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Wild Chapter 11McGraw-Hill/Irwin
*
In this chapter we will learn about various aspects of a
corporation and accounting for equity items.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
C2: Describe the components of stockholders’ equity
C3: Explain characteristics of common and preferred stock
C4: Explain the items reported in retained earnings
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
A2: Compute price-earnings ratio and describe its use in
analysis
A3: Compute dividend yield and explain its use in analysis
A4: Compute book value and explain its use in analysis
Analytical Learning Objectives
McGraw-Hill/Irwin
P2: Record transactions involving cash dividends
P3: Account for stock dividends and stock splits
P4: Distribute dividends between common stock and preferred
stock
P5: Record purchases and sales of treasury stock and the retirement
of stock
Procedural Learning Objectives
McGraw-Hill/Irwin
Has rights and privileges
*
Corporations are entities created by law that exist separately from
their owners and that have rights and privileges. Corporations may
be privately or publicly owned. Publicly owned corporations have
additional reporting responsibilities beyond those of a privately
held corporation.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Advantages
Ease of capital accumulation
*
The corporate form of organization has several advantages. It is a
separate legal entity that can enter into contracts and sue and be
sued. Stockholders’ losses are limited to the amount invested in
the corporation. Ownership rights are transferable. The corporation
continues in existence even when ownership changes. Stockholders
are not agents of the corporation and can not enter into contracts
on the corporation’s behalf. Capital needs can be met by selling
more ownership in the corporation.
Two disadvantages include extra governmental regulations imposed on
corporations and corporate taxation of earnings. Corporations pay
taxes on their earnings and then if they distribute a dividend to
stockholders, the stockholders pay taxes on the dividends received.
This is sometimes referred to as double taxation.
© The McGraw-Hill Companies, Inc., 2010
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Stockholders
Employees of the Corporation
*
Ultimate control of a corporation rests with the stockholders who
elect the Board of Directors. In turn, the members of the board of
directors hire the executive officers of the corporation. Finally,
officers of the corporation empower others to hire needed
employees. Employees, officers, and members of the board of
directors may also be owners of the corporation.
© The McGraw-Hill Companies, Inc., 2010
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Selected by a vote of the stockholders.
Overall responsibility for managing the company.
*
At their annual meeting, stockholders elect the Board of Directors
and vote on important management issues facing the company. The
Board of Directors has the ultimate responsibility for managing the
company. The executive management team manages the day-to-day
decisions for the corporation.
5.bin
McGraw-Hill/Irwin
Receive dividends, if any
Share equally in any assets remaining after creditors are paid in a
liquidation
Rights of Stockholders
*
In addition to voting on important issues at annual meetings,
stockholders have the right to buy and sells shares of stock, to
receive dividends when declared by the board of directors, and in
the event of liquidation, they share equally in any remaining
assets after creditors are paid.
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Each unit of ownership is called a share of stock.
A stock certificate serves as proof that a stockholder has
purchased shares.
Stock Certificates and Transfer
When the stock is sold, the stockholder signs a transfer
endorsement on the back of the stock certificate.
C 1
Part I
On the right side of your screen is a copy of a stock certificate
for AT&T. The share certificate is proof of ownership in
AT&T.
Part II
When stock is sold, the seller signs a transfer endorsement on the
back of the stock certificate.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Basics of Capital Stock
Total amount of stock that a corporation’s charter authorizes it to
sell.
C 2
*
Corporations must disclose information related to their stock, such
as par value and number of shares authorized and issued. The
corporate charter determines the number of shares of stock the
corporation is authorized to sell.
Sheet1
Common Stock, par value $.01; authorized 250,000,000 shares; issued
92,556,295 shares in 2010; 111,015,133 shares in 2009
$925,563
$1,110,151
&A
McGraw-Hill/Irwin
C 2
*
We can also find the number of shares actually issued by the
company. In our example, the company had issued a total of ninety
two million, five hundred fifty-six thousand, two hundred
ninety-five shares by the end of 2010. Notice that this common
stock has a par value of one cent. Low par values are normal in
business. Let’s look at the meaning of par value.
