Chapter 14 — Stockholders' Equity
The module's primary reading · ~40–50 minutes · Objective 8 (account for long-term liabilities, including bonds issued at face, at a discount, and at a premium, and for stockholders' equity, including stock issuance, dividends, and treasury stock), with Objective 4 (complete the accounting cycle: prepare an income statement, a statement of retained earnings, and a classified balance sheet, journalize closing entries, and prepare a post-closing trial balance) called back · Read it first this week; the lecture, the slides, the tutorial, the quiz, and the workshop all build on it.
In plain language
A corporation's owners put money into the business, and sometimes the business hands money back to them. This week you learn to record both directions. You will meet shares (the units of ownership a corporation sells), par value (a legal amount printed on each share, which is not its price), and dividends (payments the business makes to its owners out of what it has earned). You will also see what happens when a corporation buys back its own shares. By the end, you can build the part of the balance sheet that shows what the owners' claim is made of.
Why you already care about this
Picture the bicycle shop at the start of Year 2. Business is good, and the two founders want $45,000 more to expand the repair floor. They could borrow it, the way Week 13's bonds borrow. This time they choose to sell 5,000 new shares at $9 each instead. Later in the year the shop pays its owners a dividend and buys back 1,000 of its own shares.
You have seen this from the outside. Maybe a friend's family runs a small bakery and someone says, "We sold a share of the business to my aunt." Maybe you belong to a cooperative grocery where members buy a share to join. Owners buy in, owners get paid, and sometimes owners sell out. Each of those moves changes the owners' claim on the business, and each one has a correct entry.
By the end of this chapter you will be able to:
- describe the corporate form by its limited liability and transferable shares, and tell a C corporation from an S corporation;
- tell authorized, issued, and outstanding shares apart, and read par value correctly;
- record an issue of common stock above par;
- describe preferred stock by its priority;
- record a cash dividend on its declaration date and payment date;
- explain why stock dividends and stock splits leave total equity unchanged;
- record treasury stock at cost;
- prepare the statement of retained earnings, the stockholders' equity section, and the statement of stockholders' equity;
- compute basic earnings per share.
Carry this sentence with you: owners' money in or out is not revenue — and not expense.
Where we are
- Already covered: Week 1 defined a corporation and limited liability. Week 2 split stockholders' equity into contributed capital and retained earnings and said a dividend is not an expense. Week 5 prepared the statement of retained earnings and closed Dividends. Week 12 listed current liabilities, and Week 13 showed how a corporation borrows with bonds.
- This week: the corporate form, shares and par value, issuing common stock, preferred stock, cash dividends and their three dates, stock dividends and splits, treasury stock, the equity statements, and basic earnings per share.
- How they connect: a declared dividend becomes a Week 12 current liability, the dividends close to Retained Earnings as in Week 5, and selling shares is the owners' alternative to Week 13's borrowing.
- Where we're going next: Week 15 begins the course's final unit with the statement of cash flows, where this week's stock issue, dividend, and buyback all reappear as financing activities.
Week 1 told you that a corporation is a legal entity separate from its owners, the shareholders, who have limited liability. Week 2 told you that stockholders' equity is the owners' residual claim, with two parts: contributed capital, recorded in Common Stock, and retained earnings. Week 3 gave Common Stock and Retained Earnings their normal credit balances, and gave Dividends a normal debit balance. Week 5 closed Dividends to Retained Earnings. This week fills in the contributed-capital side in detail and adds one account that reduces equity.
1. Describe the corporate form
Think about two friends who open a food truck as partners. If the truck runs up debts it cannot pay, the partners can owe those debts personally. And if one partner wants out, the partnership may have to end and start over.
A corporation works differently in two ways. The first, from Week 1, is limited liability: shareholders cannot lose more than they invested. The second is transferable shares: an owner can sell shares to someone else without the business closing or changing. Together they make up the corporate form.
The corporate form also has a tax side. Here are two facts, stated as facts and never as advice:
- A C corporation is taxed separately under the federal corporate income tax.
- An S corporation's income passes through to its shareholders for federal income tax, instead of being taxed at the corporation.
Other ownership types exist too. A cooperative grocery, for example, is owned by members who each buy a share to join. This course names it only as a type.
