Stock dividends and stock splits stock dividends are

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______________________________________________________________________________ _____________________________________________________________________________ Stock Dividends and Stock Splits Stock dividends are new shares of stock that are distributed to the company’s current shareholders. If a corporation wants to pay a dividend, but does not have sufficient cash on hand, it can issue a stock dividend. Accounting for stock dividends: a. Retained earnings is decreased. b. Contributed capital is increased. Asset s = Liabilitie s + Stockholders’ Equity Revenu e - Expense s = Net Income Contributed Capital Retained Earnings = + $50,000 Common Stock (50,000) Retained Earnings 0 - = Stock splits are the division of the current shares of stock by a specific number to increase the number of shares. Accounting for stock splits: a. The number of shares of stock increases. b. The par value decreases. Chapter 8 Handout, Page 5 of 8
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c. ______________________ entry is recorded in the accounting system to reflect a stock split. Different than a stock dividend because ________ new shares are issued. One reason for a stock split is to lower the ______________________________ of the stock. RETAINED EARNINGS Retained earnings represent the amount of all of the earnings of the firm that have NOT been distributed. May be called earned capital. Includes: a. Profits since the day the company began b. Minus losses since the day the company began c. Minus dividends paid to stockholders since the company began Ratio Analysis Return on Equity measures how well a company produces income with the amount of investment the common shareholders have made in the company. This ratio is only meaningful in comparison with other companies, industry standards, or other years. Return on equity = (Net Income - Preferred Dividends) / Average Common Shareholders’ Equity The financial statements of the XYZ Co. reported the following information at the end of 2012: 2012 2011 Net income $20,000 $22,500 Interest expense 5,000 6,000 6% Preferred stock 25,000 25,000 Common stock, $1 par, 50,000 shares issued and outstanding 50,000 50,000 Retained earnings 45,000 40,000 Total assets 210,000 190,000 Example 9: XYZ declared and paid $13,500 and $10,000 to the common stockholders in 2012 and 2011, respectively. What is the return on equity for 20X2? Return on equity = ____________________________________________________________________ Earnings Per Share (EPS) is a calculation of how much of the company’s earnings are left per common share. Analysts and investors use current earnings to predict future dividends and stock prices. This ratio is required to be calculated and presented on the financial statements of all public companies. Basic EPS = (Net Income – Preferred Dividends) Weighted Average # of Common Shares Outstanding Example 10: What is the Basic EPS for XYZ Co. for 2012 given the information above? Basic EPS __________________________________________________________________ Chapter 8 Handout, Page 6 of 8
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Diluted EPS is based on a “what-if” assumption. What if all of the potential securities that could have been converted into common stock actually had converted to common stock at year end? These calculations are complex and beyond the scope of this course.
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