Sheet1
Common Stock, par value $.01; authorized 250,000,000 shares; issued
92,556,295 shares in 2010; 111,015,133 shares in 2009
$925,563
$1,110,151
&A
McGraw-Hill/Irwin
Par value is an arbitrary amount assigned to each share of stock
when it is authorized.
Market price is the amount that each share of stock will sell for
in the market.
Selling (Issuing) Stock
*
Par value is an arbitrary amount assigned to each share of stock in
the corporate charter. Par value is typically a nominal amount, and
is not related in any manner to market value which is the selling
price of a share of stock.
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McGraw-Hill/Irwin
*
In addition to par value stock, some states permit no-par, stated
value common stock, or no par value common stock.
Let’s see how these 3 classes of stock work.
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Par Value Stock
On September 1, Matrix, Inc. issued 100,000 shares of $2 par value
stock for $25 per share. Let’s record this transaction.
Record:
The cash received.
The number of shares issued × the par value per share in the Common
Stock account.
The remainder is assigned to Paid-In Capital in Excess of Par
Value, Common Stock.
Issuing Par Value Stock
*
When par value stock is sold for cash, the Common Stock account is
credited for the par value of the stock sold. Remember that par
value and market value are not related. The difference between the
par value of the stock and the market value of the stock is
credited to Contributed Capital in Excess of Par. If you added
together the amount of par value in the Common Stock account and
the amount in the Paid-In Capital in Excess of Par, Common Stock,
you would have the market value of the sale of the stock.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Par Value Stock
On September 1, Matrix, Inc. issued 100,000 shares of $2 par value
stock for $25 per share. Let’s record this transaction.
P1
Part I
Let’s record the entry for Matrix Incorporated for the issue of one
hundred thousand shares of two dollar par value stock for twenty
five dollars in cash.
Part II
Matrix would debit Cash for the market value of the stock sold: one
hundred thousand shares times twenty-five dollars per share. Matrix
would credit Common Stock for the par value of the share sold: one
hundred thousand shares times two dollars per share. And, they
would credit Paid-In Capital in Excess of Par Value, Common Stock,
for the excess of market over par: one hundred thousand shares
times twenty-three dollars per share.
Larson
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200,000
2,300,000
T- Account
Company Name
Financial Statement
McGraw-Hill/Irwin
*
This is the way Matrix would report the common stock on its balance
sheet. The two hundred thousand dollars is the par value of the
stock sold and the two million, three hundred thousand dollars is
the excess over par value Matrix received for the stock. These two
amounts added together total two million, five hundred thousand
dollars, the amount of cash received for the sale of the
stock.
Sheet1
Stockholders' Equity
authorized; 100,000 shares issued and
outstanding
$ 200,000
2,300,000
McGraw-Hill/Irwin
Record:
The asset received at its market value.
The number of shares issued × the par value per share in the Common
Stock account.
The remainder is assigned to Paid-In Capital in Excess of Par,
Common Stock.
Issuing Stock for Noncash Assets
Par Value Stock
On September 1, Matrix, Inc. issued 100,000 shares of $2 par value
stock for land valued at $2,500,000. Let’s record this
transaction.
P1
*
A similar situation occurs when par value stock is exchanged for
noncash assets. The Common Stock account is credited for the par
value of the stock sold. The difference between the par value of
the stock and the market value of the assets received is credited
to Contributed Capital in Excess of Par. If you added together the
amount of par value in the Common Stock account and the amount in
the Paid-In Capital in Excess of Par, Common Stock, you would have
the market value of the assets received.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Par Value Stock
On September 1, Matrix, Inc. issued 100,000 shares of $2 par value
stock for land valued at $2,500,000. Let’s record this
transaction.
P1
Part I
Let’s record the entry for Matrix Incorporated for the issue of one
hundred thousand shares of two dollar par value stock for land
valued at two million, five hundred thousand dollars.
Part II
Matrix would debit Land for its market value. Matrix would credit
Common Stock for the par value of the share sold: one hundred
thousand shares times two dollars a share. And, they would credit
Paid-In Capital in Excess of Par Value, Common Stock, for the
excess of land’s market value in excess of the par value.
