Accounting 8 E Chapter 11 Paid in Capital and the Balance Sheet

Document Sample
Accounting 8 E Chapter 11 Paid in Capital and the Balance Sheet Powered By Docstoc
					                                       Chapter 11


                      Stockholders’ Equity


                                  Certificate of Stock



Financial Accounting, Alternate 4e by Porter and Norton   1
Equity Financing: Issue Stock

 Dividend
  flexibility
 Ready markets
 Often provides
  higher ROI than
  debt financing
 Borrowing may
  not be feasible
                                2
Equity Financing: Issue Stock

          Less control
          Dividends not tax deductible
          Hurts some financial ratios




                                      3
Expanded Accounting Equation

  Assets = Liabilities + Owners’ Equity



Assets = Liabilities + Stockholders’ Equity


                Contributed       Retained
                  Capital         Earnings
                                             4
     Relationships among Financial
Statements – Winnebago Industries, Inc.
                      Income Statement for 2002
Revenues                                          $    xxx
Less: expenses                                         xxx
Net income                                        $ 54,671

          Statement of Change in Stockholders’ Equity for 2002
Beginning balance, reinvested income           $ 234,139
Add: Net income                                   54,671
Deduct: Cash dividends                            (3,954)
Ending balance, reinvested income              $ 284,856

                      Balance Sheet as of August 25, 2002
Total Assets                                      $      xxx
Total Liabilities                                        xxx
Capital Stock                                            xxx
Reinvested Earnings                                  284,856
Total Liabilities & Stockholders' Equity          $      xxx
                                                                 5
Stockholders’ Equity Components

                   Common
       Preferred    Stock
         Stock           Addt’l.
    Retained           Paid-In Cap.
    Earnings
                               Deduct:
        Donated                Treasury
                   Other        Stock
        Capital    Misc.

                                          6
Delta Air Lines Inc.
                                                       (in millions)
Partial Balance Sheet                                  2002 2001

Shareholders' equity:
  Common stock, $1.50 par value, 450 million shares
    authorized; 2002 – 180,903,373 issued;
    2001 – 180,890,356 issued                             271      271
  Additional paid-in capital                            3,263    3,267
  Retained earnings                                     1,639    2,930
  Accumulated other comprehensive income (loss)        (1,562)      25
  Treasury shares at cost: 2002 – 57,544,168; 2001 –
  57,644,690                                           (1,716) (1,865)
    Total shareholders' equity                            893 3,769




                                                                         7
           Contributed Capital

   Common Stock
                                       Certificate
     » basic stock of corporation      of Stock
     » has voting rights
     » represents ownership interest

   Preferred Stock
    » optional
    » tailored to meet specific needs
    » provides dividend returns with less risk
                                                     8
  Number of Shares of Stock
Authorized
               Maximum
               Allowable




                           Issued - sold &
                             distributed
 Outstanding - not
repurchased or retired
                                             9
               Par Value


 “Legal capital”
 Arbitrary amount      Certificate of Stock
  stated on stock       $1.00 Par Value
  certificate
 Also called “stated
  value”

                                               10
     Additional Paid-in Capital

   Amount received
    in excess of par or
    stated value of       Certificate of Stock
    stock                  $1.00 Par Value




                                                 11
         Retained Earnings

 Net income retained in business
  (not paid out as dividends) since
  inception
 Reinvested in a variety of assets
  (not necessarily liquid)




                                      12
          Preferred Stock

 Can tailor to specific needs of firm
 Stated dividend rate
 Often carries dividend preference over
  common stock

                          $100 par,
                      7% Preferred Stock


                                           13
        Preferred Stock Features
                             2002
                              2003            1      2      3



   Cumulative      4


                    11
                         5


                         12
                          4
                               2004
                                6


                                13
                                 5
                                       7


                                      14
                                       6
                                              8


                                             15
                                              7
                                                     9
                                                     1

                                                    16
                                                     8
                                                           1
                                                            10
                                                             2

                                                            17
                                                             9
                                                                  2
                                                                      3


                                                                      10
                                                                           3

                    18   19
                          11    20
                                 12   2113   22
                                              14    23
                                                     15    2416    17
                               4      5      6      7      8      9        10

