Slides09-01

KNOWLEDGE FOR ACTION

Shareholders Equity

Shareholders equity is the residual claim on assets after settling claims of creditors (i.e. assets liabilities)

Shareholders equity due to share issuance: Contributed capital

Common stock Preferred stock

Treasury Stock Repurchased shares that may be reissued

Shareholders equity due to operations: Retained earnings

End Retained Earnings = Beg Retained Earnings + Net Income Dividends Accumulated Other Comprehensive Income

Items that bypass the Income Statement


Types of Stock

Preferred stock Between debt holders and common stock holders in claim on assets No voting rights, but pay a fixed dividend that must be paid before common

dividends May be callable, convertible, or redeemable

Common Stock Voting rights, but residual claimant to assets

Par Value Stated value on shares used to compute balance in Common Stock or Preferred

Stock Additional Paid In Capital (APIC) Amount received in excess of par value


Contributed Capital Terminology

Shares Authorized Total number of shares the firm could issue

Shares Issued Number of shares that have been sold to the public Balance in Common Stock at Par based on this amount

Shares Outstanding Number of shares currently held by the public Shares issued minus treasury shares Dividends and Earnings Per Share based on this amount


Example: Issuing Stock - Preferred

On 1/14/2012, Stack Inc. issued 10,000 shares of no-par preferred stock for proceeds of $7 per share. The preferred stock specifies cumulative $1 annual dividends per share.

Journal entry1/14/12 Dr. Cash (+A) 70,000 (10,000 x 7)

Cr. Preferred Stock (+SE) 70,000


Example: Issuing Stock - Common

On 1/14/2012, Stack Inc. issued 12,000 shares of $1 par value stock for proceeds of $10 per share


Cr. Common Stock (+SE) 12,000 (12,000 x 1)Cr. Addl Paid in Capital (+SE) 108,000 (Plug)

Shares issued: 12,000 Shares outstanding: 12,000


Share Repurchases and Treasury Stock

Companies sometimes repurchase their own shares Repurchased shares are carried in the Treasury Stock (XSE) account Treasury stock does not have voting rights or dividend rights Treasury stock can be reissued by the firm Reissued treasury stock is removed from the Treasury Stock account at the

original price paid to repurchase APIC or Retained Earnings are used to balance the journal entry if reissue price

differs from repurchase price Companies cannot book gains or losses in trading in their own stock!


Example: Treasury Stock Purchase

On 3/3/2012, Stack Inc. repurchased 4,000 shares of its common stock at a price of $11 per share

Journal entry3/3/12 Dr. Treasury Stock (+XSE) 44,000 (4,000 x 11)

Cr. Cash (-A) 44,000



Example: Treasury Stock Sale Price Increase

On 4/4/2012, Stack Inc. sold 1,000 shares of its treasury stock at a price of $14 per share


Cr. Addl Paid in Capital (+SE) 3,000 (Plug)Cr. Treasury Stock (-XSE) 11,000 (Original cost)



Example: Treasury Stock Sale Price Decrease

On 5/5/2012, Stack Inc. sold 1,000 shares of its treasury stock at a price of $9 per share


Dr. Addl Paid in Capital (-SE) 2,000 (Plug)Cr. Treasury Stock (-XSE) 11,000 (Original cost)


Note: if APIC has a zero balance, debit Retained Earnings


Example: Treasury Stock Retirement

On 5/15/2012, Stack Inc. decided to retire 1,000 shares of its treasury stock

Journal entry5/15/12 Dr. Common Stock (-SE) 1,000 (1,000 x 1)

Dr. Addl Paid in Capital (-SE) 10,000 (Plug)Cr. Treasury Stock (-XSE) 11,000 (Original cost)


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