Larson
Dr
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200,000
2,300,000
T- Account
Company Name
Financial Statement
McGraw-Hill/Irwin
A separate class of stock, typically having priority over common
shares in . . .
Dividend distributions
Usually has a stated dividend rate
Normally has no voting rights
Preferred Stock
C 3
*
Preferred stock is a separate class of stock that typically has
priority over common stock in dividend distributions and
distribution of assets in a liquidation.
Preferred stock usually has a stated dividend that is expressed as
a percentage of its par value. It normally does not have voting
rights.
© The McGraw-Hill Companies, Inc., 2010
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Dividends in arrears must be paid before dividends may be paid on
common stock.
Undeclared dividends from current and
prior years do not have to be paid in future years.
Cumulative or Noncumulative Dividend
P4
Noncumulative
Cumulative
Vs.
*
Cumulative preferred stockholders have the right to be paid both
the current and all prior periods’ unpaid dividends before any
dividends are paid to common stockholders. When the preferred stock
is cumulative and the directors do not declare a dividend to
preferred stockholders, the unpaid dividend is called a dividend in
arrears and must be disclosed in the financial statements.
Noncumulative preferred stock has no rights to prior periods’
dividends if they were not declared in those prior periods.
Let’s look at an example.
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Example: Consider the following Stockholders’ Equity Section of the
Balance Sheet
The Board of Directors did not declare or pay dividends in 2009. In
2010, the Board of Directors declare and pay cash dividends of
$42,000.
Cumulative or Noncumulative Dividend
*
This company has both common stock and preferred stock. The
directors did not declare a dividend in 2009. In 2010, the
directors declare and pay cash dividends of forty-two thousand
dollars.
Let’s see how this dividend is distributed if the preferred stock
is cumulative and if it is noncumulative.
Sheet1
authorized, issued and outstanding
shares authorized, issued and outstanding
100,000
McGraw-Hill/Irwin
*
If the preferred stock is noncumulative, these stockholders have no
rights to the missed dividends of the year 2009. However, they get
first distribution of the dividends declared in 2010. The dividend
for the preferred stock in 2010 is calculated as follows: one
hundred dollar par value times nine percent times one thousand
shares. Since forty two thousand dollars in dividends were
declared, preferred would first get their nine thousand dollars,
and the remaining thirty three thousand dollars would be divided
evenly among the common stockholders.
If the preferred stock is cumulative, these stockholders have
rights to the missed dividends of 2009 in addition to the dividend
in 2010. The preferred stockholders first get a distribution of
nine thousand dollars for the missed dividends of 2009. Then they
get another nine thousand dollars for the dividend in 2010. Since
forty two thousand dollars in dividends were declared, preferred
would first get their eighteen thousand dollars and the remaining
twenty four thousand dollars would be divided evenly among the
common stockholders.
Larson
2,300,000
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
Dividends may exceed a stated amount once common stockholders
receive a dividend equal to the preferred stated rate.
Dividends are limited to a maximum amount each year. The maximum is
usually the stated dividend rate.
Participating or Nonparticipating Dividend
P4
Vs.
Nonparticipating
Participating
*
An additional preference for preferred stock is participation in
dividends if they are declared above certain limits. This
participation feature does not apply until common stockholders
receive dividends equal to the preferred stock’s dividend percent.
This is not a common preference seen in practice.
© The McGraw-Hill Companies, Inc., 2010
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To raise capital without sacrificing control
To boost the return earned by common stockholders through financial
leverage
To appeal to investors who may believe the common stock is too
risky or that the expected return on common stock is too low
P4
*
Corporations may issue preferred stock to be able to raise needed
capital without sacrificing control since preferred stock has no
voting rights. Issuing preferred stock is a way to boost return to
common stockholders. It is also a way to increase ownership in the
company if the common stock is perceived as too risky or has a
lower than expected return.
© The McGraw-Hill Companies, Inc., 2010
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A sufficient balance in retained earnings and
The cash necessary to pay the dividend.
Cash Dividends
*
To pay a cash dividend, a corporation must have two things:
Sufficient retained earnings to absorb the dividend without
creating a deficit and
Enough cash to pay the dividend.
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Regular cash dividends provide a return to investors and almost
always affect the stock’s market value.
