Post on 26-Mar-2015
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPAWinston Kwok, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 13
Accounting for Corporations
13 - 2
Privately HeldPrivately Held
Publicly HeldPublicly Held
Ownership can be
Corporate Form of Organization
Existence is separate from
owners
Existence is separate from
owners
An entity created by law
An entity created by law
Has rights and privileges
Has rights and privileges
C 1
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Characteristics of Corporations
Advantages
Separate legal entity
Limited liability of shareholders
Transferable ownership rights
Continuous life
Lack of mutual agency for shareholders
Ease of capital accumulation
Disadvantages
Governmental regulation
Corporate taxation
C 1
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ShareholdersShareholders
Board of DirectorsBoard of Directors
President, Vice-President, President, Vice-President, and Other Officersand Other Officers
Employees of the CorporationEmployees of the Corporation
Corporate Organization and Management
C 1
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Rights of Shareholders
Vote at shareholders’ meetings
Sell shares
Purchase additional shares
Receive dividends, if any
Share equally in any assets remaining after creditors are paid in a liquidation
C 1
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Basics of Share Capital
Total number of shares that a corporation is authorized to sell or issue.
Total number of shares that has been sold or issued to shareholders.
C 1
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Par value is an arbitrary amount assigned to each share when it is
authorized.
Market price is the amount that each
share will sell for in the market.
Basics of Share Capital
Classes of Shares
Par Value
No-Par Value
Stated Value
C 1
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Par Value Share
On September 1, Matrix, Inc. issued 100,000 shares of $2 par value for $25 per share. Let’s
record this transaction.
Issuing Par Value ShareP 1
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Issuing Par Value SharesP 1
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Issuing Shares for Noncash Assets
Par Value Shares
On September 1, Matrix, Inc. issued 100,000 shares of $2 par value for land valued at $2,500,000. Let’s record this transaction.
P 1
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Dividends Shareholders
Cash Dividends
Corporation
To pay a cash dividend, the corporation must have:
1. A sufficient balance in retained earnings; and
2. The cash necessary to pay the dividend.
75%
22%
0%
20%
40%
60%
80%
100%
Common Preferred
%of Corporations Paying Divends
Regular cash dividends provide a return to investors and almost always affect the share’s market value.
P 2
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Accounting for Cash Dividends
Three important datesThree important dates
Date of Declaration
Record liabilityfor dividend.
Dividends
Date of Record
No entryrequired.
Date of Payment
Record payment ofcash to shareholders.
P 2
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Date of DeclarationRecord liability
for dividend.
Dividends
Accounting for Cash Dividends
On January 19, a $1 per share cash dividend is declaredon Dana, Inc.’s 10,000 ordinary shares outstanding. The
dividend will be paid on March 19 to shareholders ofrecord on February 19.
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No entry required on February 19, the date of record.
Date of Payment
Record payment ofcash to shareholders.
Accounting for Cash Dividends
On January 19, a $1 per share cash dividend is declaredon Dana, Inc.’s 10,000 ordinary shares outstanding. The
dividend will be paid on March 19 to shareholders ofrecord on February 19.
P 2
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Share Dividends or Bonus Issue
Why a share dividend? Can be used to keep the market price on the shares affordable. Can provide evidence of management’s confidence that the company is doing well.
A distribution of a corporation’s own shares to its shareholders without receiving any cash payment in return.
Capitalization: Transferring a portion of equity from retained earnings to contributed capital.
P 2
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Ordinary Shares
$10 par value
100 shares
OldShares
NewShares Ordinary Shares
$5 par value
200 shares
Share SplitsA distribution of additional shares to shareholders
according to their percent ownership.
P 2
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Preference Shares
A separate class of shares, typically having priority over ordinary shares in . . . Dividend distributions Distribution of assets in case of liquidation
Usually has a stated dividend rate
Normally has novoting rights
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vs. NoncumulativeCumulative
Dividends in arrears must be paid before dividends may be paid on ordinary
shares. (Normal case)
Undeclared dividends from current and prior years do
not have to be paid in future years.
Preference Shares
Consider the following Shareholders’ Equity section of the Balance Sheet. The Board of Directors did not
declare or pay dividends in 2010. In 2011, the Board declared and paid cash dividends of $42,000.
C2
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preference sharesC2
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vs. NonparticipatingParticipating
Dividends may exceed a stated amount once
common shareholders receive a dividend equal to the preferred stated rate.
Dividends are limited to a maximum amount each year. The maximum is usually the
stated dividend rate.(Normal case)
Preference Shares
Reasons for Issuing Preference Shares
To raise capital without sacrificing control To boost the return earned by ordinary shareholders
through financial leverage To appeal to investors who may believe the ordinary
shares are too risky or that the expected return on common stock is too low
C2
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Treasury Shares
Treasury shares are a company’s own shares that have been acquired. Corporations might acquire its own shares to:1. Use their shares to buy other companies.2. Avoid a hostile takeover.3. Reissue to employees as compensation.4. Support the market price.
P 3
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Purchasing Treasury Shares
Treasury shares are shown as a reduction in totalTreasury shares are shown as a reduction in totalshareholdersshareholders’’ equity on the balance sheet. equity on the balance sheet.
Treasury shares are shown as a reduction in totalTreasury shares are shown as a reduction in totalshareholdersshareholders’’ equity on the balance sheet. equity on the balance sheet.
On May 8, Whitt, Inc. purchased 2,000 of its ownshares in the open market for $4 per share.
P 3
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Selling Treasury Shares at Cost
On June 30, Whitt sold 100 shares ofits treasury shares for $4 per share.
P 3
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Selling Treasury SharesAbove Cost
On July 19, Whitt, Inc. sold an additional 500treasury shares for $8 per share.
P 3
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Selling Treasury Shares Below Cost
On August 27, Whitt sold an additional 400 treasury shares for $1.50 per share.
P 3
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Statement of Comprehensive Income C3
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Statement of Changes in Equity C3
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Reserves
Most reserves result from accounting standards to reflect certain measurement changes in equity rather than the income statement, e.g. asset revaluation reserve, foreign currency translation reserve and other statutory reserves.
Retained earnings also called revenue reserves.Ending Retained Earnings =
Beginning Retained Earnings + Net Income – Dividends
A company’s cumulative net income less any net losses and dividends declared since its inception.
C3
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Earnings Per Share
Basicearningsper share
= Net income - Preference dividendsWeighted-average ordinary shares outstanding
Earnings per share is one of the most widely cited accounting statistics.
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PRICE–EARNINGS RATIO
Price–Earnings
Ratio=
Market value per shareEarnings per share
This ratio reveals information about the stock market’s expectations for a company’s future growth
in earnings, dividends, and opportunities.
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Dividend Yield
DividendYield
= Annual cash dividends per share
Market value per share
Tells us the annual amount of cash dividends distributed to ordinary shareholders relative to
the share’s market price.
A 3
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BOOK VALUE PER ORDINARY SHARE
Book value perBook value perordinary shareordinary share =
Shareholders’ equity applicable to ordinary sharesNumber of ordinaryshares outstanding
Reflects the amount of shareholders’ equityapplicable to ordinary shares on a per share basis.
A 4
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End of Chapter 13