Stock Dividends by fjwuxn


									Stock Dividends

              Corporation declares and issues additional shares of its own stock to its
               existing shareholders

              Why use stock dividends over cash dividends?

                   -   lack of cash o declare a dividend
                   -   other sources of cash tied up in debt financing or NPV projects
                   -   additional shares dilute the value of securities and lower the share
                   -   are normally not part of taxable income, so perhaps preferred by
                       wealthy shareholders

              Declared by the board of directors on a specific date and then paid at a
               later date—similar to cash dividends

RECORDED and recognized when declared

Consider the following company’s excerpted statement of stockholders’ equity as of
November 30, 2005:

Common stock ($15 par, 10,000 shares
   issued and outstanding)                                                          $150,000
Additional paid-in capital—Common                                                     50,000
Retained Earnings                                                                     80,000
   Total Stockholders’ Equity                                                       $280,000

The company decides to pay a 15% stock dividend to common stockholders to be
distributed on December 1, 2005. The stock was trading at $46 that day.

1. Calculate the amount of stock that will be issued as a result of the dividend.

15% x 10,000 = 1,500

2. Determine the size of the stock dividend (stock dividends below 20-25% are
   accounted for differently than those that are larger in magnitude.

       Small stock dividends use the market value of shares to determine the value of
       the stock dividend           1,500 x 56 = 84,000

       Large stock dividends use the par value of the stock in order to determine the
       value of the dividend
3. In order to declare the announcement of the dividend, we must: debit retained
   earnings for the entire value of the dividend, credit an account called stock dividends
   distributable for the par value of the stock, and record the rest as a plug in APIC.

       Retained Earnings                       69,000
              APIC—Common                                           46,500
              Common Stock Dividend Distributable                   22,500

4. When the dividend is distributed, we will strike the obligation (dividends
   distributable) and credit the stock account.

       Common Stock Dividend Distributable           22,500
            Common Stock                                            22,500

After the dividend is declared and issued, determine the balances in the statement of
stockholders’ equity.

Common stock ($15 par, 10,000 shares
   issued and outstanding)
Additional paid-in capital—Common
Retained Earnings
   Total Stockholders’ Equity


1. Be aware of the difference in accounting for large and small stock dividends

2. Be aware of the Common Stock Dividend Distributable account, it is NOT a liability
   as we are not paying out assets or cash. It should be treated as a component of
   contributed capital.

3. Note that the neither the declaring or issuance of a stock dividend has an impact on
   total stockholders’ equity.
Stock Splits

Similar to stock splits

       Increases total shares outstanding and has no tax implications to investors

       Enacted for many of the reasons stock dividends are encated

Two differences, the par value of the stock is affected as well as the number of shares

Otherwise there is NO RECORD of this transaction in the double-entry system,

you must simply remember to adjust the par value and number of shares outstanding once
a split has occurred

There is no increase in wealth for the shareholders, although a stock split is usually a
positive signal in regard to the future prospects of the corporation

Statement of Stockholders’ Equity

Delineates the relevant equity accounts tracking any significant events that occurred
during the year and impacted the equity section of the balance sheet.

Financial Ratios Based on Per Share Amounts—Computing Share Value

Book Value per Share – represents the rights that each share of common stock has to the
net assets of the corporation, thus, when only common stock is present, the book value
per share is measured as

Book Value per Share =         Total Stockholders’ Equity
                               Total Shares Outstanding

Indicates the rights of the shareholder in the case of corporate liquidation, it does not
represent market value or what the shareholder could get for the share of stock

Also based on ―stale‖ information, since assets are measured at historical cost, not current

If preferred shares are present, then you must deduct the liquidation value of the preferred
shares, as well as any dividends in arrears if the preferred stock is cumulative

       T.S.E. – liq/redemption value of preferred shares – dividends in arrears
       Total Shares outstanding less preferred shares outstanding
Market Value per Share – more meaningful to shareholders engaged in rapid

The price at which the stock is currently selling

Earnings per Share – one of the most quoted statistics for publicly-traded companies…
allows investors to understand the piece of profits that are accumulating to their share

Can be compared to the amount paid for the stock or the amount at which the stock is
being currently traded

Earnings per Share =          Net Income – Preferred Shares
                              Weighted Average number of C.S. outstanding

Becomes more complicated as the share structure of firms is diversified (must account for
potential dilutive securities such as convertible preferred and stock options)

Often quoted and forecasted by professional financial intermediaries…. Analysts

If a company does not meet or beat this forecast, stock downgrades and strong price
revisions are usually precipitated

Statement of Cash Flows

Important to realize that cash is the lifeblood of firms. Bills can’t be paid with promises
of payment from your customers, thus, companies can report healthy bottom lines and
have near zero cash on hand to settle bills

Differences between the cash-basis and accrual basis of accounting can accumulate
bloated bottom lines with little cash inside the company’s stomach

Companies can report income in years when cash decreased or losses for years in which
cash increased

Reports changes in cash OVER TIME (not a snap shot) in three areas

Operating Activities
Investing Activities
Financing Activities

The only financial statement upon which the cash basis of accounting is used
General Format

Cash Flows from Operating Activities
  Inflows                                                               $xxx
  Outflows                                                              (xxx)
Net Cash provided (used) by operating activities                                       $xxx
Cash Flows from Investing Activities
  Inflows                                                               $xxx
  Outflows                                                              (xxx)
Net cash provided (used) by investing Activities                                         xxx
Cash Flows from Financing Activities
  Inflows                                                               $xxx
  Outflows                                                              (xxx)
Net cash provided (used) by financing activities                                        xxx
Net increase (decrease) in cash and cash equivalents                                   $xxx
Cash and cash equivalents at beginning of year                                          xxx
Cash and cash equivalents at end of year                                               $xxx

If provided, the last two lines come from the balance sheet comparative statements of the
cash account. The net increase (decrease) in cash should be the movement between the
two snap-shots

What is Cash? What is Equivalent?

Recall our discussion of cash and cash equivalents, equivalents must be items readily
convertible to cash for a known amount with maturities of three months or less

On the state of cash flows, cash and its equivalents are combined in the statement of cash

Hence, if I invested in treasury securities (government t-bills), there would be no entry on
the cash flow statement (it would essentially be a cash-for-cash transaction)

If I invest in another companies’ stock, however, since the risk of this stock is much
higher and the value is not readily determinable, it would be reported on the statement of
cash flows as an outflow beneath the financing activities section of the cash flows

Operating Activities

Acquiring and selling products and services, the definition will then change with each

              Purchasing inventory
              Paying employees
              Collecting cash from account customers
              Paying on accounts
              taxes

Investing Activities

Acquiring and selling long-term assets, replacing equipment and expanding with new
long-term assets

Sometimes also called capital expenditures

Sales of equipment usually do not make up a large magnitude of the companies cash

Mergers with other companies as well as investing in held-to-maturity or available for
sale securities are recorded here, but money spent (gained) on trading securities is
reported on the operating activities section of the cash flow statement

Pages 612-622

Pages 638-644

To top