Upload
ishmael-burks
View
52
Download
0
Embed Size (px)
DESCRIPTION
9. Sources of Capital: Owners’ Equity. Part One: Financial Accounting. The McGraw-Hill Companies, Inc., 1999. Forms of Business Organizations. Slide 9-1. Sole Proprietorship. Owned by an individual No incorporation fees No special reports - PowerPoint PPT Presentation
Citation preview
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Sources of Capital: Owners’ Equity
© The McGraw-Hill Companies, Inc., 1999
9Part One: Financial Accounting
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Forms of Business Organizations Slide 9-1
Owned by an individual
No incorporation fees
No special reports
Profits taxed at proprietor’s personal tax rate
Personally responsible for the entity’s debts
Borrow money as an individual
Owned by an individual
No incorporation fees
No special reports
Profits taxed at proprietor’s personal tax rate
Personally responsible for the entity’s debts
Borrow money as an individual
Sole Proprietorship
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Forms of Business Organizations Slide 9-2
Owned by two or more persons
Each partner is personally liable for all debts incurred by firm
Each partner is responsible for
business actions of other partners
Taxed as individuals
Owned by two or more persons
Each partner is personally liable for all debts incurred by firm
Each partner is responsible for
business actions of other partners
Taxed as individuals
Partnership
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Forms of Business Organizations Slide 9-3
Legal entity with essentially perpetual existence
Granted a charter to operate
Taxed as an entity
Limited liability to owners
Ownership of an individual is easily added or liquidated
Legal entity with essentially perpetual existence
Granted a charter to operate
Taxed as an entity
Limited liability to owners
Ownership of an individual is easily added or liquidated
Corporation
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
There may be significant legal and other fees involved in formation.
The corporation’s activities are limited to those specifically granted in its charter.
It is subject to numerous regulations and requirements.
It must secure permission from each state in which it wishes to operate.
Its income is subject to double taxation.
There may be significant legal and other fees involved in formation.
The corporation’s activities are limited to those specifically granted in its charter.
It is subject to numerous regulations and requirements.
It must secure permission from each state in which it wishes to operate.
Its income is subject to double taxation.
Disadvantages of the Corporation Form Slide 9-4
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Salary $60,000 $20,000 $40,000
Interest on capital 8,000 2,400 5,600
Remainder 12,000 6,000 6,000
Total $80,000 $28,400 $51,600
Partnership Equity Slide 9-5
The partnership agreement of Jackson and Curtin provided that Jackson would receive a salary of $20,000 and Curtin a salary of
$40,000; that each would receive 8 percent interest on their invested capital; and they they would share any remainder equally.
The partnership’s net income for the year is $80,000.
The partnership agreement of Jackson and Curtin provided that Jackson would receive a salary of $20,000 and Curtin a salary of
$40,000; that each would receive 8 percent interest on their invested capital; and they they would share any remainder equally.
The partnership’s net income for the year is $80,000.
Total Jackson Curtin
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Salary $60,000 $20,000 $40,000
Interest on capital 8,000 2,400 5,600
Remainder 12,000 6,000 6,000
Total $80,000 $28,400 $51,600
Partnership Equity Slide 9-6
If the partnership agreement is silent concerning the remainder, then it is
divided equally.
If the partnership agreement is silent concerning the remainder, then it is
divided equally.
Total Jackson Curtin
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Recording a Common Stock Issue Slide 9-7
Kuick Corporation is authorized to issue 200,000 shares of $1 par value common stock. Of these,
100,000 shares were issued at $7 per share.
Kuick Corporation is authorized to issue 200,000 shares of $1 par value common stock. Of these,
100,000 shares were issued at $7 per share.
Cash 700,000
Common Stock at Par 100,000
Additional Paid-In Capital 600,000100,000 x $1100,000 x $1
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Cash Dividend Slide 9-8
Kuick Corporation declares a $6,000 dividend on December 15 to be paid on January 15 to holders
of record as of January 1.
Kuick Corporation declares a $6,000 dividend on December 15 to be paid on January 15 to holders
of record as of January 1.
December 15Retained Earnings 6,000
Dividends Payable 6,000
January 1 (no entry)
January 15Dividends Payable 6,000
Cash 6,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Stock Dividend Slide 9-9
Kuick Corporation declares and issues a 5 percent stock dividend to the holders of its 100,000
outstanding shares (par value of $1) when the market price of a share is $10.50.
Kuick Corporation declares and issues a 5 percent stock dividend to the holders of its 100,000
outstanding shares (par value of $1) when the market price of a share is $10.50.
Retained Earnings 52,500Common Stock at Par 5,000Additional Paid-In Capital 47,500
5,000 x $10.50
5,000 x $10.50 5,000 x
$1
5,000 x $1
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Common stock, $25 per share $ 77.6 $ 77.5
Capital in excess of par 72.0 60.2
Retained earnings 3.409.4 3.033.9
Treasury stock, at cost (1,653.1) (1,105.0)
Total stockholders’ equity $1,905.9 $2,075.6
Balance Sheet Presentation Slide 9-10
PRESTON COMPANY AND SUBSIDIARIESConsolidated Balance Sheet
At December 31(millions)
1998 1997
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Basic Earnings Per Share Slide 9-11
Basic earnings per share is a measurement of the corporation’s per share performance
over a period of time.
Basic earnings per share is a measurement of the corporation’s per share performance
over a period of time.
