1Introduction and Learning ObjectivesLast week’s lecture provided a useful revision of the accrual concept of accounting. Now weturn our attention towards the remaining major component of the balance sheetowners’equity. Like liabilities, owners’ equity represents another form of financing for a business.At first glance, liabilities (capital provided by creditors) and owners’ equity (capital providedby owners or shareholders) may look very different.As we delve deeper into the topic,however, you will appreciate that debt and equity are at either end of a continuum offinancial instruments and that sometimes, financial instruments exhibit both debt‐andequity‐like qualities. Further, you will note that some financing arrangements do not appearin the balance sheet at all!In our discussion of equity financing, we discuss the option of using equity as a source forresources (assets) of the corporation. Shareholders are a key source of initial finance for acompany.While traditionally regarded as the owners of a company’s assets, more recentthought suggests that the shareholder exchanges their investment in a company for a rightto the residual cash flows of the firm (dividends).At the end of this topic, you should be able to:LO1.Describe the components of owners’ equityLO2.Accounting for contributed equityLO3.Accounting for retained profitsLO4.Accounting for reservesLO5.Describe bonus issues, share splits, and share buybacksLO6.Understand what is meant by debt/equity trade‐off
2Required readings:Trotman & Gibbins (TG)Chapter 10, pages 467‐468 – Section on hybrid capitalChapter 11, pages 502‐510Additional readings:Weekes, Peter.Why buybacks have investors salivating.Sydney MorningHerald, 4‐5 October 2003. (See attached)Excerpt from AASB 101Presentation of Financial Statements,http://www.aasb.com.au/admin/file/content105/c9/AASB101_09-07_COMPjun09_01-10.pdfOther references used in the lecture:Hoggett, J., L. Edwards & J. Medilin. 2006.Accounting.Melton ALD: John Wiley & SonsAustralia LtdKimmel, P. D., S. Carlon, J. Loftus, R. Mladenovic, D. Kieso & J. Weygandt. 2003.Accountingbuilding business skills.Melton ALD: John Wiley & Sons Australia LtdAlfredson, K., Leo, K., Picker, R., Pacter, P. & Radford, J.Applying International AccountingStandards.2005 Milton QLD: John Wiley & Sons Australia Ltd.Jubb, P, Langfield‐Smith, I & Haswell, S. 2002,Company accounting.Southbank VIC: NelsonThomson Learning.
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