Worked example — the shop's choice. The bicycle shop (illustrative) was organized as a corporation by its two founders in Month 1 of Year 1. In Year 2 it sells shares to new owners, and those owners can later sell their shares to someone else. The shop goes on repairing bicycles no matter who holds the shares. In words: the shop's owners can change while the shop stays the same business.
Misconception check. Students often think the corporate form protects the business from all risk, because "limited liability" sounds like a shield. It shields the owners' personal assets, not the business. A corporation that cannot pay its debts can still fail; its owners lose what they invested and no more.
2. Count authorized, issued, and outstanding shares
Picture a theater company organized as a corporation (illustrative). Its charter allows it to sell up to 50,000 shares. So far it has sold 20,000. Later it buys 500 of them back. How many shares does it have? The honest reply is "it depends which count you mean."
Accountants count shares three ways:
- Authorized shares are the most a corporation's charter lets it issue.
- Issued shares are the shares it has sold to owners so far.
- Outstanding shares are the issued shares still held by owners, not bought back by the corporation.
For the theater company: 50,000 authorized, 20,000 issued, and 20,000 − 500 = 19,500 outstanding.
Each share also carries a par value: a legal amount per share printed in the charter. Par value sets how much of each share's price goes to the Common Stock account. It is not what a share sells for. Week 13 used the same words for a bond, where par value means the face value the borrower repays at maturity; a share's par value is not an amount the corporation promises to repay.
Worked example — the founders' shares (Dataset A). The bicycle shop's charter authorizes 100,000 shares of $1-par common stock. On Day 1 of Month 1, the founders invested $30,000 cash for 30,000 shares, or 30,000 ÷ 30,000 = $1 a share. That price is exactly par, so Common Stock is credited 30,000 × 1 = $30,000 and Additional Paid-in Capital is $0. In words: the founders paid par, so the whole $30,000 went to Common Stock, which you first saw in Week 2.
Misconception check. Students often read par value as market value, because both are "a price per share." Par value is a legal amount set when the corporation is formed, and it rarely changes. Market value is what a buyer pays this year. The shop's shares have a $1 par value, and in Year 2 they sell for $9.
3. Record an issue of common stock above par
Imagine you join a group of friends who started a small business three years ago. They took the early risk, and the business now earns a profit. Would you expect to pay the same price per share they paid on day one? Probably not. You would pay more, because the business is now worth more.
That is what happens when a corporation issues common stock above par. The entry splits the cash in two:
- Common Stock is credited for the par value of the shares.
- Additional Paid-in Capital is credited for the rest, the amount paid above par.
Worked example — the Year 2 issue (Dataset K). On the first day of Year 2, the bicycle shop (illustrative) sells 5,000 more shares at $9 a share.
- Proceeds of the Year 2 issue: 5,000 shares × $9 = $45,000.
- Par portion: 5,000 shares × $1 par = $5,000, credited to Common Stock.
- Above-par portion: 45,000 − 5,000 = $40,000, credited to Additional Paid-in Capital; the same as 5,000 × (9 − 1) = $40,000.
| Date | Account | Debit | Credit |
|---|---|---|---|
| First day of Year 2 | Cash | 45,000 | |
| Common Stock | 5,000 | ||
| Additional Paid-in Capital | 40,000 | ||
| Records the sale of 5,000 shares above par. |
The entry balances: debits 45,000 = credits 5,000 + 40,000 = 45,000. Issued shares are now 30,000 + 5,000 = 35,000, all outstanding, and shares authorized stay 100,000.
Walk it the same way you walk every entry. What happened: new owners paid cash for shares. Which accounts change: Cash rises, and two equity accounts rise. The debit and the credit: debit Cash 45,000; credit Common Stock 5,000 and Additional Paid-in Capital 40,000. The effect on the statements: total assets and total stockholders' equity each rise by $45,000, and the income statement does not change.
A small software firm (illustrative) making its first stock issue records it the same way. Suppose it sells 2,000 shares of $2-par stock at $15 a share. It receives 2,000 × 15 = $30,000, credits Common Stock 2,000 × 2 = $4,000, and credits Additional Paid-in Capital 30,000 − 4,000 = $26,000.
