Post on 18-Jan-2016
11
7/e
PowerPoint Author: Catherine Lumbattis
COPYRIGHT © 2011 South-Western/Cengage Learning
Stockholders’Equity
Statements and
the Annual Report
Disadvantages
Advantages
Advantages of Stock vs. Debt Financing Flexibility Exchanges
facilitates trading Return on
investment
LO1
Disadvantages of Stock vs. Debt Financing
Control Tax consequences Impact on ratios
Disadvantages
Advantages
Expanded Accounting Equation
Assets = Liabilities + Owners’ Equity
Assets = Liabilities + Stockholders’ Equity
Contributed Capital
RetainedEarnings
Retained Earnings Connects the Income Statement and Balance Sheet
Statement of Retained Earnings Retained Earnings, Beginning Balance $ xxxAdd: Net Income incDeduct: Dividends xxxRetained Earnings, Ending Balance $ end
Balance Sheet Total Assets $ xxxTotal Liabilities $ xxx
Stockholders’ Equity xxxRetained Earnings end
Total Liabilities and Stockholders' Equity $ xxx
Income Statement Revenues $ xxxLess: Expenses xxxNet Income $ Net Inc
Stockholders’ Equity Components
Common Stock
Preferred Stock
AdditionalPaid-inCapital
RetainedEarnings
TreasuryStock
Contributed CapitalCommon Stock
• Basic stock of corporation• Normally carries voting rights
Preferred Stock• Optional• Tailored to meet specific needs
Outstanding: notrepurchased or retired
Issued: sold or distributed
Number of Shares of Stock
Authorized MaximumAllowable
Par Value“Legal capital”Arbitrary amount stated on stock
certificateAlso called “stated value”
Additional Paid-in CapitalAmount received in excess of par
when stock was originally issued
Retained EarningsNet income retained in the business (not
paid out as dividends) since its inceptionReinvested in a variety of assets (not
necessarily liquid or cash)
IFRS and Stockholders’ Equity International standards differ from U.S. standards for those
items that have attributes of both debt and equityConvertible stock must be separated into a part that is
presented in the Liability section and another part that is presented as Stockholders’ Equity section of the Balance Sheet
Preferred StockCan tailor to specific needs of firmStated dividend rate
• Percentage of the stock’s par value• Per-share amount
Often carries dividend preference over common stock
LO2
Preferred Stock Features
Callable
Convertible
Cumulative
Participating
Stock Issued for Cash
Cash 15,000 Common Stock 10,000 Additional Paid-In Capital—Common 5,000 To record the issuance of 1,000 shares of $10 common stock at $15 per share.
LO3
1,000 shares of $10 par value
stock sold for $15 per
share
Common Stock $ 10,000( $10 par value × 1,000 shares)
Additional Paid-In Capital $5,000 ([$15 – $10] × 1,000 shares)
Example:
Stock Issued for Noncash Consideration
Record at fair market value of consideration given or received, whichever is more readily determinable
BuildingCommon or
PreferredStock
Treasury Stock Company buys back its own stock Contra-equity account (debit balance) Not outstanding (no voting rights)
LO4
Reasons for Repurchasing Stock
Provide for employee bonuses or benefit plansMaintain a favorable market price Improve financial ratiosMaintain control of ownershipPrevent unwanted takeover or buyout attempts
Presentation of Treasury StockCommon stock, $10 par value, 1,000
shares issued, 900 outstanding $10,000Additional paid-in capital—Common 12,000Retained earnings 15,000Total contributed capital and retained earnings 37,000Less: Treasury stock, 100 shares at cost ($25 per share) 2,500
Total stockholders’ equity $34,500
Retirement of StockRepurchase of stock and is not intended to be resoldA proportional amount of the related Stock and
Paid-In Capital accounts must be eliminated
Cash Dividends
Paidto
Stockholderson date of record
Date of declaration
Paymentdateon
LO 5
Dividend RequirementsSufficient cashPositive retained earnings
Dividend Payout Ratio
Annual Dividend AmountAnnual Net Income
The % of earnings paid as dividends
Dividends Journal entry required to record: (1) dividends declared (2) dividends paid
Reduce retained earnings
12/31/10 1/15/11
Pay dividends
Recording Cash DividendsRetained Earnings XXX
Cash Dividend Payable XXX
To record the declaration of a cash dividend.
Cash Dividend Payable XXXCash XXX
To record the payment of a cash dividend.
Allocation of Common and Preferred Cash Dividends
1. Distribute dividends in arrears, if any, to preferred
2. Distribute current year’s dividends to preferred
3. Distribute remainder to common (or to both if preferred is participating)
Cash Dividends ExampleStricker Company declares a $70,000 dividend in 2010 (no dividends were paid in 2008 or 2009). There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.
Cash Dividends Example
To Preferred To CommonStep 1: Distribute current-year dividend to preferred (10,000 shares × $10 par × 8% × 1 year) $8,000Step 2: Distribute remaining dividend to common ($70,000 – $8,000) $62,000Total allocated $8,000 $62,000
Noncumulative Preferred Stock
$0.80per
share
$1.55per
share
Cash Dividends Example To Preferred To
CommonStep 1: Distribute dividends in arrears to preferred (10,000 shares × $10 par × 8% × 2 years) $16,000Step 2: Distribute current-year dividendto preferred (10,000 shares × $10 par ×8% × 1 year) 8,000Step 3: Distribute remainder to common($70,000 – $24,000) $46,000Total allocated $24,000 $46,000
Cumulative Preferred Stock
$2.40per
share
$1.15per
share
Stock Dividends
Reasons:• Insufficient cash• Market price reduction• Nontaxable to recipients
Issue of additional shares proportionately to existing stockholders
LO6
Stockholders’ Equity:Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000Additional paid-in capital—Common 30,000
Retained earnings 70,000
Total stockholders’ equity $150,000Assume Shah Company declares a 10% stock dividend;
500 shares @ $40 per share market value
Before Dividend
Small Stock Dividend Example
Stockholders’ Equity: Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000Additional paid-in capital—Common 30,000 45,000Retained earnings 70,000 50,000
Total stockholders’ equity $150,000 $150,000
$40 market value deducted from retained earnings; allocated between Common Stock (initially Common
Stock Dividend Distributable) andAdditional Paid-in Capital.
