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Financial Accounting 08

Financial Accounting 08 - Equily forS B Here's hereY ou've...

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Accounting for Shureholders' Equily Here's Where You've Been You leorned how o firm occounis for ond reports current ond long-term liobilities. Here's Where You're Goinq You will leorn how o compony occounts for ond reports contributions from owners, poyment of divldends, ond retoined eornrngs. Apr"rw{ryr ffiW*fie,es When you are finished studying Chapter 8, you should be able to: 1. Explain how a company finances its business with equity. 2. Account for the payment of cash dividends and calculate the allocation of divi- dendsbetween common and preferred shareholders. 3. Define treasury stock, explain why a company would purchase treasury stock, and account for its purchase. 4. Explain stock dividends and stock splits. 5. Define retained earnings and account for its increases and decreases. 6. Prepare financial statements that contain equity transactions. ?" Compute return on equity and earnings per share, and explain what these ratios mean. 8. Recognize the business risks associated with shareholders'equity and the related controls. 383
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CHAPTER 8 . ACCOUNTING FORSHAREHOLDERS' EQUITY #fAiss tW{*ffers Stock options are a common form of compensation for executives of large corporations. A stock option given as executive compen- sation is a privilege that gives the receiver the right, but not the obligation, to buy shares of the firm's stock at a specified price within a certain period or on a specific date. When the firm's steck price increases above the amount specified in the option, the ex- ecutive can make quite a lot of money by buying the stock at the lower amount specified in the option and then either keeping the stock or selling it for the higher market price. In July 2006, Gregory L. Reyes, the chief executive of Brocade Communica- tions Systems, was charged by the Justice Department in connection with a company scheme to issue backdated options. Dozens of firms are being inves- tigated for "rigging the timing of option grants to jack up their value, to the benefit of executives and the detriment of shareholders" ("Making Your Own Luck," The New York Times editorial, June 25, 2005). Stockoptions made Mr. Reyes a very rich man, and he will need some of that wealth to pay his attor- neys to try to keep him out of jail, Components of Shareholders' Equity in a Corporation-Contributed Capital Every business has owners. As you learned in Chapter 1, there are three general forms of business organization. 1. Sole proprietorships 2. Partnerships 3. Corporations No matter which form a business takes, it needsmoney-contributions-from the owners to operate. With sole proprietorships and partnerships,individual owners use their own money or borrow money from family, friends, or banks. Corporations have access to more money because they sell stocks to investors. In this chapter, we will focus on how the firm acquiresand accounts for money from owners.
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