Misconception check. Students often credit the whole $45,000 to Common Stock, because "the owners bought common stock." Common Stock holds only par. If you put $45,000 there, the account would no longer equal 35,000 issued shares × $1 par, and the extra $40,000 the new owners paid would be hidden.
4. Compare preferred stock with common stock
Think about a line at a food bank that serves families with young children first. Everyone in line will be served, but one group goes ahead of the others. Preferred stock works like that front of the line.
Preferred stock is a second class of shares with priority over common stock for dividends and in liquidation, usually without voting rights. Priority means two things. When the board pays a dividend, preferred shareholders get their dividend before common shareholders get any. And if the corporation closes and sells everything, preferred shareholders are repaid before common shareholders.
Worked example — a ferry company's dividend. A small ferry company (illustrative) has preferred stock that is owed a $3,000 dividend each year. Its board decides to pay $10,000 in dividends in total. The preferred shareholders receive their $3,000 first, and the common shareholders share the rest: 10,000 − 3,000 = $7,000. In words: the preferred owners were paid first, and the common owners received what was left.
The bicycle shop issues no preferred stock, so its preferred dividends are $0. You will need that $0 in Section 9.
Misconception check. Students often think "preferred" means preferred shareholders own more of the company or always earn more. Priority is about order, not size. Preferred owners are paid first, but they usually cannot vote, and common owners keep whatever the business earns beyond the preferred dividend.
5. Record a cash dividend on its three dates
Imagine a neighborhood bakery organized as a corporation (illustrative). At a meeting, its board announces a $0.50 dividend on each of its 2,000 shares. Two weeks later it settles who owns the shares. A week after that, it sends the checks. Three days, three different events.
A cash dividend is a dividend paid in cash, declared as an amount per share. It has three dates:
- On the declaration date, the board declares the dividend, and the liability is recorded.
- On the record date, no entry is made; the date fixes who receives the dividend.
- On the payment date, the liability is paid.
The liability is Dividends Payable, a current liability like those you listed in Week 12. For the bakery, the dividend is 2,000 × 0.50 = $1,000.
Worked example — the shop's dividend (Dataset K). The bicycle shop's board declares a cash dividend of $0.20 a share on its 35,000 outstanding shares: 35,000 × 0.20 = $7,000. It declares and sets the record date in Month 5 and pays in Month 6.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Declaration date, Month 5 | Dividends | 7,000 | |
| Dividends Payable | 7,000 | ||
| Records the liability for the declared dividend. | |||
| Record date, Month 5 | No entry | ||
| Payment date, Month 6 | Dividends Payable | 7,000 | |
| Cash | 7,000 | ||
| Pays the dividend. |
Each entry balances: debits 7,000 = credits 7,000. Between Month 5 and Month 6, the shop owes its owners $7,000. At year end, the Week 5 closing entry moves the dividends into Retained Earnings: debit Retained Earnings 7,000; credit Dividends 7,000.
In words: the dividend became a liability when the board declared it, and it left the business as cash when the shop paid it.
Misconception check. Students often record a dividend as an expense, because cash goes out and equity falls. Week 2 settled this: a dividend is a distribution to owners, never an expense. An expense is a cost of earning revenue. A dividend is a share of what has already been earned, handed to the people who own the business, so it never appears on the income statement.
Pause and think (choose one). (a) Imagine you own shares in the shop. Why might you care that the record date, and not the payment date, decides who receives the dividend? (b) Imagine you keep the shop's books. How would you explain to a new clerk why nothing is recorded on the record date?
6. Explain stock dividends and stock splits
Think about a pizza cut into eight slices instead of four. You have more slices, but you do not have more pizza. Two equity events work the same way.
- A stock dividend hands owners additional shares instead of cash and moves an amount from retained earnings to paid-in capital.
- A stock split increases the number of shares and reduces par value per share in proportion. In a 2-for-1 split, each share becomes two, each with half the par value.
Worked example — a 2-for-1 split at a bookbinding firm. A bookbinding firm (illustrative) has 1,000 shares of $10-par stock, so its Common Stock is 1,000 × 10 = $10,000. After a 2-for-1 split it has 2,000 shares of $5-par stock, and its Common Stock is 2,000 × 5 = $10,000. In words: the shares doubled, the par value halved, and the account did not move.
This course teaches stock dividends and stock splits in words. Here is the limitation to keep in mind: the detailed entries for stock dividends depend on their size, and the course does not key them. What it does key is the effect on total equity.