Before After
Small Stock Dividend Example
++–
Stockholders’ Equity: Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000Additional paid-in capital—Common 30,000 45,000Retained earnings 70,000 50,000
Total stockholders’ equity $150,000 $150,000
Before After
Small Stock Dividend Example
++–
Total S/E is unchanged
Stockholders’ Equity:Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000Additional paid-in capital—Common 30,000
Retained earnings 70,000
Total stockholders’ equity $150,000
Assume Shah Company declares 100% stock dividend
Before Dividend
Large Stock Dividend Example
Stockholders’ Equity: Common stock, $10 par, 10,000 shares $ 50,000 $100,000Additional paid-in capital—Common 30,000 30,000Retained earnings 70,000 20,000
Total stockholders’ equity $150,000 $150,000
Dividend deducted from retained earnings and recorded in the Common Stock account at par. Additional Paid-in Capital account is unaffected.
Before After
Large Stock Dividend Example
+–
Stockholders’ Equity: Common stock, $10 par, 10,000 shares $ 50,000 $100,000Additional paid-in capital—Common 30,000 30,000Retained earnings 70,000 20,000
Total stockholders’ equity $150,000 $150,000
Before After
Large Stock Dividend Example
+–
Total S/E is unchanged
Stock SplitsResults in additional issuance of
sharesReduces par value per shareNo change in Stockholders’ Equity
accounts
LO 7
Stock SplitsNot recorded in accounts
Reduce market price per share and make the stock more accessible to a wider range of investors
Disclosed in notes
Stockholders’ Equity:Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000Additional paid-in capital—Common 30,000
Retained earnings 70,000
Total stockholders’ equity $150,000Assume Shah Company declares 2-for-1 stock split
Before Split
2-for-1 Stock Split Example
Stockholders’ Equity: Common stock, $5 par, 10,000 shares $ 50,000 $ 50,000Additional paid-in capital—Common 30,000 30,000Retained earnings 70,000 70,000
Total stockholders’ equity $150,000 $150,000
Before After
2-for-1 Stock Split Example
All accounts are unchangedOnly disclosures
are affected
Statement of Stockholders’ Equity
Explains all the reasons for the difference between the beginning and the ending balance of each of the accounts in the Stockholders’ Equity category of the balance sheet
Statement of Retained EarningsBeginning retained earnings
Add: Net earningsSubtract: Dividend(s) declared = Ending retained earnings
LO8
Income StatementFor Year Ended December 31, 20XX
Revenues xxxExpenses xxxOther gains and losses xxxIncome before tax xxxIncome tax expense xxxNet income xxx
Statement of Comprehensive Income
Statement of Comprehensive IncomeFor Year Ended December 31, 20XX
Net income xxxForeign currency translation adjustment xxxUnrealized holding gains/losses xxxMinimum pension liability adjustment xxxOther comprehensive income xxxComprehensive income xxx
Comprehensive income: The total change in net assets from all sources except investments by or distributions to the owners
Analyzing Stockholders’ EquityBook value per share
• Rights that each share of common stock has to the net assets of corporation
Market value per share • Price at which stock is currently
selling
LO9
Book Value per Share
Amount per share of net assets to which the company’s common stockholders have the rights
Does not indicate the price that should be paid by those who want to buy or sell the stock on the stock exchange
Total Stockholders’ Equity Number of Shares of Stock Outstanding
Market Value per Share The selling price of the stock as indicated
by the most recent transactions Usually stated in a 52-week high and low More meaningful measure of the value of
the stock than book value
52-week Daily
High Low Sym High Low Last Change
68.17 39.17 GM 43.3 42.01 42.93 +0.48 (1.13%)
Stockholders’ Equity Items on the Statement of Cash FlowsOperating Activities Net income xxx Investing Activities Financing Activities Issuance of stock +
Retirement or repurchase of stock – Payment of dividends –
LO10
AppendixAccounting Tools:
Unincorporated Businesses
Sole Proprietorships Not a separate legal entity so owner has
unlimited liability Must keep personal and business records
separate Business income is declared on the owner’s
personal tax return and taxed at personal tax rate
LO11
Sole ProprietorshipsOwner’s withdrawal of an auto from the business:
Peter Tom, Drawing 6,000Equipment 6,000
To record the withdrawal of an auto from the business.
Owners’ drawing or withdrawal accounts are contra-equity accounts
Sole Proprietorships Drawing or withdrawal and income summary
accounts are closed to the owner’s capital account
Owner’s Equity section of the balance sheet consists of the capital account:
Beginning balance $ 0Plus: Investments 10,000
Net Income 4,000Less: Withdrawals (6,000)Ending balance $ 8,000
PartnershipsUnlimited liabilityLimited life—partnership
agreements can and do endNot taxed as a separate entity
PartnershipsDistribution of income: Equal distribution Stated ratio Other allocation
• For example, based on salaries, interest on invested capital, and a stated ratio
End of Chapter 11