Financial Accounting and Accounting Standards by 9n8IpO7k

VIEWS: 9 PAGES: 80

									      Reporting and Analyzing
        Stockholders’ Equity


Chapter
 11-1      Financial Accounting, Fifth Edition
    The Corporate Form of Organization

      An entity separate and distinct from its owners.

      Classified by Purpose       Classified by Ownership
          Not-for-Profit              Publicly held
          For Profit                  Privately held


  Salvation Army         Nike                   Cargill Inc.
  American Cancer        General Motors
   Society                IBM
  Gates Foundation       General Electric

Chapter
 11-2
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence
          Limited Liability of Stockholders
          Transferable Ownership Rights
                                                                 Advantages
          Ability to Acquire Capital
          Continuous Life
          Corporate Management
          Government Regulations                               Disadvantages
          Additional Taxes

Chapter
 11-3          SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence                      Corporation acts
                                                        under its own name
          Limited Liability of Stockholders             rather than in the
          Transferable Ownership Rights                 name of its
                                                        stockholders.
          Ability to Acquire Capital
          Continuous Life
          Government Regulations
          Additional Taxes
          Corporate Management

Chapter
 11-4          SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence
                                                        Limited to their
          Limited Liability of Stockholders
                                                        investment.
          Transferable Ownership Rights
          Ability to Acquire Capital
          Continuous Life
          Government Regulations
          Additional Taxes
          Corporate Management

Chapter
 11-5          SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence
          Limited Liability of Stockholders
                                                        Shareholders may
          Transferable Ownership Rights
                                                        sell their stock.
          Ability to Acquire Capital
          Continuous Life
          Government Regulations
          Additional Taxes
          Corporate Management

Chapter
 11-6          SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence
          Limited Liability of Stockholders
          Transferable Ownership Rights                 Corporation can
          Ability to Acquire Capital                    obtain capital
                                                        through the
          Continuous Life                               issuance of stock.
          Government Regulations
          Additional Taxes
          Corporate Management

Chapter
 11-7          SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence
          Limited Liability of Stockholders
          Transferable Ownership Rights                 Continuance as a
          Ability to Acquire Capital                    going concern is not
                                                        affected by the
          Continuous Life                               withdrawal, death,
          Government Regulations                        or incapacity of a
                                                        stockholder,
          Additional Taxes                              employee, or
          Corporate Management                          officer.

Chapter
 11-8          SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence
          Limited Liability of Stockholders
          Transferable Ownership Rights
          Ability to Acquire Capital
          Continuous Life
          Government Regulations
          Additional Taxes
          Corporate Management

Chapter
 11-9          SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence
          Limited Liability of Stockholders
          Transferable Ownership Rights
          Ability to Acquire Capital                   Corporations pay
                                                       income taxes as
          Continuous Life
                                                         a separate legal
          Government Regulations                          entity and
          Additional Taxes                               stockholders pay
                                                          taxes on cash
          Corporate Management
                                                          dividends.
Chapter
 11-10         SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Characteristics of a Corporation
          Separate Legal Existence
          Limited Liability of Stockholders
          Transferable Ownership Rights
          Ability to Acquire Capital
                                                      Separation of
          Continuous Life                             ownership and
          Government Regulations                      management prevents
                                                      owners from having
          Additional Taxes                            an active role in
          Corporate Management                        managing the
                                                      company.
Chapter
 11-11         SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

                                         Stockholders
     Illustration 11-1
     Corporation
     organization chart                 Chairman and
                                          Board of
                                          Directors


                                         President and
                                        Chief Executive
                                            Officer



    General                              Vice President                        Vice President
                      Vice President                          Vice President
   Counsel and                           Finance/Chief                            Human
                        Marketing                              Operations
    Secretary                           Financial Officer                        Resources



                            Treasurer                       Controller

Chapter
 11-12           SO 1 Identify and discuss the major characteristics of a corporation.
Chapter
 11-13
    The Corporate Form of Organization

     Characteristics of a Corporation
          Other Forms of Business Organization
            Limited partnerships
            Limited liability partnerships (LLPs)
            Limited liability companies (LLCs)
            S Corporation
                   no double taxation
                   cannot have more than 75 shareholders


Chapter
 11-14         SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Forming a Corporation
          Initial Steps:
              File application with the Secretary of State.
              State grants charter.
              Corporation develops by-laws.

