The Balance Sheet: Stockholders' Equity
Preferred stock, common stock, additional paid‐in‐capital, retained earnings, and treasury stock are all reported on the balance sheet in the stockholders' equity section. Information regarding the par value, authorized shares, issued shares, and outstanding shares must be disclosed for each type of stock. If a company has preferred stock, it is listed first in the stockholders' equity section due to its preference in dividends and during liquidation.
Book value measures the value of one share of common stock based on amounts used in financial reporting. To calculate book value, divide total common stockholders' equity by the average number of common shares outstanding.
If preferred stock exists, the preferred stockholders' equity is deducted from total stockholders' equity to determine the total common stockholders' equity. The preferred stockholders' equity is the call price for the preferred stock plus any cumulative dividends in arrears. The par value is used if the preferred stock does not have a call price. Using Grandpa's Hook Rug, Inc. balance sheet information, the book value is:
The $1,000,000 deducted from total stockholders' equity represents the par value of the preferred stock as the preferred stock is not callable. There was no common stock activity during the year. The book value of common stock is rarely identical to the market value. If the market value of asset is substantially different from their respective book values, then the book value per share measure loses most of its relevance.