1.Overview of Corporation (General)2.Cash and Property dividends3.Stock dividends and Stock splits4.Treasury Stock transactions5.Stock rights and warrants6.Financial Statement Presentation

Professor Vedd

Board of directors appoint officers.

Articles of incorporationare filed with the state.

Board of directors elected by

shareholders.Shares of

stock issued.

State issues a corporate charter.

CorporateCharter

• Nature and location of business activities.• Number and classes of shares authorized.• Number and classes of shares authorized.

Professor Vedd4

Rightto vote.

Right to sharein distribution of

assets if companyis liquidated.

Right to sharein profits whendividends are

declared.

Preemptiveright to maintain

percentageownership

(proportional interest)

Professor Vedd5

Issued shares are authorized shares of stock that have been

sold.

Unissued shares are authorized shares of stock that have never been sold.

AuthorizedShares

Professor Vedd6

UnissuedShares

TreasuryShares

OutstandingShares

Treasury shares are issued shares that have been reacquired by the

corporation.

IssuedShares

Outstanding shares are issued shares that are

owned by shareholders.Authorized

Shares

Professor Vedd7

UnissuedShares

RetiredShares

OutstandingShares

Retired shares assume the same status as

authorized but unissued shares.

Outstanding shares are issued shares that are

owned by stockholders.Authorized

Shares

Professor Vedd8

Par value stock

*Designated dollar amount per share stated in the corporate charter.

*Par value has no relationship to market value.

Par value stock

*Designated dollar amount per share stated in the corporate charter.

*Par value has no relationship to market value.

No-par stock*Dollar amount per share

not designated in corporate charter.

*Corporations can assign a stated value per share (treated as if par value).

No-par stock*Dollar amount per share

not designated in corporate charter.

*Corporations can assign a stated value per share (treated as if par value).

Professor Vedd

Common stock is the basic voting stock of the corporation. It ranks after preferred stock for dividend and liquidation distribution. Dividends are determined by the board of

directors.

Dividend and liquidation preference overcommon stock.

Generally does nothave voting rights.

Usually has apar or stated value.

May be convertible,callable, and/or

redeemable.

PreferredStock

Professor Vedd10

Rights given up by preferred stockholders:1.Voting rights (No)

2.Sharing in success- Cash dividends received by Preferred Stockholders are usually fixed in amount.

E.g. Co issued 5,000 preferred shares of 7%, $100 par value

(each $100 share pays a $7.00 dividends (100 x .07)

Rights enjoyed by preferred stockholders:1.Cash dividend preference-

2.Liquidation preference-

Professor Vedd

Unpaid dividends must be paid in full beforeany distributions to common stock.

Dividends in arrears are not liabilities, but the pershare and aggregate amounts must be disclosed.

• Are usually stated as a percentage of the par or stated value.

• May be cumulative or noncumulative.

• May be partially participating, fully participating, or nonparticipating.

Professor Vedd12

Callable issuing companyto redeem the preferred stock.

Redeemableholder to redeem The stock—usually with somerestrictions.

Convertibleexchangepreferred stock for common stock.

Professor Vedd13

Shareholders’ Equity

Paid-in Capital(Capital Stock)

Retained Earnings

Amounts earnedby corporation

Amounts investedby shareholders

Accumulated OtherComprehensive Income

Other gains and losses not

included in comprehensive

net income

Professor Vedd14

Net holding gains (losses)

on investments.

Net holding gains (losses)

on investments.

Deferred gains (losses) from derivatives.

Deferred gains (losses) from derivatives.

Net unrecognized

loss on pensions.

Net unrecognized

loss on pensions.

Gains (losses) from foreign

currency translations.

Gains (losses) from foreign

currency translations.

Professor Vedd13-15

Balance Sheet Reporting

The accumulated amount of comprehensive income is reflected in the Equity section of the balance sheet in two ways:

• Net income (less dividends) is cumulated in retained earnings.

• Other comprehensive income is cumulated in accumulated other comprehensive income.

Professor Vedd

Professor Vedd

*Issuing Stock for Noncash AssetsIssuing Stock for Noncash Assets

Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly evident.

