The Statement of Stockholders� Equity by F3514Gb

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									 The Statement of
Stockholders’ Equity
      Module 5
 Statement of Shareholders’
          Equity
Documents changes in balance sheet equity
accounts from one accounting period to the
next
Provides an important link between the
balance sheet and the income statement
Company may report info in note or
supplementary schedule rather than formal
statement if desired….(many do!)


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      Statement of S/E
In a nutshell, it simply explains how
each account got from the balance at
the beginning of the period to the
balance at the end of the period and
describes “events” that caused the
balances to change
Federal Express Statement of Changes
in Stockholders' Equity

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      Retained Earnings
Changes in R/E account are primarily
result of net income/loss and dividends
Balance can also be affected by prior
period adjustments and some changes
in accounting principles
Changes in R/E are watched by
analysts and the details on what caused
the changes are documented in the
Statement of Stockholders’ Equity
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Ownership of a Corporation
Owners of common stock generally
receive the following rights:
– Voting (in person or by proxy).
– Distributions of profits (in the form of Dividends).
– Distributions of assets in a liquidation.
– Offers to purchase shares of a new stock
  issue (pro rata basis).



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      Authorized, Issued, and
     Outstanding Capital Stock
Authorized
 Shares
             The maximum number
             of shares of capital
             stock that can be sold
             to the public is called
             the authorized number
             of shares.




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   Authorized, Issued, and
  Outstanding Capital Stock
Authorized
 Shares
             Issued Unissued
             shares
             have been
                       shares have
               sold.   never been
                          sold.




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      Authorized, Issued, and
     Outstanding Capital Stock
Authorized                 owned by stockholders.
 Shares

             Outstanding
                           Unissued
Issued         Shares
                            Shares
Shares




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      Authorized, Issued, and
     Outstanding Capital Stock
Authorized                 owned by stockholders.
 Shares

             Outstanding
                           Unissued
Issued         Shares
                            Shares
Shares
               Treasury      reacquired by the
                Shares          corporation.


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Sale and Issuance of Capital
           Stock

An initial public offering (IPO) is the very
first time a corporation sells stock to the
public.
SEC's IPO Information




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      Common Stock
Basic voting stock of the corporation
Ranks after preferred stock for dividend
and liquidation distribution.
Dividend rates are determined by the
board of directors based on the
corporation’s profitability
and other factors.


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Par Value and No-par Value
           Stock
  Par value
  – Is a nominal value per share of capital
    stock specified in the charter.
  – Has no relationship to market value.
  – Serves as the basis for legal capital.
  Legal capital is the amount of capital,
  required by the state, that must remain
  invested in the business.
  – It serves as a cushion for creditors.
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Par Value and No-par Value Stock
  No-par value is capital stock that does
  not have an amount per share specified
  in the charter.
  When no-par stock is issued by a
  corporation, the amount of legal capital
  is defined by the state.
  Stated value is an amount per share
  that is specified by the corporation when
  it issues no-par stock.
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        Preferred Stock
Has dividend and liquidation preference
over common stock.
Cumulative preferred stock has a
preference for all past dividends over any
paid to common shareholders.
Generally does not have voting rights.
Usually has a par or stated value.
Usually has a fixed dividend rate that is
stated as a percentage of the par value.
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Special Features of Preferred
           Stock
 Convertible preferred stock may be
 exchanged for common stock. (It’s up
 to the stockholder to decide.)
 Callable preferred stock may be
 repurchased by the corporation at a
 predetermined price. (It’s
 the company’s choice.)


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Accounting for Capital Stock
      Transactions
Two primary sources of stockholders’ equity:
 – Contributed capital
     Par or stated value of issued stock.
     Additional paid-in capital in excess of par or
     stated value.
 – Retained earnings
     The cumulative net income earned by the
     corporation less the cumulative dividends
     declared by the corporation.

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Accounting for the Issue of
     Common Stock
      When stock is issued, the equity
      account Common Stock is credited
      (increased) for the par or stated
      value of the stock.
      If the stock sold for more than par,
      the additional amount is credited
      (increased) to the equity account
      Paid in Capital in Excess of Par,
      Common Stock.


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         Treasury Stock
A corporation’s own stock that had been
issued but was subsequently reacquired
and is still being held by that corporation.
Why would a corporation reacquire its
own stock?
– To reduce the shares outstanding.
– Because the market price is low.
– To increase earnings per share, if shares
  won’t be reissued soon.
– To use in employee stock option programs.
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          Treasury Stock
is considered issued stock but not
outstanding stock.

has no voting or dividend rights.

is a contra equity account.

reduces total stockholders’ equity on
the Balance Sheet.