Cash Dividends
*
Stockholders receive a return on their investment in two ways: one
is through increases in the market value of the stock and one is
through cash dividends.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
There are three important dates to remember when discussing
dividends:
The date of declaration is the date the directors declare the
dividend. At this time, a
liability is created and must be recorded.
The date of record is important because you must own the stock on
this date to
receive the dividend. No entry is required in the accounting
records.
The date of payment is the date the corporation pays the dividend
to the
stockholders who owned the stock on the record date.
Let’s look at an example.
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McGraw-Hill/Irwin
Dividends
On January 19, a $1 per share cash dividend is declared on Dana,
Inc.’s 10,000 common shares outstanding. The dividend will be paid
on March 19 to stockholders of record on February 19.
Entries for Cash Dividends
*
Dana Incorporated declared a one dollar per share dividend on
January 19th on its ten thousand common shares outstanding. The
entry on January 19th includes a debit to Retained Earnings and a
credit to Common Dividend Payable of ten thousand dollars.
Larson
Dr
Cr
T- Account
Company Name
Financial Statement
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
Entries for Cash Dividends
On January 19, a $1 per share cash dividend is declared on Dana,
Inc.’s 10,000 common shares outstanding. The dividend will be paid
on March 19 to stockholders of record on February 19.
No entry required on February 19.
P2
*
On February 19th, the record date, we need to know who owns the
stock, but an accounting entry is not needed.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Entries for Cash Dividends
On January 19, a $1 per share cash dividend is declared on Dana,
Inc.’s 10,000 common shares outstanding. The dividend will be paid
on March 19 to stockholders of record on February 19.
P2
*
On March 19th, the payment date, Dana Incorporated would debit
Common Dividend Payable and credit Cash for the ten thousand dollar
dividend.
Larson
Dr
Cr
T- Account
Company Name
Financial Statement
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
Created when a company incurs cumulative losses or pays dividends
greater than total profits earned in other years.
Deficits and Cash Dividends
*
A deficit in Retained Earnings occurs when a company incurs
cumulative losses and or pays dividends greater than cumulative
profits earned in other years. Most states have laws that prohibit
corporations with a deficit from declaring dividends.
When there is a deficit in Retained Earnings, the account has a
debit balance and is subtracted in the equity section of the
balance sheet.
Sheet1
December 31, 2010
$ 100,000
McGraw-Hill/Irwin
The corporation distributes additional shares of its own stock to
its stockholders without receiving any payment in return.
Stock Dividends
price on the stock affordable.
Can provide evidence of
management’s confidence that
P3
*
Sometimes corporations will distribute additional shares of stock
as a dividend. Reasons for doing this include keeping the market
price affordable by increasing the number of shares outstanding and
providing evidence of management’s confidence in the company.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Distribution is £ 25% of the previously outstanding shares.
Capitalize retained earnings for the market value of the shares to
be distributed.
Stock Dividends
Distribution is > 25% of the previously outstanding
shares.
Capitalize retained earnings for the minimum amount required by
state law, usually par or stated value of the shares.
P3
*
A stock dividend can be classified as small or large. A small stock
dividend is a distribution of stock that is less than or equal to
twenty five percent of the outstanding shares. A large stock
dividend is a distribution of stock that is greater than twenty
five percent of the outstanding shares.
Let’s look at the entries to record a small and large stock
dividend.
© The McGraw-Hill Companies, Inc., 2010
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Here is the stockholders’ equity section of Quest’s balance sheet
prior to the declaration of a small stock dividend.
Recording a Small Stock Dividend
P3
*
Here is the equity section for Quest Incorporated prior to a small
stock dividend.
Sheet1
250,000 shares authorized,
$ 100,000
8,000
McGraw-Hill/Irwin
On December 31, 2010, Quest declared a 2% stock dividend, when the
stock was selling for $10 per share. The stock will be distributed
to stockholders on January 20, 2011. Let’s make the December 31
entry.