          Companies generally incorporate in a state whose laws are
          favorable to the corporate form of business (Delaware, New
          Jersey).
          Corporations engaged in interstate commerce must obtain a
          license from each state in which they do business.
Chapter
 11-15          SO 1 Identify and discuss the major characteristics of a corporation.
    The Corporate Form of Organization

     Stockholders Rights                                            Illustration 11-3



          1. Vote
          2. Dividends (if declared)
          3. Keep the same percentage ownership when new
             shares of stock are issued (preemptive right).
          4. Residual interest, or claim, at liquidation




Chapter
 11-16          SO 1 Identify and discuss the major characteristics of a corporation.
    Stock Issue Considerations

    Authorized Stock
          Charter indicates the amount of stock that a
          corporation is authorized to sell.
          Number of authorized shares is often reported
          in the stockholders’ equity section.




Chapter
 11-17       SO 1 Identify and discuss the major characteristics of a corporation.
    Stock Issue Considerations
                      Prenumbered                             Shares    Illustration 11-4




 Name of corporation


   Stockholder’s
       name




  Signature of
corporate official
Chapter
 11-18        SO 1 Identify and discuss the major characteristics of a corporation.
    Stock Issue Considerations

    Issuance of Stock
          Corporation can issue common stock
           directly to investors or
           indirectly through an investment banking firm.

          U.S. securities exchanges
           New York Stock Exchange
           American Stock Exchange
           13 regional exchanges
           NASDAQ national market

Chapter
 11-19       SO 1 Identify and discuss the major characteristics of a corporation.
                 Stock issuance definitions


         Authorized- (can sell)
         Issued- (has sold)
         Outstanding (has sold and has not bought
          back)




Chapter
 11-20
    Stock Issue Considerations

    Par and No-Par Value Stocks
          Capital stock that has been assigned a value per share.
          Years ago, par value determined the legal capital per
          share that a company must retain in the business for
          the protection of corporate creditors.
          Today many states do not require a par value.
          No-par value stock is quite common today.
          In many states the board of directors assigns a stated
          value to no-par shares.


Chapter
 11-21       SO 1 Identify and discuss the major characteristics of a corporation.
                  Stockholders’ Equity


          Total stockholders’ equity is divided
          into two components:

   1.     Contributed capital - proceeds
          received by the issuing company from
          original stock issuances, net of the
          amounts paid to repurchase shares of
          the issuer’s stock from its investors.
   2.     Earned capital - Retained earnings and
          accumulated other comprehensive
          income (AOCI).
Chapter
 11-22
          Components of Paid-in-Capital




Chapter
 11-23
          P&G’s Stockholders’ Equity




Chapter
 11-24
                         Types of Stock


          There are two classes of stock:
          1.   Preferred Stock
          2.   Common Stock
          Preferred stock preferences:
          1.   Dividend preference – preferred shareholders
               receive dividends on their shares before
               common shareholders do.
          2.   Liquidation preference –preferred shareholders
               receive payment in full before common
               shareholders in liquidation.


Chapter
 11-25
    Stock Issue Considerations

                             Common Stock
                                 Account
                                                      Paid-in Capital in
          Paid-in Capital
                                                       Excess of Par
                                                           Account
                            Preferred Stock
                                 Account


    Two Primary
    Sources of              Retained Earnings
                                 Account
      Equity

     Paid-in capital is the total amount of cash and other assets
     paid in to the corporation by stockholders in exchange for
     capital stock.
Chapter
 11-26                            SO 2 Record the issuance of common stock.
    Stock Issue Considerations

                             Common Stock
                                 Account
                                                      Additional Paid-
          Paid-in Capital
                                                        in Capital
                                                           Account
                            Preferred Stock
                                 Account


    Two Primary
    Sources of              Retained Earnings
                                 Account
      Equity

     Retained earnings is net income that a corporation retains
     for future use.

Chapter
 11-27                            SO 2 Record the issuance of common stock.
    Stock Issue Considerations

    Accounting for Common Stock Issues
          Primary objectives:
           1)   Identify the specific sources of paid-in capital.
           2) Maintain the distinction between paid-in capital and
              retained earnings.


            Other than consideration received, the issuance of
            common stock affects only paid-in capital accounts.



Chapter
 11-28                               SO 2 Record the issuance of common stock.
    Stock Issue Considerations

    Accounting for Common Stock Issues
    Illustration: Assume that Hydro-Slide, Inc. issues 1,000
    shares of $1 par value common stock at par. Prepare the
    journal entry.

          Cash                                    1,000
             Common stock (1,000 x $1)                        1,000




Chapter
 11-29                             SO 2 Record the issuance of common stock.
    Stock Issue Considerations

    Accounting for Common Stock Issues
    Illustration: Now assume Hydro-Slide, Inc. issues an
    additional 1,000 shares of the $1 par value common stock for
    cash at $5 per share. Prepare Hydro-Slide’s journal entry.

