- 1. Slide 1-1Chapter11STOCKHOLDERS EQUITY: PAID-IN
CAPITALMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002
2. Slide 1-2Corporations Corporations An entity An entity
created by law. created by law. Existence is Existence is separate
from separate from owners. owners. Has rights and Has rights and
privileges. privileges. McGraw-Hill/IrwinOwnership can bePrivately,
or Closely, HeldPublicly Held The McGraw-Hill Companies, Inc., 2002
3. Slide 1-3Advantages of Incorporation Advantages of Incorporation
Limited personal Limited personal liability for liability for
stockholders. stockholders. Transferability of Transferability of
ownership. ownership. Professional Professional management.
management. Continuity of Continuity of existence. existence.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 4. Slide
1-4Disadvantages of Incorporation Disadvantages of Incorporation
Heavy taxation. Heavy taxation. Greater regulation. Greater
regulation. Cost of formation. Cost of formation. Separation of
Separation of ownership and ownership and management. management.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 5. Slide
1-5Publicly Owned Corporations Face Publicly Owned Corporations
Face Different Rules Different Rules By LAW, publicly owned By LAW,
publicly owned corporations must: corporations must: Prepare
financial statements Prepare financial statements in accordance
with GAAP. in accordance with GAAP. Have their financial statement
Have their financial statement audited by an independent audited by
an independent CPA. CPA. Comply with federal securities Comply with
federal securities laws. laws. Submit financial information Submit
financial information for SEC review. for SEC
review.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 6.
Slide 1-6Formation of a Corporation Formation of a Corporation Each
corporation isformed according to the laws of the state where it is
located. The application for corporate status is called the
Articles of Incorporation.McGraw-Hill/IrwinThe costs associated
with The costs associated with incorporation are usually
incorporation are usually expensed immediately, but expensed
immediately, but amortized over 5 years for amortized over 5 years
for tax purposes. tax purposes. The McGraw-Hill Companies, Inc.,
2002 7. Slide 1-7Rights of Stockholders Rights of Stockholders
Voting (in person or by proxy). Right s
StockholdersMcGraw-Hill/IrwinProportionate distribution of
dividends. Proportionate distribution of assets in a liquidation.
The McGraw-Hill Companies, Inc., 2002 8. Slide 1-8Rights of
Stockholders Rights of StockholdersC o r p o r a t e O r g a n iz a
t io n C h a r t Stockholder Stockholder Ultimate Ultimate ledgers
are often ledgers are often control control maintained by a
maintained by a stock transfer stock transfer agent or stock agent
or stock registrar. registrar.S t o c k h o ld e r sStockholders
Stockholders usually meet usually meet once a year. once a year.B o
a r d o f D ir e c t o r s P r e s id e n tS e c re ta ry
McGraw-Hill/IrwinT re a s u re rC o n t r o lle rO t h e r V ic e P
r e s id e n t s The McGraw-Hill Companies, Inc., 2002 9. Slide
1-9Rights of Stockholders Rights of Stockholders Each unit of
ownership is called a share of stock. A stock certificate serves as
proof that a stockholder has purchased shares.McGraw-Hill/Irwin The
McGraw-Hill Companies, Inc., 2002 10. Slide 1-10Rights of
Stockholders Rights of Stockholders When the stock is sold, the
stockholder signs a transfer endorsement on the back of the stock
certificate.McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002
11. Slide 1-11Functions of the Board of Directors Functions of the
Board of DirectorsC o r p o r a t e O r g a n iz a t io n C h a r t
S t o c k h o ld e r s Selected by a Selected by a vote of the vote
of the stockholders stockholdersB o a r d o f D ir e c t o r
sOverall Overall responsibility responsibility for managing for
managing the company. the company.P r e s id e n t S e c re ta ry
McGraw-Hill/IrwinT re a s u re rC o n t r o lle rO t h e r V ic e P
r e s id e n t s The McGraw-Hill Companies, Inc., 2002 12. Slide
1-12Functions of the Corporate Officers Functions of the Corporate
OfficersC o r p o r a t e O r g a n iz a t io n C h a r t
Contractual and legal Contractual and legal representation
representation Custodian of Custodian of funds fundsS t o c k h o
ld e r s B o a r d o f D ir e c t o r sChief Chief Accountant
AccountantP r e s id e n t S e c re ta ry McGraw-Hill/IrwinT re a s
u re rC o n t r o lle rO t h e r V ic e P r e s id e n t s The
McGraw-Hill Companies, Inc., 2002 13. Slide 1-13Paid-In Capital of
a Corporation Paid-In Capital of a Corporation S to c k h o ld e r
s ' e q u ity is in c r e a s e d in tw o w a y s .C o n tr ib u
tio n s b y in v e s to r s in e x c h a n g e fo r c a p ita l s
to c k .R e te n tio n o f p r o fits e a rn e d b y th e c o r p o
r a tio n .P a id -in C a p ita lR e ta in e d E a r n in g
sMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 14. Slide
1-14Authorization and Issuance of Authorization and Issuance of
Capital Stock Capital Stock Authorized Authorized Shares
SharesMcGraw-Hill/IrwinThe maximum number of shares of capital
stock that can be sold to the public. The McGraw-Hill Companies,
Inc., 2002 15. Slide 1-15Authorization and Issuance of
Authorization and Issuance of Capital Stock Capital Stock
Authorized Authorized Shares SharesUsually Usually shares are
shares are sold sold through an through an underwriter.