Recording a Small Stock Dividend
100,000 × 2% = 2,000 × $10 = $20,000
2,000 × $1 par = $2,000
*
Quest declares a two percent stock dividend. The stock was selling
for ten dollars a share. On the declaration date, Quest would debit
Retained Earnings for the number of shares declared times the
market value of the stock. In this example, that amount is twenty
thousand dollars. The account Common Stock Dividend Distributable
is credited for the par value of the shares declared. In this
example, that amount is two thousand dollars. The excess is
credited to Contributed Capital in Excess of Par Value. In this
example, that amount is eighteen thousand dollars.
Larson
Dr
Cr
T- Account
Company Name
Financial Statement
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
*
Comparing Quest’s equity section before and after the stock
dividend shows that the Common Stock dividend Distributable account
is reported with the common stock and the Contributed Capital in
Excess of Par Value is reported as additional paid in capital.
Retained Earnings also decreased based on the previous entry.
Sheet1
December 31, 2010
250,000 shares authorized,
$ 100,000
2,000
$ 102,000
26,000
December 31, 2010
250,000 shares authorized,
$ 100,000
8,000
McGraw-Hill/Irwin
Router, Inc. shows the following stockholders’ equity section just
prior to issuing a large stock dividend.
Recording a Large Stock Dividend
P3
*
Here is the equity section for Router Incorporated prior to a large
stock dividend.
Sheet1
December 31, 2010
200,000 shares authorized,
$ 50,000
75,000
McGraw-Hill/Irwin
On December 31, 2010, Router declared a 40% stock dividend, when
the stock was selling for $8 per share. It is often required by law
that large stock dividends be capitalized at par value per
share.
50,000 × 40% = 20,000 shares × $1 par value = $20,000
Recording a Large Stock Dividend
P3
*
Router declares a forty percent stock dividend. On the declaration
date, Router would debit Retained Earnings for the number of shares
declared times the par value of the stock. In this example, that
amount is twenty thousand dollars. The account Common Stock
Dividend Distributable is credited for the par value of the shares
declared. In this example, that amount is twenty thousand
dollars.
Larson
Dr
Cr
T- Account
Company Name
Financial Statement
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
A distribution of additional shares of stock to stockholders
according to their percent ownership.
Common Stock
*
A stock split is the distribution of additional shares of stock to
stockholders according to their percent ownership. When a stock
split occurs, the corporation calls in the outstanding shares and
issues new shares of stock. In the process of a stock split, the
par value of the stock changes.
Let’s look at an example.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
After the 2-for-1 split the stockholders’ equity section of the
balance sheet looks like this:
No accounting
*
After the split, the number of shares doubled and the par value was
cut in half. Notice that an accounting entry is not required, and
that Retained Earnings is not reduced.
In many respects a one hundred percent stock dividend and a
two-for-one stock split result in similar impacts in the stock
market. The stock split usually requires more administrative tasks
to call in and reissue stock certificates. However, sometimes
corporations do not reissue certificates in a stock split, saving
some of the administrative costs.
Sheet1
100,000 shares authorized,
$ 250,000
300,000
McGraw-Hill/Irwin
On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in
the open market for $8,000.
Purchasing Treasury Stock
stockholders’ equity on the balance sheet.
P5
*
On May 8th, Whitt Incorporated purchased two thousand of its own
shares in the market for eight thousand dollars.
The entry on May 8th includes a debit to Treasury Stock and a
credit to Cash for eight thousand dollars, which is the amount of
the purchase.
The Treasury Stock would be reported on the balance sheet in the
equity section as a reduction from total equity.
Larson
Cr
Dr
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
On June 30, Whitt sold 100 shares of its treasury stock for $4 per
share.
Selling Treasury Stock at Cost
$8,000 ÷ 2,000 shares = $4 cost per treasury share
P5
*
On June 30th, Whitt sold one hundred shares of the treasury stock
for four dollars per share.
This entry would include a debit to Cash and a credit to Treasury
Stock for four hundred dollars.
This was a nice clean entry because we sold the treasury stock for
its original cost of four dollars per share.
Let’s see what happens when the selling price of the treasury stock
is different than the cost.
Larson
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for $4 per share
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
On July 19, Whitt, Inc. sold an additional 500 shares of its
treasury stock for $8 per share.
Selling Treasury Stock Above Cost
P5
*
On July 19th, Whitt sold five hundred shares of the treasury stock
for eight dollars per share. Remember that the original cost of the
treasury stock was four dollars per share.