          Cash                                        5,000
             Common stock (1,000 x $1)                          1,000
             Paid-in capital in excess of par value             4,000




Chapter
 11-30                             SO 2 Record the issuance of common stock.
    Stock Issue Considerations

     Stockholders’ equity section assuming Hydro-Slide, Inc.
     has retained earnings of $27,000.
                                                         Illustration 11-5




Chapter
 11-31                         SO 2 Record the issuance of common stock.
                 Sale of Stock Illustrated


         To illustrate, assume that Hewitt issues
          100,000 shares of its $0.01 par value
          common stock at a market price of $43 cash
          per share:




Chapter
 11-32
    Accounting for Treasury Stock

                                   Common Stock
                                        Account
                                                               Paid-in Capital in
          Paid-in Capital
                                                                Excess of Par
                                                                    Account
                                  Preferred Stock
                                        Account


    Two Primary
    Sources of                   Retained Earnings
                                        Account
      Equity

                                        Less:
                                    Treasury Stock
                                        Account


Chapter
 11-33                SO 3 Explain the accounting for the purchase of treasury stock.
    Accounting for Treasury Stock

   Treasury stock - corporation’s own stock that it has
   reacquired from shareholders, but not retired.
      Corporations purchase their outstanding stock:
          1.   To reissue the shares to officers and employees under
               bonus and stock compensation plans.
          2. To increase trading of the company’s stock in the
             securities market.
          3. To have additional shares available for use in acquiring
             other companies.
          4. To increase earnings per share.
          Another infrequent reason is to eliminate hostile shareholders.
Chapter
 11-34               SO 3 Explain the accounting for the purchase of treasury stock.
    Accounting for Treasury Stock

      Purchase of Treasury Stock
          Generally accounted for by the cost method.

          Debit Treasury Stock for the price paid.

          Treasury stock is a contra stockholders’ equity
          account, not an asset.

          Purchase of treasury stock reduces stockholders’
          equity.


Chapter
 11-35          SO 3 Explain the accounting for the purchase of treasury stock.
    Accounting for Treasury Stock
                                                              Illustration 11-6




   Illustration: On February 1, 2008, Mead acquires 4,000
   shares of its stock at $8 per share. Prepare the entry.
      Treasury stock (4,000 x $8)                    32,000
          Cash                                                      32,000
Chapter
 11-36           SO 3 Explain the accounting for the purchase of treasury stock.
    Accounting for Treasury Stock

    Stockholders’ Equity with Treasury stock
                                                                Illustration 13-7




      Both the number of shares issued (100,000), outstanding (96,000), and
      the number of shares held as treasury (4,000) are disclosed.

Chapter
 11-37              SO 3 Explain the accounting for the purchase of treasury stock.
                   Sale of Stock Illustrated


         To illustrate, assume that Hewitt issues 100,000
          shares of its $0.01 par value common stock at a
          market price of $43 cash per share:




Chapter
 11-38
              Repurchase of Stock Illustrated


         To illustrate, assume that 3,000 common shares of
          Hewitt previously issued for $43 are repurchased for
          $40:




Chapter
 11-39
             Repurchase of Stock Illustrated


         Now assume that these 3,000 shares are
          subsequently resold for $42 cash per share.:




Chapter
 11-40
          Hewitt’s Stock Repurchase Program




Chapter
 11-41
          Hewitt’s Treasury Stock Section of 2008
                       Balance Sheet




Chapter
 11-42
          Cisco’s Stock Purchase Program




Chapter
 11-43
Chapter
 11-44
    Preferred Stock

      Features often associated with preferred stock.
          1.   Preference as to dividends.
          2. Preference as to assets in liquidation.
          3. Nonvoting.

      Each paid-in capital account title should identify the
      stock to which it relates:
           Paid-in Capital in Excess of Par Value—Preferred Stock
           Paid-in Capital in Excess of Par Value—Common Stock


Chapter
 11-45                    SO 4 Differentiate preferred stock from common stock.
    Preferred Stock

     Illustration: Stine Corporation issues 10,000 shares of
     $10 par value preferred stock for $12 cash per share.
     Journalize the issuance of the preferred stock.

          Cash                                     120,000
             Preferred stock (10,000 x $10)                     100,000
             Paid-in capital in excess of par –
                Preferred stock                                  20,000


          Preferred stock may have a par value or no-par value.