underwriter. McGraw-Hill/IrwinIssued shares are authorized shares
of stock that have been sold.Unissued shares are authorized shares
of stock that never have been sold. The McGraw-Hill Companies,
Inc., 2002 16. Slide 1-16Authorization and Issuance of
Authorization and Issuance of Capital Stock Capital Stock
Outstanding shares are issued shares that are owned by
stockholders.Authorized Authorized Shares SharesIssued Issued
Shares SharesOutstanding Shares Treasury
SharesMcGraw-Hill/IrwinUnissued Shares Treasury shares are issued
shares that have been reacquired by the corporation. The
McGraw-Hill Companies, Inc., 2002 17. Slide 1-17Stockholders Equity
Stockholders Equity Par value is an arbitrary amount assigned to
each share of stock when it is authorized. Market price is Market
price is the amount that the amount that each share of each share
of stock will sell stock will sell for in the for in the market.
market. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 18.
Slide 1-18Stockholders Equity Stockholders Equity Common stock can
be issued in three forms: Common stock can be issued in three
forms: Par Value Par Value Common Common Stock StockNo-Par No-Par
Common Common Stock StockStated Value Stated Value Common Common
Stock StockLets examine Lets examine this form of this form of
stock. stock.All proceeds All proceeds credited to credited to
Common Stock Common StockTreated like Treated like par value par
value common stock common stockMcGraw-Hill/Irwin The McGraw-Hill
Companies, Inc., 2002 19. Slide 1-19Issuance of Par Value Stock
Issuance of Par Value Stock Record: Record: The cash received. The
cash received. The number of shares issued the par value The number
of shares issued the par value per share in the Common Stock
account. per share in the Common Stock account. The remainder is
assigned to Contributed The remainder is assigned to Contributed
Capital in Excess of Par. Capital in Excess of Par.Prepare the
journal entry to record an issuance Prepare the journal entry to
record an issuance of 10,000 shares of $2 par value stock for $25
of 10,000 shares of $2 par value stock for $25 per share which
occurred on September 1, 2003. per share which occurred on
September 1, 2003. McGraw-Hill/Irwin The McGraw-Hill Companies,
Inc., 2002 20. Slide 1-20Issuance of Par Value Stock Issuance of
Par Value Stock The journal entry to record an issuance of 10,000
The journal entry to record an issuance of 10,000 shares of $2 par
value stock for $25 per share on shares of $2 par value stock for
$25 per share on September 1, 2003, should include a credit to
September 1, 2003, should include a credit to common stock for the
par value of the shares common stock for the par value of the
shares issued. issued.McGraw-Hill/Irwin The McGraw-Hill Companies,
Inc., 2002 21. Slide 1-21Issuance of Par Value Stock Issuance of
Par Value StockMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc.,
2002 22. Slide 1-22Preferred Stock Preferred Stock A separate class
of stock, typically having priority over A separate class of stock,
typically having priority over common shares in ...... common
shares in Dividend distributions (rate is usually stated). Dividend
distributions (rate is usually stated). Distribution of assets in
case of liquidation. Distribution of assets in case of
liquidation.Other Features Include: Cumulative Cumulative dividend
dividend rights. rights. McGraw-Hill/IrwinUsually Usually callable
by callable by the company. the company.Normally has Normally has
no voting no voting rights. rights. The McGraw-Hill Companies,
Inc., 2002 23. Slide 1-23Cumulative Preferred Stock Cumulative
Preferred Stock Cumulative Dividends in Dividends in arrears must
be arrears must be paid before paid before dividends may be
dividends may be paid on common paid on common stock.
stock.McGraw-Hill/IrwinVs.Noncumulative Undeclared Undeclared
dividends from dividends from current and prior current and prior
years do not have years do not have to be paid in future to be paid
in future years. years. The McGraw-Hill Companies, Inc., 2002 24.