                    25   26
                          18    27
                                 19    28
                                        20    29
                                               21    30
                                                      22    31
                                                             23     24
                               11     12     13     14     15     16       17

                         25    1826   1927    28
                                             20      29
                                                    21     2230   2331     24


                               25     26     27     28     29     30       31




   Participating
                                                                                      Callable


                                                                                      Convertible


                                                                           Preferred              Common

                                                                                                           14
            Stock Issued for Cash
  Example:
                                Common Stock $ 10,000
                             ( $10 par value x 1,000 shares)
    1,000 shares of
 $10 par value stock
sold for $15 per share         Addt’l Paid-In Cap. $5,000
                                (($15 - $10) x 1,000 shares)

Assets          = Liab. +    O/E       + Rev. – Exp.
Cash   15,000           Common Stk. 10,000
                        Addtl. Paid in
                        Cap. - Common 5,000

                                                          15
        Stock Issued for Noncash
             Consideration

   Record at fair market value of
    consideration given or received,
    whichever is more readily determinable


     Certificate of Stock
                               Title
                             to land,
                            building,
                              etc.

                                             16
           Treasury Stock

 Company buys back its own stock
 Contra-equity account (debit balance)
 Not outstanding (no voting rights)




                              Certificate of Stock




                                                     17
Reasons for Repurchasing
          Stock
 Provide for bonus or benefit plans
 Maintain favorable market value
 Improve financial ratios
 Maintain control of ownership
 Cash in on future price increases




                                       18
Presentation of Treasury Stock

Common stock, $10 par, 1,000
 shares issued, 900 outstanding $ 10,000
Additional paid-in capital         12,000
Retained earnings                  15,000
                                   37,000
Less: Treasury stock, 100 shares
 at cost ($25 per share)          ( 2,500)
 Total stockholders’ equity      $34,500

                                             19
                                                                             Date




    Cash Dividends


                    1    2    3                                                          1    2     3


4    5    6    7    8    9    10   Paid                            4    5     6     7    8    9     10


11   12   13   14   15   16   17                              on   11   12   13     14   15   16    17


18   19   20   21   22   23   24
                                    to                             18   19   20     21   22   23    24


25   26   27   28   29   30   31                                   25   26   27     28   29   30    31




 Date of                                    Stockholders           Payment
declaration                               on date of record          date
                                                                                                   20
                Dividends

Record dividends when declared; not when paid

            12/31/03        1/15/04



                              Pay
             Reduce        dividends
             retained
             earnings
                                                21
     Dividend Requirements

 Sufficient cash
 Positive retained
  earnings




                             22
Dividend Payout Ratio


       Annual dividend
         Net income

          Date        The % of
   I.M. Treasurer
                    earnings paid
                     as dividends
                                    23
     Allocation of Cash Dividends
                                  2001
1) Distribute dividends in   4    5
                                   2002      6      7
                                                            1

                                                            8
                                                                 2

                                                                 9
                                                                         3

                                                                        10




                                    2003
                             11   12        13      14     15    16 1   17 2        3



   arrears, if any, to       18


                             25
                                  19 4      20 5 21 6 22 7 23 8


                                  26 11 2712 28 13 29 14 30 15 31 16 1
                                                                        24 9        10


                                                                                    17 2      3




   preferred
                                       18        19 4    20 5 21 6 22 7 23 8        24 9      10


                                       25        26 11 2712 28 13 29 14 30 15 31 16           17


                                                   18      19   20      21     22        23   24


                                                   25      26   27      28     29        30   31




2) Distribute current
                                                    2004
   dividends to preferred                   4       5      6    7
                                                                        1

                                                                        8
                                                                               2

                                                                               9
                                                                                         3

                                                                                         10


                                            11     12      13   14      15     16        17


                                            18     19      20   21      22     23        24


                                            25     26      27   28      29     30        31




3) Distribute remainder
   to common (or to both
   if preferred is
   participating)
                                                                                                   24
Cash Dividends Example

Stricker Company declares a
  $70,000 dividend for 2004 (no dividends
  were paid in 2002 or 2003).
There are 10,000 shares of $10 par, 8%
  preferred stock and 40,000 shares of $5
  par common stock outstanding.