Chapter
 11-46                      SO 4 Differentiate preferred stock from common stock.
    Preferred Stock

      Dividend Preferences
          Right to receive dividends before common
          stockholders.
          Per share dividend amount is stated as a percentage
          of the preferred stock’s par value or as a specified
          amount.
          Cumulative dividend – holders of preferred stock
          must be paid their annual dividend plus any dividends
          in arrears before common stockholders receive
          dividends.

Chapter
 11-47                  SO 4 Differentiate preferred stock from common stock.
    Preferred Stock

      Liquidation Preference
          Preference on corporate assets if the
          corporation fails.

          Preference may be

              for the par value of the shares or

              for a specified liquidating value.




Chapter
 11-48                 SO 4 Differentiate preferred stock from common stock.
                Fortune Brands’
          Convertible Preferred Stock




Chapter
 11-49
          Fortune Brands’ Convertible Preferred
                          Stock
   Holders of convertible preferred are entitled to $2.67 dividends per
    share.
   Each share of convertible preferred stock is entitled to 3/10 of a vote
    per share.
   Holders of convertible preferred have a preference in liquidation
    over common shareholders amounting to $30.50.
   Each share of convertible preferred is convertible into 6.601 shares
    of common stock.
   Fortune Brands has an option to redeem each share at a price of
    $30.50; upon redemption, the preferred shareholder will receive that
    cash amount and will surrender that share to the company.



Chapter
 11-50
          P&G’s Preferred Stock




Chapter
 11-51
    Dividends

     A distribution of cash or stock to stockholders on a
     pro rata (proportional to ownership) basis.

     Types of Dividends:

          1.   Cash dividends.            3.   Stock dividends.
          2.   Property dividends.        4.   Scrip (promissory note)


     Dividends expressed: (1) as a percentage of the par or
     stated value, or (2) as a dollar amount per share.


Chapter                 SO 5 Prepare the entries for cash dividends and understand
 11-52
                             the effect of stock dividends and stock splits.
    Dividends

      Cash Dividends
          For a corporation to pay a cash dividend, it must have:
          1. Retained earnings - Payment of cash dividends
             from retained earnings is legal in all states.
          2. Adequate cash.
          3. A declaration of dividends by the Board of
             Directors.



Chapter               SO 5 Prepare the entries for cash dividends and understand
 11-53
                           the effect of stock dividends and stock splits.
    Dividends

   Dividends require information concerning three dates:




Chapter          SO 5 Prepare the entries for cash dividends and understand
 11-54
                      the effect of stock dividends and stock splits.
    Dividends

     Illustration: On Dec. 1, the directors of Media General
     declare a 50¢ per share cash dividend on 100,000 shares of
     $10 par value common stock. The dividend is payable on Jan.
     20 to shareholders of record on Dec. 22?
      December 1 (Declaration Date)
          Retained earnings                          50,000
            Dividends payable                                      50,000

      December 22 (Date of Record)                    No entry

      January 20 (Payment Date)
          Dividends payable                          50,000
             Cash                                                  50,000
Chapter              SO 5 Prepare the entries for cash dividends and understand
 11-55
                          the effect of stock dividends and stock splits.
            Accounting for Dividends:
                 Cash Dividends
         Hewitt declares and pays a cash dividend of
          $10 million:




Chapter
 11-56
         Preferred and Common
               Dividends
       Assume that a company has 15,000 shares of
        $50 par value, 8% preferred stock
        outstanding and 50,000 shares of $5 par
        value common stock outstanding.
    During its first three years in business, the
        company declares $20,000 dividends in the
        first year, $260,000 of dividends in the
        second year, and $60,000 of dividends in the
        third year.
    If the preferred stock is cumulative, the total
        amount of dividends paid to each class of
Chapter
        stock in each of the three years follows:
11-57
          Preferred and Common
            Dividends (cont’d)




Chapter
 11-58
Chapter
 11-59
    Dividends

      Stock Dividends                                           Illustration 11-10


      Pro rata distribution of the corporation’s own stock.




 Results in decrease in retained earnings and increase in paid-in capital.
Chapter              SO 5 Prepare the entries for cash dividends and understand
 11-60
                          the effect of stock dividends and stock splits.
          Accounting for Dividends:
              Stock Dividends




Chapter
 11-61
              Small Stock Dividends Illustrated

         Assume that a company has 1 million shares of $5 par common
          stock outstanding. It then declares a small stock dividend of
          15% of the outstanding shares when the market price of the
          stock is $30 per share. This small stock dividend has the
          following financial statement effects:




Chapter
 11-62
              Large Stock Dividends Illustrated

         To illustrate the effect of a large stock dividend, assume that
          the company now declares a large stock dividend of 70% of the
          outstanding shares when the market price of the stock is $30
          per share ($5 par value). The large stock dividend will have the
          following effects on the balance sheet:




Chapter
 11-63
          Stock Splits in the Form of a
          Stock Dividend – John Deere




Chapter
 11-64
    Dividends

      Effects of Stock Dividends
          Changes the composition of stockholders’ equity.
          Total stockholders’ equity remains the same.
          No effect on the par or stated value per share.
          Increases the number of shares outstanding.




