Residual Claim to Income, Essay Example

There are two categories under which the term ‘residual claim to income’ can apply. Common stockholders have a last claim on assets and a residual claim on income for their stock in any company. The shareholder retains the right to a company’s profit after all other obligatory payments are made.

Furthermore, a stockholder’s residual claims against the assets of the firm are calculated by subtracting total liabilities from total assets.  Equity shareholders have a residual claim to any income that exists after the rest of a firm’s debts have been paid off. The amount available to shareholders is the preference dividend subtracted from the profit after tax (PAT). In turn the PAT is equivalent to the operating profits without taxes.

The residual claim is virtually theoretical in nature as it is the final decision of the firm’s board of directors that will decide the allotment supplanted to the stockholders. The payment is completely subject to the decisions of the board. Therefore, the shareholders have no legal recourse in the event that they do not receive the amount they feel is correct.