                                            25
       Cash Dividends Example
   Noncumulative Preferred Stock
                                               Preferred Common
Step 1: Distribute current-year dividend to
preferred (10,000 shares x $10 par x 8% x 1 yr.) $8,000
Step 2: Distribute remaining dividend to common
($70,000 - $8,000)                                        $62,000
Total allocated                                  $8,000   $62,000


                                                $0.80     $1.55
                                                 per       per
                                                share     share
                                                                    26
       Cash Dividends Example
      Cumulative Preferred Stock
                                                 Preferred Common
Step 1: Distribute dividends in arrears to
preferred (10,000 shares x $10 par x 8% x 2 yrs.) $16,000
Step 2: Distribute current-year dividend to
preferred (10,000 shares x $10 par x 8% x 1 yr.)    8,000
Step 3: Distribute remaining dividend to common
($70,000 - $24,000)                                         $46,000
Total allocated                                   $24,000   $46,000


                                               $2.40        $1.15
                                                per          per
                                               share        share     27
              Stock Dividends
   Issue of additional shares proportionately to
    existing stockholders


                            Certificate of Stock
                             Certificate of Stock
                              Certificate of Stock
                                Certificate of Stock
                                  Certificate of Stock
                                    Certificate of Stock
   Reasons:
     insufficient cash
     market price reduction
     nontaxable to recipients
                                                           28
  Small Stock Dividend Example
                              Before
                             Dividend
  Stockholders’ Equity:
  Common stock, $10 par,
    5,000 shares         $ 50,000
  Additional paid-in cap. 30,000
  Retained earnings        70,000
    Total                $150,000

Assume Shah Company declares 10% stock dividend;
     500 shares @ $40 per share market value
                                               29
  Small Stock Dividend Example
                                 Before      After
 Stockholders’ Equity:
 Common stock, $10 par,
   5,500 shares          $ 50,000 $ 55,000 +
 Additional paid-in cap.    30,000 45,000 +
 Retained earnings          70,000 50,000 -
   Total                 $ 150,000 $150,000

$40 market value deducted from retained earnings;
allocated between Common Stock (initially Common
Stock Div. Distributable) and Addtl. Paid-In Capital.
                                                     30
Small Stock Dividend Example
                          Before     After
Stockholders’ Equity:
Common stock, $10 par,
  5,500 shares          $ 50,000 $ 55,000 +
Additional paid-in cap.    30,000 45,000 +
Retained earnings          70,000 50,000 -
  Total                 $ 150,000 $150,000

                       Total S/E is unchanged

                                             31
  Large Stock Dividend Example
                               Before
                              Dividend
Stockholders’ Equity:
Common stock, $10 par,
  5,000 shares              $ 50,000
Additional paid-in cap.       30,000
Retained earnings             70,000
  Total                     $150,000


Assume Shah Company declares 100% stock dividend
                                               32
Large Stock Dividend Example
                               Before     After
Stockholders’ Equity:
Common stock, $10 par,
  10,000 shares         $ 50,000 $100,000 +
Additional paid-in cap.    30,000 30,000
Retained earnings          70,000 20,000 -
  Total                 $ 150,000 $150,000

Dividend deducted from retained earnings and
recorded in the Common Stock account at par.
Additional Paid-In Capital account is unaffected.
                                                    33
Large Stock Dividend Example
                          Before    After
Stockholders’ Equity:
Common stock, $10 par,
  10,000 shares         $ 50,000 $100,000 +
Additional paid-in cap.    30,000 30,000
Retained earnings          70,000 20,000 -
  Total                 $ 150,000 $150,000

                       Total S/E is unchanged
                                            34
                        Stock Splits

 Results in additional issuance of shares
 Reduces par value per share
 No change in Stockholders’ Equity
  accounts

                                Certificate of Stock
 Certificate of Stock
    $3 par value                    Certificate of Stock
                                       Certificate of Stock
                                          $1 par value

                                                              35
               Stock Splits

   Not recorded in accounts
   Splits reduce market value
    per share and make stock
    more affordable to a wider
    range of investors           Disclose
                                 in notes



