Question

How would Square’s IPO impact its balance sheet and income statement?

Square, Inc., is an electronics payment company. Its small credit card readers plug into smartphones, making it easy for sellers to accept credit and debit card payments. Jack Dorsey, the founder of Square and Twitter, is said to have been inspired to start Square in 2009 when a friend of his was unable to complete a $2,000 sale of glass faucets because he had no way to accept a credit card (source: Wikipedia.)

In November 2015, Square completed its Initial Public Offering (IPO.) In the IPO, Square issued 29,700,000 shares of its Class A Common Stock with a par value of $0.0000001 per share in exchange for cash of $9 per share. After deducting underwriting and offering expenses, Square’s net proceeds from the IPO were $245.7 million.

Questions

1. On the date of the IPO, how would Square’s balance sheet have been impacted? What about its income statement?

2. Since the date of the IPO, Square’s stock price has fluctuated from a low of $8.37 (February 8, 2016) to a high of $13.09 (December 31, 2015.) Does the fluctuating stock price have an impact on Square’s total stockholders’ equity? Why or why not?

Answer 1

1. On the date of IPO, the shareholders fund will increase by $245.7 million including share capital of $2.97 (29700000 shares @ 0.0000001 per share ).Now assuming issue costs as a reduction of the amounts paid in. The debit to cash and the credit to additional paid-in-capital are reduced accordingly. This method results in a smaller increase in stockholder's equity upon issuance of the shares and ultimately the shreholder fund is $245.7million

Alternatively, Capitalize the amount as an organizational cost on the balance sheet and amortize the this intangible asset similarly to the amortization of goodwill. This method results in a greater increase in stockholder's equity initially and reduced profitability in the future as the amortization expense is recorded. Resulting which, shareholder fund will be $267.3 million (29700000*9) and issue expenses capitalised will be $21.6 million (267.3-245.7)

2. Fluctuation of stock price dont affect the shareholders fund in company's perspect. The benefit or loss of stock price fluctuation is always in hands of shareholders personally. Company accoun remains same.

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