Earnings per share =Net income
Number of shares of common stock outstanding
Earnings per share =$7,000,000
1,000,000 shares= $7
Assume Nugent Corporation had net income of $7 million and 1 million shares of
common stock outstanding.
Assume Nugent Corporation had net income of $7 million and 1 million shares of
common stock outstanding.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
= $6.20
Now, assume that Nugent Corporation also has 100,000 shares of $8 convertible
preferred stock.
Now, assume that Nugent Corporation also has 100,000 shares of $8 convertible
preferred stock.
Basic Earnings Per Share Slide 9-12
Earnings per share =Net income - Preferred dividends
Number of shares of common stock outstanding
Earnings per share =$7,000,000 - $800,000
1,000,000 shares
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
= $5.83
For diluted earnings per share, we assume that the 100,000 convertible preferred shares are
exchanged for 200,000 shares of common stock.
For diluted earnings per share, we assume that the 100,000 convertible preferred shares are
exchanged for 200,000 shares of common stock.
Earnings Per Share Slide 9-13
Earnings per share =Net income - Preferred dividends
Number of shares of common stock outstanding
Earnings per share =$7,000,000
1,200,000 shares
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
= $5.83
For diluted earnings per share, we assume that the 100,000 convertible preferred shares are
exchanged for 200,000 shares of common stock.
For diluted earnings per share, we assume that the 100,000 convertible preferred shares are
exchanged for 200,000 shares of common stock.
Slide 9-14
Earnings per share =Net income - Preferred dividends
Number of shares of common stock outstanding
Earnings per share =$7,000,000
1,200,000 shares
Note that all the preferred stock is assumed converted, sothere would be no dividends.
Note that all the preferred stock is assumed converted, sothere would be no dividends.1,000,000 shares of common stock
plus the 200,000 shares assumedfrom converting preferred stock
1,000,000 shares of common stockplus the 200,000 shares assumedfrom converting preferred stock
Earnings Per Share
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
1,000,000 x 12/12 = 1,000,000
500,000 x 6/12 = 250,000
Denominator amount 1,250,000
Slide 9-15 Weighted-Average Number of Shares
Optel Corporation had 1 million shares of common stock outstanding on January 1. On July
1 it issued an additional 500,000 shares. How many weighted-average shares would be used for
calculating earnings per share?
Optel Corporation had 1 million shares of common stock outstanding on January 1. On July
1 it issued an additional 500,000 shares. How many weighted-average shares would be used for
calculating earnings per share?
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Slide 9-16 Zero-Coupon Bonds
Bonds with a total par of $100,000 and carrying zero interest are issued when the current yield is 14 percent. How much should the investor pay
for each $1,000 bond?
Bonds with a total par of $100,000 and carrying zero interest are issued when the current yield is 14 percent. How much should the investor pay
for each $1,000 bond?
$1,000 x .519 = $519 per $1,000 bond
No cash is paid by the borrower until these bonds mature.
No cash is paid by the borrower until these bonds mature.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Slide 9-17 Debt With Warrants
Some corporations issue warrants in conjunction with the issuance of bonds,
putting an exercise price on the warrants of about 15 to 20 percent above the current
market price of the common stock.
Some corporations issue warrants in conjunction with the issuance of bonds,
putting an exercise price on the warrants of about 15 to 20 percent above the current
market price of the common stock.
If detachable, the warrants can be removed from the debt and used to purchase the issuer’s stock or sold
to a third party.
If detachable, the warrants can be removed from the debt and used to purchase the issuer’s stock or sold
to a third party.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Slide 9-18 Debt With Warrants
If nondetachable, the debt is accounted for as if it were a convertible debt
security--no recognition is given to the equity
character of the debt.
If nondetachable, the debt is accounted for as if it were a convertible debt
security--no recognition is given to the equity
character of the debt.
Some corporations issue warrants in conjunction with the issuance of bonds,
putting an exercise price on the warrants of about 15 to 20 percent above the current
market price of the common stock.
Some corporations issue warrants in conjunction with the issuance of bonds,
putting an exercise price on the warrants of about 15 to 20 percent above the current
market price of the common stock.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Slide 9-19 Redeemable Preferred Stock
Redeemable preferred stock not only pays dividends, it may also be redeemed by the
investor on or after a certain date.
Redeemable preferred stock not only pays dividends, it may also be redeemed by the
investor on or after a certain date.
The SEC requires that redeemable preferred stock be listed as a separate item on the balance sheet at it’s redemption price. This item must be
listed between the liability and owners’ equity section and not included in the total of either
liabilities or owner’s equity.
The SEC requires that redeemable preferred stock be listed as a separate item on the balance sheet at it’s redemption price. This item must be
listed between the liability and owners’ equity section and not included in the total of either
liabilities or owner’s equity.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Slide 9-20 Redeemable Preferred Stock
Redeemable preferred stock $ 8,000,000Stockholders’ equity:
Common stock @ $1 par 20,000,000Additional paid-in capital 75,000,000
Total paid-in capital 95,000,000Retained earnings 60,000,000 Total stockholders’ equity $155,000,000
Redeemable preferred stock $ 8,000,000Stockholders’ equity:
Common stock @ $1 par 20,000,000Additional paid-in capital 75,000,000
Total paid-in capital 95,000,000Retained earnings 60,000,000 Total stockholders’ equity $155,000,000
The $8 million for redeemable preferredstock is not included.
The $8 million for redeemable preferredstock is not included.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Chapter 9
The End