                                            36
   2-for-1 Stock Split Example
                               Before
                                Split
Stockholders’ Equity:
Common stock, $10 par,
  5,000 shares          $ 50,000
Additional paid-in cap.    30,000
Retained earnings          70,000
  Total                 $ 150,000


Assume Shah Company declares 2-for-1 stock split.
                                                    37
   2-for-1 Stock Split Example
                            Before     After
Stockholders’ Equity:
Common stock, $5.00 par,
  10,000 shares           $ 50,000 $ 50,000
Additional paid-in cap.     30,000 30,000
Retained earnings           70,000   70,000
  Total                  $ 150,000 $150,000

      Only disclosures      All accounts are
       are affected           unchanged
                                               38
Statement of Stockholders’ Equity

   Shows changes in all equity accounts
    including
    » Sales and Purchases of capital stock
   Includes:
          Statement of Retained Earnings
                  Beginning retained earnings
        Add:      Net income
        Subtract: Dividends
        =         Ending retained earnings
                                                39
                 Statement of
             Comprehensive Income
       Income Statement
                                 Statement of Comprehensive Income
 For Year Ended Dec. 31, 20xx       For Year Ended Dec. 31, 20xx
Revenues                 xxx    Net income                      xxx
Expenses                 xxx    Foreign currency translation
Other gains and losses   xxx    adjustment                      xxx
Income before tax        xxx    Unrealized holding gains/losses xxx
                                Minimum pension liability
Income tax expense       xxx
                                adjustment                      xxx
Net income               xxx    Other comprehensive income      xxx
                                Comprehensive income            xxx
 Excluded from Inc. Stmt.

 Comprehensive income – the total change in net assets from all
 sources except investments by or distributions to the owners
                                                                 40
   Analyzing Owners’ Equity

 Book   value per share
  » rights of each share to net
   assets of corporation

 Market   value per share
  » price at which stock is
   currently selling

                                  41
      Book Value per Share

    Total Common Stockholders’ Equity
     # of Common Shares Outstanding

 Rights of common
  stockholders in event of
  liquidation
 Generally represents “floor”
  price of stock
                                        42
  Book Value vs. Market Value

Southwest Airlines’ 2002:
  Book value per share:    $ 5.69
  Market value per share: $16.42 (avg.)

Which value would you expect to pay for a
 share of Southwest Airlines’ stock?
What factors account for the difference
 between the two values?
                                            43
     Stockholders’ Equity Items on the
         Statement of Cash Flows
            Operating Activities
 Net income                        xxx
            Investing Activities
            Financing Activities
 Issuance of stock                 +
 Retirement or repurchase
   of stock                        –
Payment of dividends               –
                                         44
       Appendix

    Accounting Tools:
Unincorporated Businesses




                            45
       Sole Proprietorships

 Not a separate legal entity so owner has
  unlimited liability
 Must keep personal and business records
  separate
 Business income is declared on the
  owner’s personal tax return and taxed at
  personal tax rate

                                             46
             Sole Proprietorships

Owner’s withdrawal of assets from
 business:
Assets       = Liab. +    O/E       + Rev. – Exp.
Equip. (6,000)       Peter Tom,
                      Drawing (6,000)



 Owners’ drawing or withdrawal
 accounts are contra-equity accounts
                                                47
          Sole Proprietorships
 Drawing or withdrawal and income
  summary accounts are closed to the
  owner’s capital account
 Owner’s Equity section of the balance
  sheet consists of the capital account:
    Beginning balance   $      0
    Plus: Investments    10,000
           Net Income      4,000
    Less: Withdrawals     (6,000)
    Ending balance      $ 8,000
                                           48
            Partnerships

 Unlimited liability
 Limited life – partnership agreements can
  and do end
 Not taxed as a separate entity




                                              49
              Partnerships

Distribution of income:
 Equal distribution
 Stated ratio
 Other allocation
  » For example, based on salaries, interest on
    invested capital, and a stated ratio



                                                  50
End of Chapter 11




       Certificate of Stock




                              51

				
DOCUMENT INFO
Description: Accounting 8 E Chapter 11 Paid in Capital and the Balance Sheet document sample