various differences that exist between ordinary shares and preferred shares. The first
difference is that preferred shares have the right to receive dividends each year, even I losses,
while ordinary shares can only receive dividends if a company makes a profit. The second
difference is that preference shares dividends are paid before dividends on ordinary shares are
paid out. The third difference is that ordinary shares have voting rights in companies and their
shareholders can take part in company decision making while preference shares do not have any
voting rights in a company (Tenase & Calota, 2014).
The book value of shares may show vast differences when compared to the market value
of the same shares. This differences may be brought about by the fact that the book value of
shares is reached through calculations based on a company's balance sheet while the market
value of shares is determined through the market dynamics of demand and supply in the stock
market. The market value is obtained from a multiplication of the current market price of shares
and a firm's share outstanding shares (Tenase & Calota, 2014). A real-world example is the coca
cola company whose shares trade at around four times its recorded book share value. This means
that the book value of its shares is only a quarter of its market share value. This translates to the
company being worth at least four times more in the market than its book value
Dividends
Before a company announces its dividends there are various matters that are considered
by the board of governors. The first key consideration that is made before the declaration of
dividends is the company's growth factor. The board must first analyze the growth needs of a
company and the amount of additional capital that needs to be injected into the growth of a
company before declaring dividends. This consideration is key as failure to pay dividends can
end up disappointing stockholders while at the same time not retaining dividends so as to invest

in company growth may make the company stagnated and shares may not appreciate. The other
key consideration is the tax cost that a company would incur by declaring dividends. Dividends
have the characteristics of increasing the amount of taxes that are paid by shareholders based on
their incomes. Therefore, the board of directors must consider if it’s more profitable to the
shareholders for the company to pay out dividends or use the money to grow and expand the
company. The third considerations that the board should make are the cost factors whereby the
board can decide to reduce the annual costs that are incurred by a corporation using dividend
money instead of declaring the dividends to shareholders (Ball et al., 2017). The lowering of
costs may be informed of payment and servicing of company debts, restructuring. This
consideration maintains at improving the long-term company financial standing and image.
Retained earnings
According to Ball et al. (2017), retained earnings represents the portion of a company's
profit that is not shared among shareholders but remains in the company for growth and
development purposes. Retained earnings can be restricted due to a variety of reason but the
major one is so that the company can be able to prevent the issuing out dividends before it is able
to service its debt obligations. The second reason may be as a result of the requirement by
lenders to retain a certain percentage of their earning as a way of guaranteeing the lenders that a
company can be able to service its loans.
Share split occurs when a company has shares extremely high values and there is the
need to split the shares so as to lower their value and increase the company’s liquidity. Share
splits increase the number of shares in a company. Additionally, share splits make high-value
shares more affordable to investors in the stock market. Stock dividends, on the other hand, are
similar to other forms of dividends only that share dividends are paid out in the form of shares

rather than cash. Share dividends also serve the purpose of increasing the number of shares in a
company and decreasing the value of all shares in a company (Ball et al., 2017).

References
Tanase, A. E., & Calota, T. O. (2014). Types of shares. Romanian Economic and Business
Review, 9(1), 7
Ball, R., Gerakos, J. J., Linnainmaa, J. T., & Nikolaev, V. V. (2017). Earnings, retained earnings,
and book-to-market in the cross-section of expected returns.