Slide 1-24Stock Preferred as to Dividends Stock Preferred as to
Dividends Example: Consider the following partial Statement of
Stockholders Equity.During 2002, the directors declare cash
dividends of $5,000. In year 2003, the directors declare cash
dividends of $42,000. McGraw-Hill/Irwin The McGraw-Hill Companies,
Inc., 2002 25. Slide 1-25Stock Preferred as to Dividends Stock
Preferred as to Dividends Example: Consider the following partial
Statement of Stockholders Equity.During 2000, the directors declare
cash dividends of $5,000. In year 2001, the directors declare cash
dividends of $42,000. McGraw-Hill/Irwin The McGraw-Hill Companies,
Inc., 2002 26. Slide 1-26Convertible Preferred Stock Convertible
Preferred Stock IIjust converted 100 just converted 100 shares of
preferred stock shares of preferred stock into 1,000 shares of into
1,000 shares of common stock and ended common stock and ended up
with a higher dividend up with a higher dividend yield! yield!Gee,
II cant Gee, cant do that with do that with MY preferred MY
preferred stock! stock!Some preferred stock is convertible into
shares of common stock. McGraw-Hill/Irwin The McGraw-Hill
Companies, Inc., 2002 27. Slide 1-27Preferred Stock Preferred
StockMcGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 28.
Slide 1-28Stock Issued for Assets Other Than Stock Issued for
Assets Other Than Cash Cash Companies sometimes issue Companies
sometimes issue stock in exchange for nonstock in exchange for
noncash assets. cash assets.Since no cash is received, Since no
cash is received, record the transaction at the record the
transaction at the market value of the goods or market value of the
goods or services received. services received. McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002 29. Slide 1-29I love this
stuff! Can we do some more? McGraw-Hill/Irwin The McGraw-Hill
Companies, Inc., 2002 30. Slide 1-30Market Value Market
ValueAccounting by Accounting by the issuer. the issuer.Common
stock is Common stock is carried at original issue carried at
original issue price. price.Accounting by Accounting by the
investor. the investor.Investments in Investments in marketable
securities marketable securities are carried at market are carried
at market value. value.McGraw-Hill/Irwin The McGraw-Hill Companies,
Inc., 2002 31. Slide 1-31Market Price of Preferred Stock Market
Price of Preferred Stock Factors affecting market price Factors
affecting market price of preferred stock: of preferred stock:
Dividend rate Dividend rate Risk Risk Level of interest rates Level
of interest ratesMcGraw-Hill/IrwinThe return based on The return
based on the market value is the market value is called the
dividend called the dividend yield. yield. The McGraw-Hill
Companies, Inc., 2002 32. Slide 1-32Market Price of Common Stock
Market Price of Common Stock Factors affecting Factors affecting
market price of market price of common stock: common stock:
Investors Investors expectations of expectations of future
profitability. future profitability. Risk that this level Risk that
this level of profitability will of profitability will not be
achieved. not be achieved. McGraw-Hill/IrwinChanges in market value
Changes in market value have no impact on the have no impact on the
books of the issuer. books of the issuer. The McGraw-Hill
Companies, Inc., 2002 33. Slide 1-33Stock Splits Stock Splits
Companies use stocksplits to reduce market price. Outstanding
shares increase, but par value is decreased
proportionately.McGraw-Hill/IrwinIce Cream Parlor Banana Splits On
Sale Now The McGraw-Hill Companies, Inc., 2002 34. Slide 1-34Stock
Splits -- Example Stock Splits Example Assume that a corporation
had 5,000 shares of $1 par value common stock outstanding before a
2for1 stock split.Increase Decrease No Change McGraw-Hill/Irwin The
McGraw-Hill Companies, Inc., 2002 35. Slide 1-35Treasury Stock
Treasury Stock No voting or dividend rightsContra equity
accountTreasury Treasury shares are shares are issued issued shares
that shares that have been have been reacquired reacquired by the
by the corporation. corporation.When stock is reacquired, the
corporation When stock is reacquired, the corporation records the
treasury stock at cost. records the treasury stock at cost.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002 36. Slide
1-36Treasury Stock -- Example Treasury Stock Example On May 1,
2003, East Corp. reacquired 3,000 shares of its common stock at $55
per share. Prepare the journal entry for May 1.McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002 37. Slide 1-37Treasury Stock
-- Example Treasury Stock Example On December 3, 2003, East Corp.
reissued 1,000 shares of the stock at $75 per share. Prepare the
journal entry for December 3. 1,000 shares $75 = $75,000 1,000
shares $75 = $75,0001,000 shares $55 cost = $55,000 1,000 shares
$55 cost = $55,000 McGraw-Hill/Irwin The McGraw-Hill Companies,
Inc., 2002 38. Slide 1-38Stockholders Equity -- Presentation
Stockholders Equity PresentationMcGraw-Hill/Irwin The McGraw-Hill
Companies, Inc., 2002 39. Slide 1-39End of Chapter 11 End of
Chapter 11 This isnt what I meant when I asked for stock for my
birthday!McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.,
2002
