When a corporation issues common stock what is the impact on the financial statements (assets, liabilities, stockholders' equity, and net income) and on the following financial ratios: Current ratio, ROA, and ROE?
When a corporation issues common stock, there are several impacts on the financial statements and financial ratios.
Financial Statements:
1. Assets: The issuance of common stock does not directly impact the total assets of a company. However, it may increase the cash or other assets if the stock is issued in exchange for cash or other valuable assets.
2. Liabilities: The issuance of common stock does not directly impact the liabilities of a company. It does not create any new obligations or debt for the company.
3. Stockholders' Equity: The issuance of common stock increases the stockholders' equity of a company. This is because the company receives additional capital from the investors who purchase the stock. The amount of the increase in stockholders' equity will depend on the number of shares issued and the price at which they are issued.
4. Net Income: The issuance of common stock does not directly impact the net income of a company. Net income is the result of the company's operations and is typically determined by factors such as revenues, expenses, and taxes.
Financial Ratios:
1. Current Ratio: The current ratio is calculated by dividing current assets by current liabilities. Since the issuance of common stock does not impact current assets or current liabilities directly, the current ratio is not affected by this transaction.
2. Return on Assets (ROA): ROA is calculated by dividing net income by total assets. As mentioned earlier, the issuance of common stock does not directly impact net income or total assets, so the ROA ratio remains unaffected.
3. Return on Equity (ROE): ROE is calculated by dividing net income by average shareholders' equity. As the issuance of common stock increases the stockholders' equity, the ROE ratio may be impacted. If the increase in stockholders' equity is accompanied by an increase in net income, then the ROE may increase. However, if the increase in stockholders' equity is not accompanied by a proportionate increase in net income, then the ROE may decrease.
In summary, when a corporation issues common stock, it primarily affects the stockholders' equity and has limited direct impact on the financial statements and financial ratios such as the current ratio, ROA, and ROE.