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Accounting for Cash Dividends
 Dividends must be declared by the board of
 directors before they can be paid.
 The corporation is not legally required to
 declare (and subsequently pay) dividends.
 Once a cash dividend is declared, a liability
 (Dividends Payable) is created.
 Cash dividends require sufficient cash and
 retained earnings, but NOT necessarily
 Net Income in the current year, to cover the
 dividend.
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         Dividend Dates
Date of declaration
Date of record
Date of actual payment to shareholders



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Some interesting side trips…
Dividend calendar McGraw Hill
Dividends are not always straightforward
Dividend advice
DRIPs




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Dividends on Preferred Stock
Current preferred dividends must be paid before
paying any dividends to common stock.
If a preferred dividend is not paid, the unpaid
amount is either cumulative (a dividend in
arrears) or noncumulative.
 – Cumulative: Unpaid dividends must be paid
    before common dividends.
 – Noncumulative: Unpaid dividends are lost.



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Calculating Preferred and
  Common Dividends
   ABC Co. has 10 shares of $100 par, 6%
   cumulative preferred stock outstanding.
   Assume that NO dividends were paid in
   19X1.
   At the end of 19X2, the Board of Directors
   declares a total of $200 worth of dividends
   for its preferred and common shareholders.
   How much will go to the preferred
   shareholders?


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Preferred Shareholders
get their dividends first:
Cumulative means that the preferred shareholders
get all the past dividends that they were not paid
(called “dividends in arrears” which must be
footnoted, but NOT reported as a liability on the
balance sheet) before common stockholders can
receive a dividend.
10 preferred shares x $100 par x .06 = $60/year
They get a total of $120: $60 for 19X1 dividends in
arrears and $60 for 19X2 current year dividend.
Common shareholders get the remaining $80.
($80/30 shares outstanding=$2.67 per share.)
[31 shares issued - 1 still in Treasury = 30 shares outstanding.]
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         Cash Dividends
What’s needed to pay cash dividends?
– retained earnings
– cash (but, could borrow cash to pay dividend)
– no restrictions from outsiders
Effects of cash dividends on financial
statements
– decreases Assets (when they are actually
  paid) and Retained Earnings (dividends).
– NO EFFECT on Net Income.
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Accounting for Stock Dividends

  Stock dividends are distributions to
  stockholders of additional shares of stock,
  NOT CASH!
  Why issue a stock dividend?
           Low on cash (but want to “reward”
           stockholders)
           To decrease market price of stock. Why?
           To increase number of stockholders
           (assuming some of the newly issued
           stock will be sold).
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Accounting for Stock Dividends
All stockholders receive the same percentage
increase in the number of shares they own (pro
rata basis).

No change in total stockholders’ equity.

No change in par values.

Effect on financial statements?

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        Retained Earnings
Appropriating (or Restricting) Retained
Earnings
– Board of Directors can restrict (imposed by
  outsiders) or appropriate (company’s choice)
  portions of retained earnings.
    It is a way of communicating why more
    dividends are not being paid.
    Does NOT change TOTAL Ret. Earnings.
      An appropriation (or “restriction”) only separates the
    retained earnings into two categories, unappropriated
    and appropriated. (Must have Unappropriated or
    Unrestricted R.E. to declare dividends.)

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  Accounting for Stock Splits
Distributions of 100% or more of
stock to stockholders.
Decreases par value per share of
stock, but total par value stays the
same.
Increases number of outstanding
shares.
No change in total stockholders’
equity.


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           Stock Split: example
 XYZ Co. has 1000 shares outstanding.
 Each share has a $10 par value, but is selling
 on the NYSE for $80 per share.
 The Company declares a 4 for 1 stock split.

Complete the following:
                           Before   After
 # shares outstanding       1,000   4,000
 Par value per share          $10   $2.50
 Total par value          $10,000 $10,000
 Total stock market value $80,000 $80,000
 Market value per share       $80     $20
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Stock Split: example continued
 XYZ Co. has 1000 shares outstanding.
 Each share has a $10 par value, but is selling
 on the NYSE for $80 per share.
 The Company declares a 4 for 1 stock split.
Ms. Smith owned 100 shares before the split.
Complete the following for Ms. Smith’s stock:
                             Before       After
 # shares owned…………...           100         400
 Total company shares…... 1,000           4,000
 % of stock owned………...          10%          10%
 Total market value of
     Ms. Smith’s stock……. $8,000         $8,000
Remember, the stock price dropped from $80 to $20 per share.
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        Retained Earnings
Represents the net income that has been
earned less dividends that have been
declared since the first day of operations
for the company.
        Example (amounts assumed)

Balance January 1, 20X1             $ 500,000

+ Net income for 20X1                 30,000

- Dividends for 20X1:
      Cash dividends                  (10,000)
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      Retained Earnings

What affects Retained Earnings?
– net income (through closing entries)
– cash dividends
– stock dividends
– prior period adjustments
    Accounting ERRORS made in previous
    years that are being corrected now.




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The End
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