Misconception check. Students often think a stock split or a stock dividend makes owners richer, because they now hold more shares. Neither one changes total stockholders' equity. No asset leaves the corporation, and no owner pays anything in. The same claim is divided into more pieces.
7. Record treasury stock at cost
Picture a family-run hardware store, organized as a corporation (illustrative), that sold a few shares to friends years ago. One friend is moving away and wants cash for her shares. The store buys them back. Now it holds a piece of itself.
Treasury stock is a corporation's own shares that it has reacquired and not retired. Under the cost method, it is recorded at cost and reported as a deduction from stockholders' equity. Treasury stock reduces shares outstanding but not shares issued, because the shares were issued once and the corporation has not cancelled them.
Worked example — the shop's buyback (Dataset K). At the end of Month 6, the bicycle shop buys back 1,000 of its own shares at $10 a share: 1,000 × 10 = $10,000.
| Date | Account | Debit | Credit |
|---|---|---|---|
| End of Month 6 | Treasury Stock | 10,000 | |
| Cash | 10,000 | ||
| Records the buyback at cost. |
The entry balances: debits 10,000 = credits 10,000. Shares outstanding fall to 35,000 − 1,000 = 34,000, and shares issued stay at 35,000.
Notice the account's balance. Treasury Stock carries a debit balance inside the equity section, so it works like a contra account: it reduces total stockholders' equity. In words: the shop paid $10,000 to owners who left, so the owners' claim that remains is $10,000 smaller.
Misconception check. Students often list treasury stock as an asset, because the shop paid cash and got something it can hold. A corporation cannot own a claim on itself. If it could, it could make itself richer by printing shares and buying them. So treasury stock is a deduction from stockholders' equity, never an asset.
8. Prepare the equity statements and section
Imagine a lender reading the shop's Year 2 balance sheet. The lender wants to know where the owners' claim came from: how much the owners paid in, and how much the business earned and kept. Three statements answer that question.
The statement of retained earnings shows how retained earnings changed. The stockholders' equity section of the balance sheet lists each equity account at year end. The statement of stockholders' equity shows every equity account's change during the year in one table.
Worked example — the statement of retained earnings (Dataset K). Retained Earnings starts Year 2 at $13,000. The shop earns net income of $69,000 and declares $7,000 of dividends. Retained earnings, end of Year 2: 13,000 + 69,000 − 7,000 = $75,000.
| The bicycle shop — Statement of Retained Earnings — For Year 2 | |
|---|---|
| Retained earnings, beginning of Year 2 | $13,000 |
| Add: net income | 69,000 |
| Less: dividends | (7,000) |
| Retained earnings, end of Year 2 | $75,000 |
Worked example — the stockholders' equity section. Common Stock, end of Year 2: 30,000 + 5,000 = $35,000, which is 35,000 issued shares × $1 par. The section lists it, then Additional Paid-in Capital and Retained Earnings, then subtracts Treasury Stock.
| The bicycle shop — Balance Sheet (stockholders' equity, in part) — End of Year 2 | |
|---|---|
| Common Stock, $1 par; 100,000 shares authorized; 35,000 issued; 34,000 outstanding | $35,000 |
| Additional Paid-in Capital | 40,000 |
| Retained Earnings | 75,000 |
| Less: Treasury Stock (1,000 shares at cost) | (10,000) |
| Total stockholders' equity | $140,000 |
Foot it: 35,000 + 40,000 + 75,000 − 10,000 = $140,000.
Worked example — the statement of stockholders' equity. Each column is one equity account, and each row is one event. The year starts at 30,000 + 0 + 13,000 + 0 = $43,000. Additional Paid-in Capital starts at $0 because the founders paid exactly par.
| Event | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total |
|---|---|---|---|---|---|
| Balance, beginning of Year 2 | 30,000 | 0 | 13,000 | 0 | 43,000 |
| Issued 5,000 shares at $9 | 5,000 | 40,000 | 45,000 | ||
| Net income | 69,000 | 69,000 | |||
| Cash dividends | (7,000) | (7,000) | |||
| Bought 1,000 treasury shares at $10 | (10,000) | (10,000) | |||
| Balance, end of Year 2 | 35,000 | 40,000 | 75,000 | (10,000) | 140,000 |
Foot the Total column: 43,000 + 45,000 + 69,000 − 7,000 − 10,000 = $140,000, the same total as the equity section. The ending row ties to the equity section line for line.
