Chapter 11 4th.ed 2012 ACCT 101

7/24/2019 Chapter 11 4th.ed 2012 ACCT 101

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CHAPTER 11REPORTING AND ANALYZING STOCKHOLDER EQUITY

What is a corporatio!

Legal entity

Created by law

Most rights and privileges of a person could be for prot or not for

prot

Classied by purpose and ownership

O"#rship

Publicly held

Privately held

Charact#ristics o$ a corporatio

Separate legal entity

Limited liability of stockholders

Transferable ownership

Ability to raise capital

Continuous life

Corporation management

overnment regulations

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Ta!es

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%OR&ING A CORPORATION

Charter

"ylaws

license

ISSUANCE O% STOCK

Authori#ed shares

$ssued shares

%utstanding shares

PAR AND NO'PAR (ALUE STOCK

Par

&o'Par value

Stated value

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STOCKHOLDERS) EQUITY SECTION

() Paid'in *contributed capital+

,etained earnings

ACCOUNTING %OR CO&&ON STOCK ISSUES

Common stock issued at a premium

%CC issued (-... shares of /0).. par common at

/0.).. per share)

Common stock issued with a par value

Common stock issued at stated value

Common stock issued at no par

Preferred stock issued at a premium

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%CC issued (-... shares of preferred /(.).. par value 12- at

/3.).. per share)

The 12 factor on the preferred

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Tr#as*r+ stoc,

,eac4uired stock of the company

Treasury stock has5

&o voting rights

6oes not share in dividends

Company plans to reissue at a later date

Treasury stock has a debit balance

Considered a contra e4uity account

Assets Stockholder7s 84uity

9ses of treasury stock

"onus for management

Cover stock options

Could increase the 8PS of outstanding shares

$ncrease trading activity of the stock

Accounting for treasury stock

:alue of the stock is what the company pays for it

6isregard the par value

M purchased 0... of /0).. par common at a market price of /0.)..)

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STOCKHOLDERS) EQUITY

Pai-'i capita./The amount contributed by the shareholders

Preferred Stock *show par value- dividend rate- shares

authori#ed and issued+

Paid'in Capital in 8!cess of Par;Preferred

Common Stock *show par value- shares authori#ed- and

shares issued+

Paid'$n Capital in 8!cess of Par;Common

Paid'in Capital from Treasury Stock

6onated Capital

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TO ISSUE A DI(IDEND THE CO&PANY &UST HA(E/

"oard of directors approval

Cash if it is a cash dividend

A balance in the retained earnings to cover the dividend

Dhat is the eBect of a cash dividend on stockholders7 e4uityE

Assets Liabilities Stockholders7 84uity

Dhat is the eBect of a stock dividend on stockholder7s e4uityE

Assets F Liabilities G Stockholders7 84uity

Paid'in capital retained earnings

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CO&PUTING AND DISTRIUTING A CASH DI(IDEND


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8ntries for Cash dividends Three dates are important inconnection with dividends5

Assume that on 6ecember (- 0..(- the directors of Media eneraldeclare a /)1. per share cash dividend on (..-... shares of /(.

par value common stock) The dividend is /1.-...- and the entryto record the declaration

*(+ The declaration date

*0+ The record date

*=+ The payment date

ASS8TS F L$A"$L$T$8S G PA$6'$& G ,8TA$&868A,&$&S

*(+

*=+

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ST%CH 6$:$68&6S

,eason

Conserve cash

Possible reduction of the market value of the share)

Small stock dividend less than 012 of the outstanding

shares)

Stock dividends aBect only the retained earnings)

Stock dividends do not aBect cash)

The value of the stock dividends is based on the

&ARKET(ALUEof the shares)

ST%CH SPL$TS

$nvolves the issuance of additional shares of stock

$ts purpose is to is to reduce the market value of the e!isting

shares thus making it easier for the company to issue newshares

A stock split does not have any eBect on total paid'in'capital-

retained earnings- and total stockholders7 e4uity)

&o accounting entry is necessary

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CO&PUTING AND RECORDING A STOCK DI(IDEND


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STOCK SPLITS

$ncreases the number of shares&o accounting entry is re4uiredIas no eBect on the stockholders7 e4uityDill it aBect the par valueE