This entry would include a debit to Cash for four thousand dollars.
The credit Treasury Stock is for two thousand dollars. This is the
original cost of four dollars per share times the five hundred
shares sold. The difference between the selling price and the cost
of the treasury stock is credited to Contributed Capital. In this
example, that amount is two thousand dollars.
Now, let’s see what happens if we sell treasury stock for less than
its original cost.
Sheet1
Shares
T- Account
Company Name
Financial Statement
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
On August 27, Whitt sold an additional 400 shares of its treasury
stock for $1.50 per share.
Selling Treasury Stock
*
On August 27th, Whitt sold four hundred shares of the treasury
stock for one dollar and fifty cents per share. Remember that the
original cost of the treasury stock was four dollars per
share.
This entry would include a debit to Cash for six hundred dollars.
The credit to Treasury Stock is for one thousand, six hundred
dollars. This is the original cost of four dollars per share times
the four hundred shares sold. The difference between the selling
price and the cost of the treasury stock is debited to Contributed
Capital. In this example, that amount is one thousand
dollars.
Sheet1
Shares
T- Account
Company Name
Financial Statement
Preferred
Common
Preferred
Common
$ 9,000
2.
McGraw-Hill/Irwin
The right to purchase common stock at a fixed price over a
specified period of time. As the stock’s price rises above the
fixed option price, the value of the option increases.
Option
purchase
*
Stock options give the owner the right to purchase common stock at
a fixed price over a specified period of time. As the stock’s price
rises above the fixed option price, the value of the option
increases.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Options are given to key employees to motivate them to:
focus on company performance,
remain with the company.
*
Corporations give stock options to motivate employees to focus on
the company’s stock performance, to take a long-run perspective,
and to remain with the company.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Total cumulative amount of reported net income less any net losses
and dividends declared since the company started operating.
Statement of Retained Earnings
*
The Statement of Retained Earnings is a summary of the activity
that occurred in Retained Earnings during the period. It begins
with the balance at the beginning of the period. If a company has
net income, it is added to the beginning retained earnings balance.
If a company has a net loss, then that would be subtracted. Any
dividends declared are subtracted to arrive at the ending Retained
Earnings balance.
Sheet1
Retained earnings, 1/1/10
McGraw-Hill/Irwin
Legal
Contractual
*
Retained earnings can have legal or contractual restrictions. In
most states, the corporate charters will not allow companies to
purchase treasury stock in excess of the balance in retained
earnings. Some loan agreements place restrictions on how much
dividends can be based on the balance in retained earnings.
Restrictions on retained earnings are generally disclosed in the
notes to the financial statements.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
A corporation’s directors can voluntarily limit dividends because
of a special need for cash such as the purchase of new
facilities.
Appropriated Retained Earnings
*
Directors can voluntarily limit the use of retained earnings. This
is called an appropriation. When there is an appropriation of
retained earnings, it is separately reported in the financial
statements and disclosed to inform users of special activities that
require funds.
Sheet1
Retained earnings, 1/1/10
McGraw-Hill/Irwin
Correction of material errors in past years’ financial statements.
If an amount is incorrectly expensed, add amount to Retained
Earnings.
Prior Period Adjustments
*
Prior period adjustments are corrections of errors that occurred in
prior periods’ financial statements. Prior period adjustments are
reported net of tax effects on the statement of retained
earnings.
Sheet1
$ 875,000
Prior period adjustment: Cost of equipment incorrectly expensed
(net of $28,000 income taxes)
72,000
947,000
McGraw-Hill/Irwin
Statement of Stockholders’ Equity
This is a more inclusive statement than the statement of retained
earnings.
C 4
*
Many companies issue a Statement of Stockholders’ Equity rather
than a simple Statement of Retained Earnings. The Statement of
Stockholders’ Equity is more inclusive and discloses changes in all
equity accounts, not just Retained Earnings.
Sheet1
(In millions)
Retained
Shares
Amount
Earnings
Total
821
$ 2,500
$ 9,500
$ 12,000
821
$ 2,740
$ 13,595
$ 16,335
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
McGraw-Hill/Irwin
Earnings per share is one of the most widely cited items of
accounting information.