Chapter            SO 5 Prepare the entries for cash dividends and understand
 11-65
                        the effect of stock dividends and stock splits.
    Dividends

      Stock Split
          Reduces the market value of shares.
          No entry recorded for a stock split.
          Decrease par value and increase number of
          shares.




Chapter             SO 5 Prepare the entries for cash dividends and understand
 11-66
                         the effect of stock dividends and stock splits.
    Dividends

      Illustration: Assuming that instead of issuing a 10% stock
      dividend, Medland splits its 50,000 shares of common stock
      on a 2-for-1 basis.
                                                              Illustration 11-11




                                                        (Answers on notes page)
Chapter             SO 5 Prepare the entries for cash dividends and understand
 11-67
                         the effect of stock dividends and stock splits.
    Dividends

      Differences between the effects of stock dividends
      and stock splits.
                                                             Illustration 11-12




                                                       (Answers on notes page)

Chapter            SO 5 Prepare the entries for cash dividends and understand
 11-68
                        the effect of stock dividends and stock splits.
    Retained Earnings

          Retained earnings is net income that a company
          retains for use in the business.

          Net income increases Retained Earnings and a
          net loss decreases Retained Earnings.

          Retained earnings is part of the stockholders’
          claim on the total assets of the corporation.

          A debit balance in Retained Earnings is
          identified as a deficit.

Chapter
 11-69                 SO 6 Identify the items that affect retained earnings.
    Retained Earnings

                                                       Illustration 11-14




Chapter
 11-70           SO 6 Identify the items that affect retained earnings.
    Retained Earnings

      Retained Earnings Restrictions
          Restrictions can result from:
           1. Legal restrictions.
           2. Contractual restrictions.
           3. Voluntary restrictions.




Chapter
 11-71                  SO 6 Identify the items that affect retained earnings.
    Presentation of Stockholders’ Equity

      Balance Sheet Presentation
          Two classifications of paid-in capital:
             1. Capital stock
             2. Additional paid-in capital




Chapter
 11-72                SO 7 Prepare a comprehensive stockholders’ equity section.
    Presentation of Stockholders’ Equity

Balance                                                     Illustration 11-16


Sheet
Presentation




Chapter
 11-73          SO 7 Prepare a comprehensive stockholders’ equity section.
    Accumulated Other Comprehensive Income
                    (AOCI)

         This is usually part of stockholder’s equity.
         Reports comprehensive income, i.e.,
          changes in wealth, including those not fully
          recognized on the P&L statement.
         Examples include foreign currency effects,
          unrealized gains and losses on marketable
          equity securities, and pension and employee
          stock option-related items.


Chapter
 11-74
          Hewitt’s Accumulated Other
            Comprehensive Income




Chapter
 11-75
          Analysis Using Equity Items




Chapter
 11-76
    Measuring Corporate Performance

      Dividend Record
      Illustration: Using the information shown below, calculate
          the payout ratio for Nike in 2007 and 2006.


                                                                    Illustration 11-18




                              $357.2                     $304.9
                                           = 24%                        = 22%
                             $1,491.5                   $1,392.0

 The payout ratio measures the percentage of earnings a company distributes
 in the form of cash dividends.
Chapter                      SO 8 Evaluate a corporation’s dividend and earnings
 11-77                            performance from a stockholder’s perspective.
    Measuring Corporate Performance

      Earnings Performance
      Illustration: Calculate Nike’s return on common
      stockholders’ equity ratios for 2007 and 2006.



                                                                       Illustration 11-20




  This ratio shows how many dollars of net income a company earned for each
  dollar of common stockholders’ equity.                  (Answers on notes page)

Chapter                         SO 8 Evaluate a corporation’s dividend and earnings
 11-78                               performance from a stockholder’s perspective.
    Measuring Corporate Performance

      Debt Versus Equity Decision
                                                      Illustration 11-21




Chapter              SO 8 Evaluate a corporation’s dividend and earnings
 11-79                    performance from a stockholder’s perspective.
    Measuring Corporate Performance

      Debt Versus Equity Decision
                                                 Illustration 11-22




Chapter              SO 8 Evaluate a corporation’s dividend and earnings
 11-80                    performance from a stockholder’s perspective.

								
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