AGENDA
11/28/11 Cookies
Chapter
please take
11 Stockholders equity:
Evaluate
the quality of your preparation for
exam 2 (strengths, weaknesses, opportunities for
improvement on final)
Evaluate the use of our class time post exam 1.
What is going well? What could be improved?
Any other feedback/jokes/drawings
Corporations
Stock
Dividends
Review
Exam 2
Break
Thanksgiving
Quiz
on 12/1 (Next Thursday) ch 11 and
Appendix E
An entity separate and distinct from its owners.
Characteristics of a Corporation
"
Not-for-Profit
"
For Profit
"
Salvation Army
Nike
American Cancer
Society
Gates Foundation
General Motors
IBM
General Electric
Cargill Inc.
Kohler
Mars (M&M,
Snickers,
etc.)
Transferable Ownership Rights
Privately held
Limited Liability of Stockholders
Publicly held
Separate Legal Existence
Ability to Acquire Capital
"
Classified by Ownership
Classified by Purpose
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Advantages
Disadvantages
1
11/28/11
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Characteristics of a Corporation
Corporation acts
under its own name
rather than in the
name of its
stockholders.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Continuous Life
Corporate Management
Corporate Management
Government Regulations
Government Regulations
Additional Taxes
Additional Taxes
Characteristics of a Corporation
Limited to their
investment.
Characteristics of a Corporation
Separate Legal Existence
Separate Legal Existence
Limited Liability of Stockholders
Limited Liability of Stockholders
Transferable Ownership Rights
Transferable Ownership Rights
Ability to Acquire Capital
Ability to Acquire Capital
Continuous Life
Continuous Life
Corporate Management
Corporate Management
Government Regulations
Government Regulations
Additional Taxes
Additional Taxes
Shareholders may
sell their stock.
Corporation can
obtain capital
through the issuance
of stock.
2
11/28/11
Characteristics of a Corporation
Characteristics of a Corporation
Separate Legal Existence
Separate Legal Existence
Limited Liability of Stockholders
Limited Liability of Stockholders
Transferable Ownership Rights
Transferable Ownership Rights
Ability to Acquire Capital
Ability to Acquire Capital
Continuous Life
Continuous Life
Corporate Management
Corporate Management
Government Regulations
Government Regulations
Additional Taxes
Additional Taxes
Characteristics of a Corporation
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder,
employee, or officer.
Separation of
ownership and
management
prevents owners from
having an active role
in managing the
company.
Characteristics of a Corporation
Separate Legal Existence
Separate Legal Existence
Limited Liability of Stockholders
Limited Liability of Stockholders
Transferable Ownership Rights
Transferable Ownership Rights
Ability to Acquire Capital
Ability to Acquire Capital
Continuous Life
Continuous Life
Corporate Management
Corporate Management
Government Regulations
Government Regulations
Additional Taxes
Additional Taxes
Corporations pay
income taxes as
a separate legal
entity and
stockholders pay
taxes on cash
dividends.
3
11/28/11
ORGANIZING A BUSINESS
Three
overall ways of organization:
Sole Proprietorship
Partnership
Full partners
Limited partners
Corporation
S-corporation
C-corporation
WHO OWNS A CORPORATION?
Ownership
of a publicly-traded corporation is
divided into shares of stock
Formed by a grant of a state charter
The owners of stock are stockholders
Stockholders select and are represented by the
Board of Directors.
Board members select and monitor company
officers and create the operating policies of the
company.
STOCKHOLDERS RIGHTS
STOCKHOLDERS RIGHTS
3.
1.
May vote in election of board of directors
and on actions that require stockholder
approval.
2.
May share the corporate earnings
through receipt of dividends.
4.
Some companies may allow stockholders to keep the same
percentage ownership when new shares of stock are issued
(preemptive right).
May share in assets upon liquidation in proportion to their
holdings. This is called a residual claim.
4
11/28/11
AUTHORIZED & OUTSTANDING STOCK
RECORDING THE ISSUANCE OF STOCK
Par
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.
Number of shares of issued stock that are actually
held by shareholders.
value: The value of the stock in the
corporate charter
Each share is assigned a dollar value
When recording the issuance of stock, record the
par value to the Common Stock account.
Any excess of stock price over par value should be
recorded to the Paid-in Capital in Excess of Par
account.
Stock can be issued above par value (and nearly
always is)
RECORDING THE ISSUANCE OF STOCK
Years
EQUITY
ago, par value was much more important
Represented the minimum level of capital that
stockholders had to keep in the business
Par value is immaterial compared to market value
Not
all stock has a par value
value: Accounting treatment similar to
par value (just replace par with stated)
No-par & no stated value: Credit full value of
stock issuance to common stock account
Stated
Two Primary
Sources of
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.