Dill it aBect the market valueE

Kou own (.. shares of


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6ivide and Con4uer

Iow does /0-(.. become more than /( millionE An investor who bought(.. shares of Microsoft Corp) at the /0( oBering price in March (@? andheld them would now have -0.. shares worth nearly /()0 million- adusted

for seven stock splits) "y comparison- a /0-(.. investment in the StandardJ Poor7s 1.. inde! in March (@? would now be worth about /(.-?.1- notcounting dividends) And Microsoft marches on5 The world7s largest softwaremaker said Monday that it will split its stock 0 for ( on March 0- its eighthsplit in (= years- for holders of record March (0) The shares- which havemore than doubled in the last year on record revenue surged /1)= onMonday to close at /(()??) Companies generally split their shares whenthey reach high levels- to make them more aBordable to smaller investors)Microsoft7s 4uarterly closes and latest5

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March 13, 1986, stock price adjusted

for seven subseuent sp!its" 39 cents#

$ept# 21, 1987

2%for%1 stock sp!it

&pri! 16, 1990

2%for%1 stock sp!it

'une 27, 1991

3%for%2 stock sp!it

'une 15, 1992

3%for%2 stock sp!it

Ma( 23, 1994

2%for%1 stock sp!it

)ec# 9, 1996

2%for%1 stock sp!it

*eb# 29, 1998

2%for%1 stock sp!it


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E3'Di4i-#-

Dhat does it mean when a company has gone Ne!'dividendOE

$t means if you buy the company7s stock- you won7t get its recently declared

dividend) N8!'dividendO borrows from Latin- Nwithout dividend)OCompanies that pay dividends give the money to the stock holders who heldthe stock at the end of a Nrecord data)O The payments are usually made a fewweeks after the record date)

Kou might think it would be a neat trick to buy such stocks ust before they goe!'dividend so that you can 4uickly prot from the dividend amount) "ut if a stockprice moves because of a dividend- it will be weeks earlier when the dividends areannounced) All else being e4ual a stock will go down in price by the value of thedividend on the day it goes e!'dividend) Iowever- because this reects thedividend payout- that fall in price is not a genuine NchangeO and so most stock datatrackers do not include the value of the dividend in daily price change data)

To alert readers to the previous day7s record date- a stock that goes e!'

dividend will have an N!O ne!t to its listing in the Los Angeles Times and othernewspapers)

Po"#r o$ Di4i-#- Gro"thKou make think of venerable

blue chip companies such as


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shares through stock splits anddividend reinvestments)

The investment is now earningan annual dividend of more than;


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Th# &ot.#+ %oo.%ur mission5 To $nform- to Amuse and to Ielp Kou Make Money

http5RRwww)fool)com

Drip7 Drip7 Drip

Many people think they7ll never amass wealth by investing) They assumethey don7t have enough money to start) "ut investing isn7t ust for the rich) $f youhave ust /0. or /=. per month to invest in stocks- you can do so- thanks todividend reinvestment plans *6,$Ps+)

6,$Ps permit you to buy shares of a company7s stock directly from thecompany- bypassing brokers *and brokerage commissions+) They7ve been growingin popularity in recent years- and hundreds of maor corporations now oBer them-with more companies in introducing them ever day)

Dith traditional 6,$Ps- the company e!pects you to already own at least oneshare of its stock before you enroll) The share must also be in your name) So ifyou7re not already a shareholder- you7ll have to buy at least one share through a

broker- paying the commission) $n addition- you7ll have to specify that you want theshare*s+ registered in your name- not the brokerage7s name- as is typically done)Then you can open a 6,$P account with the company and buy additional sharesdirectly through the company *or its agent+)

6irect stock purchase plans *6SPs+- a new variety of 6,$Ps- operate in muchthe same way- e!cept they don7t re4uire you to own at least one share beforeenrolling) Kou can buy your very rst shares from the company)

Dith 6,$Ps- you can Ndollar'cost average-O building a position in a stock byregularly plunking a certain amount of money into it) 6,$Ps will even purchasepartial shares for you)


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8valuate a corporation7s dividend and earnings performance froma stockholder7s perspective

PAYOUT RATIO

Cash dividends declared on common stock&et income

DI(IDEND YIELDS

Annual dividend

Market price per share

EARNINGS PER SHARE >EPS+

&et income' preferred stock dividend

Average common shares outstanding

RETURN ON STOCKHOLDERS EQUITY

&et income'preferred stock dividendAverage stockholders e4uity

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Chapter 11 4th.ed 2012 ACCT 101

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