Earnings Per Share
*
Earnings per share is one of the most widely used ratios. It is
calculated as net income minus preferred dividends divided by
weighted average common shares outstanding.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
This ratio reveals information about the stock market’s
expectations for a company’s future growth in earnings, dividends,
and opportunities.
If earnings go up,
will the market price
of my stock follow?
*
The Price Earnings Ratio reveals information about the stock
market’s expectation for a company’s future growth in earnings,
dividends, and opportunities. It is calculated as market value per
share divided by earnings per share.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Tells us the annual amount of cash dividends distributed to common
stockholders relative to the stock’s market price.
Dividend Yield
A 3
Market value per share
*
The Dividend Yield ratio provides the annual amount of cash
dividends distributed to common stockholders relative to the
stock’s market price. It is calculated as the annual cash dividend
per share divided by the market value per share.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Records amount of stockholders’ equity applicable to common shares
on a per share basis.
Book Value per Share—Common
A 4
*
The Book Value per Common Share ratio records the amount of
stockholders’ equity applicable to common shares on a per share
basis. It is calculated as stockholders’ equity applicable to
common shares divided by the number of common shares
outstanding.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
Records amount of stockholders’ equity applicable to preferred
shares on a per share basis.
Book Value per Share—Preferred
A 4
*
The Book Value per Preferred Share ratio records the amount of
stockholders’ equity applicable to preferred shares on a per share
basis. It is calculated as stockholders’ equity applicable to
preferred shares divided by the number of preferred shares
outstanding.
© The McGraw-Hill Companies, Inc., 2010
McGraw-Hill/Irwin
*
In this chapter we learned about various aspects of a corporation.
We learned about accounting issues related to common stock and
different types of preferred stock. We also learned about the
statement of retained earnings and how to account for restrictions
and appropriations.
Corporate Organization Chart
authorized 250,000,000 shares; issued
shares in 2009$925,563$1,110,151
authorized 250,000,000 shares; issued
shares in 2009$925,563$1,110,151
Paid-In Capital in
Sold and issued 100,000 shares of common stock
Stockholders' Equity with Common Stock
Stockholders' Equity
authorized; 100,000 shares issued and
outstanding200,000$
Retained earnings650,000
Paid-In Capital in
Common Stock
Common stock, $5 par value; 40,000 shares
authorized, issued and outstanding200,000$
shares authorized, issued and outstanding100,000
Total Paid-In capital300,000$
Year 2009:No dividends paid.-$ -$
Year 2009:No dividends paid.-$ -$
2.Pay 2010 preferred dividend.9,000
3.Remainder goes to common.24,000$
DrCr
Stockholders' Equity
(8,500)
91,500$
December 31, 2010
250,000 shares authorized,
Paid-In capital in excess of par value8,000
Total paid-in capital108,000$
Common stock - $1 par value,
250,000 shares authorized,
Common stock dividend distributable, 2,000 shares2,000
Total common stock issued and to be issued102,000$
Paid-in capital in excess of par value26,000
Total Paid-in capital128,000$
December 31, 2010
250,000 shares authorized,
Paid-in capital in excess of par value8,000
Total paid-in capital108,000$
December 31, 2010
200,000 shares authorized,
Paid-in capital in excess of par value75,000
Retained earnings100,000
December 31, 2010
Common stock - $5 par value,
100,000 shares authorized,
Paid-In capital in excess of par value300,000
Total Paid-In capital550,000
for $4 per share
SharesPer ShareTotal
Paid-in Captial, treasury stock
Retained earnings, 1/1/10875,000$
Plus: net income155,600
Less: dividends declared(80,000)
Retained earnings, 12/31/10950,600$
Appropriated retained earnings(450,000)
Unappropriated retained earnings500,600$
incorrectly expensed (net of $28,000 income taxes)72,000
Retained earnings, 12/31/09, as adjusted947,000
Plus: net income155,600
Less: dividends declared(80,000)
Retained earnings, 12/31/101,022,600$
(In millions)
Stock sales17 500 500
Cash dividends declared(150) (150)
Common stock and
Matrix, Inc.