5
11/28/11
EXAMPLE: ISSUANCE OF STOCK
PREFERRED STOCK
If
Company X issues 1000 shares of $5 par value
stock for $10 each, the entry would look like this:
Cash
special provisions that differentiate it
from common stock
Dividend preference
Entitled
10,000
Common Stock
Paid-in Capital in Excess of Par
Contains
5,000
5,000
to dividends before common stock
Cumulative
Dividends: Preferred stockholders must be paid
current year and any unpaid prior year dividends before
common stockholders get paid.
Not
all preferred stock is cumulative
in arrears: Unpaid previous years dividends
Dividends
Liquidation
DIVIDENDS
A
distribution by a corporation to its stockholders
Dividends
preference
For par value of shares or
For a specified liquidating value
DIVIDENDS
Dividends require information concerning three dates:
Cash
Cash payments to shareholders
Stock
Dividends
Distribution of additional stock to shareholders
Each shareholder maintains the same ownership
percentage as before the stock dividend
Converts retained earnings into paid-in capital
6
11/28/11
DIVIDENDS
Declaration
Date
Cash Dividends
xxx
Dividends Payable
Record
EXAM 2
xxx
Date
No Entry
Payment
Date
Dividends Payable
Cash
xxx
xxx
These are tentative grades. We expect that when we
take everything into account, most students who are on
the borderline of each cut-off and who have performed
well in other areas of the course, will go to the next
higher we level.
Though did not give AB/BC cutoffs for this exam,
there will be AB and BC grades in our final calculation.
Thus, many students on the upper and lower border-line
of the tentative grades will fall into the AB or BC grade
average.
The overall grade in this course consists of all of your
activities in class, not just the exam.
Students should see their TAs if they have concerns
with their grades thus far in the course.
EXAM 2
HAPPY THANKSGIVING!!!!!!
Count: 653
Maximum: 123
Median: 99.5
Mean: 98.2
Safe
travels, have a nice break, GO PACKERS!!
The grade cutoffs are:
A: 113
B: 96
C: 83
D: 64
F: Below 64
7
11/28/11
TREASURY STOCK
TREASURY STOCK
The repurchase of a companys own shares
Treasury stock is a contra equity account
Example: A company acquires 4,000 shares of its stock at
$8 per share.
Treasury Stock
32,000
Sheet Effects:
Reduce Equity
Reduce Assets
Why
32,000
Cash
Balance
purchase treasury stock?
Give investors a return on their investment
Use excess cash
Increase share price
E11-6
On January 1, Tellier Corporation had 60,000 shares of nopar stock issued and outstanding. The stock has a stated
value of $4 per share. During the year, the following
transactions occurred
E11-6 (SOLUTION)
a)
Apr 1 Issued 90,000 additional shares of common stock for $11 per
share
June 15 Declared a cash dividend of $1.50 per share to
stockholders of record on June 30
July 10 Paid $1.50 cash dividend
Dec 1 Issued 4,000 additional shares of common stock at $12 per
share
Dec 15 Declared a cash dividend on outstanding shares of $1.60
per share to stockholders of record on December 31.
a)
b)
Prepare the entries, if any, on each of the three dates that
involved dividends
How are dividends and dividends payable reported in the financial
statements prepared at December 31.
June 15
Cash Dividends
$225,000
Dividends Payable
$225,000
July 10
Dividends Payable
Cash
$225,000
$225,000
December 1
Cash Dividends
$246,400
Dividends Payable
$246,400
b)
Cash Dividends = $471,400; Expense
Dividends Payable = $246,400; Liability
8
11/28/11
STOCK DIVIDENDS
DIVIDENDS
Pro rata distribution of the corporations own stock.
Reasons why corporations issue stock dividends:
1. Satisfy stockholders dividend expectations without
spending cash.
2. Increase the marketability of the corporations stock.
3. Emphasize that a portion of stockholders equity has
been permanently reinvested in the business.
Results in decrease in retained earnings and increase in paid-in capital.
STOCK DIVIDEND EXAMPLE
Company Y has 50,000 shares outstanding of $10 par value
common stock. The fair value of the stock is $30 and a 10%
stock dividend is declared.
Declaration Date
Stock Dividends
150,000
Common Stock Dividends Distributable
50,000
Paid-in Capital in Excess of Par
STOCK SPLITS
Results
in reduction in the par or stated value of
a stock.
