Privately held companies can access cash to fund current operations and growth in several ways. They can achieve high profitability and use retained earnings. They can sell existing assets to generate cash, or they can obtain loan financing. Alternatively, they can issue stock to raise the capital they need. Issuing stock for cash has no impact on net income.
Stock Issuance: Purpose
A corporation issues stock to raise capital to fund initial startup or expansion. Companies typically use these funds to pay for asset purchases that support operations, including industry-specific equipment or machinery. Depending on the circ*mstances of your business, stock issuance may be a cheaper and more strategic funding option than loans or bond issuance, according to Wealthy Education.
For example, a manufacturer may use some of the capital it raises to purchase production machinery, or a startup telecommunications company may need to purchase space on cable or fiber-optic lines. In other instances, companies use the capital raised by issuing stock to directly fund operations. For example, your company may use a portion of the funds to hire 10 new employees or to lease space in two different retail locations.
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Issuing Stock for Cash
The effect of issuing stock for cash shows on the balance sheet and the cash flow statement but there is no common stock on the income statement. The income statement captures and records the revenue- and profit-generating activities a company engages in. These include, but are not limited to, sales, marketing and salaries. The balance sheet documents what your company owns and owes – its assets, liabilities and shareholders' equity.
Effect of Issuing Stock
When you issue stock for cash, you increase both shareholders' equity and cash. The stock issuance is recorded in shareholders' equity as additional paid-in capital, according to Bob Steele CPA. Since the balance sheet balances according to the equation "assets equal liabilities plus shareholders' equity," the cash infusion is recorded in assets as an addition to cash and cash equivalents. Cash-related activities involving creditors and owners are recorded in the financing section. Therefore, when you issue stock for cash, the cash flow statement shows an increase in cash under financing activities.
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Existing shareholders get diluted by the issuance of more stock. If you expand the pool of stock available, you increase the supply which decreases tensions on demand, possibly even decreasing the share price. The share price level can have its own effects, such as stakeholder value and satisfaction and attractiveness to new investors. It is a volatile situation and is not completely predictable.
Statement Example
Say your company raises $100,000 by issuing 10,000 shares of stock at $10 each. The net income statement does not change at all. The financing section of the cash flow statement shows the following: stock issuance, $100,000. This is an increase of $100,000 in financing cash flow. The balance sheet shows an increase of $100,000 in additional paid-in capital under shareholders' equity and an increase of $100,000 in cash under assets.