In practice (your tools). In a free spreadsheet such as Google Sheets, put the events in column A and the five accounts in columns B to F. In F2 enter =SUM(B2:E2) and fill it down, so each row's total is computed. In B7 enter =SUM(B2:B6) and fill it right to F7, so each column foots itself. If F7 does not equal the equity section's total, one entry is wrong, and the spreadsheet tells you which column to check.
Misconception check. Students often add the $69,000 of net income to Common Stock or Additional Paid-in Capital, because "the owners' equity grew." Earnings belong in Retained Earnings. Paid-in capital records only what owners paid for shares, so the two parts of equity tell a reader two different stories.
9. Compute basic earnings per share
Think about a carpool that drives six people to work for the first half of the year and five for the second half. How many riders did it carry, on average? Somewhere in between. Earnings per share faces the same question.
Basic earnings per share is net income minus preferred dividends, divided by the weighted-average common shares outstanding. The weighted average counts each group of shares for the part of the year it was outstanding.
Worked example — the shop's earnings per share (Dataset K). The shop had 35,000 shares outstanding for the first 6 months and 34,000 for the last 6, after the buyback at the end of Month 6.
- Weighted-average common shares outstanding: 35,000 × 6⁄12 + 34,000 × 6⁄12 = 17,500 + 17,000 = 34,500.
- Basic earnings per share: (69,000 − 0) ÷ 34,500 = $2.00, with $0 of preferred dividends.
In words: each average outstanding share earned $2.00 in Year 2.
Here is a caveat. The shop issued its 5,000 new shares on the first day of Year 2, so all 35,000 shares were outstanding from the start of the year. A share issued later in a year would count only for the months after its issue.
Misconception check. Students often divide net income by the shares outstanding at year end, because that number sits on the balance sheet. That would give 69,000 ÷ 34,000, or about $2.03, versus the $2.00 the weighted average gives. The 1,000 treasury shares were outstanding for half the year, and the weighted average counts that half.
Now say the whole week in one plain sentence. In Year 2 the owners put in $45,000, the shop earned $69,000, paid its owners $7,000, and bought back $10,000 of its own shares, so stockholders' equity grew from $43,000 to $140,000 and each average outstanding share earned $2.00.
Key terms
- Corporate form — Organizing a business as a corporation, which gives its owners limited liability and lets them transfer their shares to others without the business closing. (first used: 1. Describe the corporate form)
- Transferable shares — Shares an owner can sell or give to someone else without the business closing or changing. (first used: 1. Describe the corporate form)
- C corporation — A corporation taxed separately under the federal corporate income tax. (first used: 1. Describe the corporate form)
- S corporation — A corporation whose income passes through to its shareholders for federal income tax. (first used: 1. Describe the corporate form)
- Authorized shares — The largest number of shares a corporation's charter allows it to issue. (first used: 2. Count authorized, issued, and outstanding shares)
- Issued shares — The shares a corporation has sold to owners so far, including any it has bought back. (first used: 2. Count authorized, issued, and outstanding shares)
- Outstanding shares — The issued shares still held by owners: issued shares minus treasury shares. (first used: 2. Count authorized, issued, and outstanding shares)
- Par value — For a share of stock, a legal amount per share printed in the charter; it sets the amount credited to Common Stock and is not market value. (A bond's par value is its face value, as in Week 13.) (first used: 2. Count authorized, issued, and outstanding shares)
- Additional Paid-in Capital — The account that records what owners paid for shares above their par value. (first used: 3. Record an issue of common stock above par)
- Preferred stock — A class of shares with priority over common stock for dividends and in liquidation, usually without voting rights. (first used: 4. Compare preferred stock with common stock)
- Cash dividend — A dividend paid in cash, declared as an amount per share on the shares outstanding. (first used: 5. Record a cash dividend on its three dates)
- Declaration date — The day the board declares a dividend and the corporation records the liability. (first used: 5. Record a cash dividend on its three dates)
- Record date — The day that fixes who receives a declared dividend; no entry is made. (first used: 5. Record a cash dividend on its three dates)