Issuance of additional shares
Effect:
100,000
Record Date: No Entry
Payment Date
Common Stock Dividends Distributable
Common Stock
50,000
50,000
Effect of a split on market value is inversely
proportional to the size of the split. For example 2for-1 split of a $10 stock would result in a drop in
value of the stock to $5
No effect on paid in capital, retained earnings, and
total stockholders equity.
Total number of shares increase.
No journal entries
9
11/28/11
E11 7
October 31, the stockholders equity section of
Opio Companys balance sheet consists of
common stock $648,000 and retained earnings
$400,000. Opio is considering the following two
courses of action: (1) declaring a 5% stock
dividend on the 81,000 $8 par value shares
outstanding or (2) effecting a 2-for-1 stock split
that will reduce par value to $4 per share. The
current market price is $17 per share.
E11-7 (SOLUTION)
On
Prepare tabular summary of effects of both.
Before Action
income retained in the company
$648,000
$680,400
$648,000
Paid-in
Capital
$0
$36,450
$0
Retained
Earnings
$400,000
$331,150
$400,000
SE Equity
$1,048,000
$1,048,000
$1,048,000
Outstanding
shares
81,000
85,050
162,000
FINANCIAL STATEMENT PRESENTATION
1.
Net income is credited and net losses are debited
Stockholders
claim on the total assets (not
specific assets)
Can have restrictions
Legal, contractual, or voluntary
Disclosed in the notes to the financial statements
After Stock
Split
Common
Stock
RETAINED EARNINGS
Net
After Stock
Dividend
Capital stock
Preferred and
Common stock
1.
2.
Preferred shown first
because of its
preferential rights
Additional paid-in
capital
10
11/28/11
PRESENTATION OF STOCKHOLDERS
EQUITY
Balance Sheet
Presentation
Payout
Preferred shown
first because of
its preferential
rights
Additional paid-incapital
RATIO ANALYSIS RETURN ON COMMON
SE
Return
on Common SE:
Net Income Preferred Stock Dividends
Average Common Stockholders Equity
Ratio:
Cash Dividend Declared on Common Stock
Net Income
Capital stock
Preferred and
Common Stock
RATIO ANALYSIS PAYOUT RATIO
Illustration 11-16
Income earned for each dollar of common
stockholders equity
Harder for large companies to maintain a high ratio
as net income levels off but equity grows
To increase, either increase return on assets or
increase reliance on debt financing
Percentage of earnings distributed as cash dividends
Companies with high growth usually have lower
payout ratios. They invest more of the net income
back into the company
BYP11-1
The
stockholders equity section of Tootsie Roll
Industries balance sheet is shown in the Consolidated
Statement of Financial Position in Appendix A. You will
also find data relative to this problem on other pages of
Appendix A. (Note that Tootsie Roll has two classes
of common stock. To answer the following
questions, add the two classes of stock together).
Answer the following questions:
a)
b)
c)
d )
What is the par or stated value per share of Tootsie Rolls
common stock?
What percentage of Tootsie Rolls authorized common stock
was issued at December 31, 2009? (Round to nearest full %)
How many shares of common stock were outstanding at
December 31, 2008 and at December 31, 2009?
Calculate the payout ratio, earnings per share, and return
on common stockholders equity ratio for 2009.
11
11/28/11
BYP 11-1 (SOLUTION)
a)
b)
c)
d )
DEBT VERSUS EQUITY DECISION
$0.69-4/9
35%
December 31, 2008 55,015
December 31, 2009 55,721
Payout Ratio 33.3%
Earnings per share $0.95 per share
Return on common SE 8.31%
DEBT VERSUS EQUITY DECISION
GENERAL FRAMEWORK FOR VIEWING
ACCOUNTING
1.
Users
Users attempting to
predict:
Investment Return
Future cash flows
Liquidity
Solvency
Profitability
2.
Recognize
Criteria for
Recognition
3.
Measure
Alternative ways
to measure:
Cost
Market value
Replacement cost
Amortized cost
4.
Impact on
Users
Decision Usefulness:
Relevance vs.
Reliability
Comparability vs.
Consistency
Preciseness of
Measure vs. Accuracy
vs. Subjectivity
12
11/28/11
GENERAL KEY QUESTIONS
2. Recognize
When do we recognize Assets, Liabilities, Revenue, Expense?
exchange of currency?
exchange of goods or services?
Where do we recognize Assets, Liabilities, Revenue, Expense?
in the financial statements?
current or long-term?
aggregated or consolidated?
in the footnote disclosures?
GENERAL KEY QUESTIONS
3. Measure
What are the alternative ways to measure the
Assets, Liabilities, Revenue, Expense?
13