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

13 - 3

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

13 - 4

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

13 - 5

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

13 - 6

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

13 - 7

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

13 - 8

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

13 - 9

Issuing Par Value SharesP 1

13 - 10

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

13 - 11

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

13 - 12

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

13 - 13

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.

P 2

13 - 14

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

13 - 15

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

13 - 16

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

13 - 17

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

C 2

13 - 18

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

13 - 19

preference sharesC2

13 - 20

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

13 - 21

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

13 - 22

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

13 - 23

Selling Treasury Shares at Cost

On June 30, Whitt sold 100 shares ofits treasury shares for $4 per share.

P 3

13 - 24

Selling Treasury SharesAbove Cost

On July 19, Whitt, Inc. sold an additional 500treasury shares for $8 per share.

P 3

13 - 25

Selling Treasury Shares Below Cost

On August 27, Whitt sold an additional 400 treasury shares for $1.50 per share.

P 3

13 - 26

Statement of Comprehensive Income C3

13 - 27

Statement of Changes in Equity C3

13 - 28

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

13 - 29

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.

A 1

13 - 30

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.

A 2

13 - 31

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

13 - 32

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

13 - 33

End of Chapter 13