Handout_09_(APSCW_-_F2009)

Handout_09_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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BUSI W3013 Handout 09 | Page 1 F INANCIAL A CCOUNTING BUSI W3013 | F ALL 2009 H ANDOUT 09 PROFESSOR ANDREW SCHMIDT 1.0 Introduction ……………………………… 1 2.0 Contributed Capital Accounts ……………………………… 2 3.0 Earned Capital ……………………………… 14 4.0 Equity and the Statement of Cash Flows ……………………………… 18 5.0 Earnings Per Share (EPS) ……………………………… 19 6.0 Financial Statement Analysis of Equity ……………………………… 20 7.0 Disclosure Requirements ……………………………… 22 8.0. Practice Exercises and Solutions ……………………………… 30 9.0 Problem Set 08 ……………………………… 50 10.0 Appendix: ……………………………… 60 H ANDOUT O BJECTIVES : S HAREHOLDERS E QUITY 1) Distinguish between common and preferred stock 2) Understand why firms repurchase stock and how to account for the repurchase, reissue, and retirement of shares 3) Understand the accounting for cash, property, and stock dividends 4) Understand disclosure requirements for stock options 5) Distinguish between earnings and comprehensive income 6) Interpret stockholders’ equity disclosures 1.0. I NTRODUCTION Before we discuss equity, it is important to understand the GAAP definition of the “firm.” GAAP is based on the proprietary view of the firm: 1 the basic accounting equation is rearranged to focus on the net resources (assets – liabilities) available to management and the capital provided by owners: Assets – Liabilities = Owners’ Equity The proprietary view makes a strong distinction between capital provided by owners (insiders) and creditors (outsiders). In doing so, the firm and its owners are viewed as inseparable – the firm is considered the owners’ equity. Better stated, the firm is the net capital deployed (net assets) and the owners are the insiders who provided the net capital. Under the proprietary view, 1 The alternative view is the entity view: the firm is the capital deployed (assets). Who provided the capital (creditors or owners) is of secondary importance.
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BUSI W3013 Handout 09 | Page 2 income (expenses) can be earned (incurred) only through transactions with outsiders. Therefore, no income or loss can be generated through transactions between the firm and its owners, because the owners are insiders. This will help us understand why certain financing transactions that we will discuss generate income or losses (paying interest), while others do not (paying dividends). General rule: Issuance, repurchase, or retirement of shares (or options) never gives rise to accounting gains or losses. Under GAAP, firms cannot recognize income from transactions in its own equity. Shareholders’ equity accounts can be classified as follows: Contributed capital accounts (common & preferred stock, additional paid-in capital) Treasury stock (a reduction of contributed capital) Retained earnings (part of earned capital) Comprehensive income accounts (part of earned capital) 2.0. C ONTRIBUTED C APITAL A CCOUNTS 2.1.
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Handout_09_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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