- Payment date — The day the corporation pays a declared dividend and removes the liability. (first used: 5. Record a cash dividend on its three dates)
- Dividends Payable — The current liability recorded when a dividend is declared and owed until it is paid. (first used: 5. Record a cash dividend on its three dates)
- Stock dividend — A distribution of additional shares instead of cash, which moves an amount from retained earnings to paid-in capital. (first used: 6. Explain stock dividends and stock splits)
- Stock split — An increase in the number of shares with a matching cut in par value per share. (first used: 6. Explain stock dividends and stock splits)
- Treasury stock — A corporation's own shares that it has reacquired and not retired, recorded at cost and deducted from stockholders' equity. (first used: 7. Record treasury stock at cost)
- Stockholders' equity section — The part of the balance sheet that lists the paid-in capital accounts and retained earnings, less treasury stock. (first used: 8. Prepare the equity statements and section)
- Statement of stockholders' equity — A statement that shows how each equity account changed during a period. (first used: 8. Prepare the equity statements and section)
- Basic earnings per share — Net income minus preferred dividends, divided by the weighted-average common shares outstanding. (first used: 9. Compute basic earnings per share)
- Weighted-average common shares outstanding — The common shares outstanding during a period, each count weighted by the fraction of the period it was outstanding. (first used: 9. Compute basic earnings per share)
Summary
- The corporate form gives owners limited liability and transferable shares.
- A C corporation is taxed separately; an S corporation's income passes through.
- Outstanding shares are issued shares minus treasury shares.
- Par value is a legal amount, not a market price.
- Common Stock takes par; Additional Paid-in Capital takes the rest.
- Preferred stock is paid first, for dividends and in liquidation.
- A dividend is recorded when declared, ignored on the record date, and paid later.
- Stock dividends and splits leave total equity unchanged.
- Treasury stock is recorded at cost and reduces equity.
- Basic earnings per share divides earnings by weighted-average shares.
Check your understanding
Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.
- A small software firm (illustrative) issues 3,000 shares of $2-par common stock at $12 a share. Compute the amounts for Common Stock and Additional Paid-in Capital, and write the entry.
- A landscaping company (illustrative) declares a $0.40 cash dividend on its 8,000 outstanding shares. Write the entries on the declaration date, the record date, and the payment date.
- A food truck corporation (illustrative) has 10,000 shares issued and outstanding. It buys back 600 shares at $7 a share. Write the entry, and give the shares issued and outstanding afterward.
- A tutoring corporation (illustrative) earns net income of $50,000 and pays $5,000 of preferred dividends. It had 12,000 common shares outstanding for the first 6 months and 18,000 for the last 6. Compute its basic earnings per share.
Answers (worked reasoning — read after attempting)
- The firm receives 3,000 × 12 = $36,000. Common Stock takes par: 3,000 × 2 = $6,000. Additional Paid-in Capital takes the rest: 36,000 − 6,000 = $30,000, the same as 3,000 × (12 − 2). Debit Cash 36,000; credit Common Stock 6,000 and Additional Paid-in Capital 30,000. The entry balances because 6,000 + 30,000 = 36,000.
- The dividend is 8,000 × 0.40 = $3,200. Declaration date: debit Dividends 3,200; credit Dividends Payable 3,200. Record date: no entry, because the date only fixes who will be paid. Payment date: debit Dividends Payable 3,200; credit Cash 3,200. No expense appears anywhere, because a dividend is a distribution to owners.
- The cost is 600 × 7 = $4,200. Debit Treasury Stock 4,200; credit Cash 4,200. Shares issued stay at 10,000, and shares outstanding fall to 10,000 − 600 = 9,400. Treasury Stock is subtracted in the equity section; it is not an asset.
- The weighted average is 12,000 × 6⁄12 + 18,000 × 6⁄12 = 6,000 + 9,000 = 15,000 shares. Earnings for common owners are 50,000 − 5,000 = $45,000. Basic earnings per share is 45,000 ÷ 15,000 = $3.00. Dividing by the 18,000 year-end shares instead would give $2.50 and miss that only 12,000 shares were outstanding for the first half.
Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, the quiz, the discussion, and the assignment; next week the indirect method turns the shop's Year 2 net income into its cash from operations.
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