If market values cannot be determined, use appraised values.

Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly evident.

If market values cannot be determined, use appraised values.

Professor Vedd

*Share Issue CostsShare Issue Costs

Share issue costs reduce net proceeds- resulting in a lower paid-in capital.

• Registration fees• Underwriter commissions• Printing and clerical costs• Legal and accounting fees• Promotional costs

ABC Issued 100 shares $1 par at 1.50 with issue cost $10

Dr. Cash 140 (150-10) cr. C Stock 100 (100 x 1) cr. PIC –CS 40 {(100x.50)-10}

Professor Vedd19

Property Dividends

Dividends payable in assets other than cash.

Restate at fair value the property it will distribute, recognizing any gain or loss.

Property Dividends (2)Property Dividends (2)

Professor Vedd20

Types of DividendsTypes of Dividends

Less than 20 - 25% shares

More than20 - 25% shares

Use FMVat declaration

Use FMVat declaration

Use parvalue

Use parvalue

Small Dividend Large dividend

Stock dividends result in more shares being issued as dividend (no assets are involved)

Distribution of corporate earnings

At FMV

ARB 43: Transfer from RE/PIC

Professor Vedd

Stock splits change the par value per share and the number of shares outstanding, but the total par value is unchanged, and no

journal entry is required.

Assume that a corporation had 3,000shares of $2 par value common stock outstanding

before a 2–for–1 stock split.

Increase

Decrease

No Change

Before Split

After Split

Common Stock Shares 3,000 6,000

Par Value per Share 2.00$ 1.00$

Total Par Value 6,000$ 6,000$

Professor Vedd22

1) Par value of a share does not change

2) Total number of shares increases

3) Total stockholders’ equity does not change

4) The composition of equity changes (less of retained earnings; more of stock)

5) Stock dividends require journal entries

1) Par value of a share decreases

2) Total number of shares increases

3) Total stockholders’ equity does not change

4) The composition of equity does not change (same amounts of stock and RE)

5) Stock splits do not require journal entries

Stock Dividends Stock Splits

Professor Vedd

Matrix, Inc. declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend.

The company has 1,000,000, $1 par value common stock outstanding. The stock is trading in the open

market for $14 per share. The per share par value of the shares is not to be changed.

Matrix, Inc. declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend.

The company has 1,000,000, $1 par value common stock outstanding. The stock is trading in the open

market for $14 per share. The per share par value of the shares is not to be changed.

Paid-in capital – excess of par common ….1,000,000 Common stock ……………..……………… 1,000,000

Retained Earnings …................. 1,000,000 Common stock ……………..…………………1,000,000To record declaration and distribution of 2-for-1 stocksplit effected in the form of a 100% stock dividend.

or

Professor Vedd

*Share BuybacksShare Buybacks

A corporation might reacquire shares of its stock to . . . • support the market price.

• increase earnings per share.

• distribute in stock option plans.

• issue as a stock dividend.

• use in mergers and acquisitions.

• avoid takeover attempts.

A corporation might reacquire shares of its stock to . . . • support the market price.

• increase earnings per share.

• distribute in stock option plans.

• issue as a stock dividend.

• use in mergers and acquisitions.

• avoid takeover attempts.

Professor Vedd

account for the reacquired shares by

1.Retiring

2. Treasury shares (to reissue).

Shares reacquired & formally retired:-reduce the proportionate originally capital

created- Any difference in PIC –repurchase

Professor Vedd26

Steps in treasury stock transactions: Initially, corporations issue stock from authorized

stock

Treasury stock: repurchase stock (from issued/outstanding)

T/Stock may be retired or reissued

Treasury Stock :CONTRA EQUITY ACCOUNT

Professor Vedd27

Presentation and Analysis of Stockholders’ EquityPresentation and Analysis of Stockholders’ Equity

Professor Vedd

*Overview of Corporation

*Structure of shareholders’ equity

*Type of stock

*Issue of shares: cash/non-cash

*Dividends: cash/stock/property

*Retirement of stock

*Repurchase of stock: Treasury stock

*Presentation