Copyright 2012 Pearson Education Inc Publishing as Prentice

  • Slides: 47
Download presentation
Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 1

Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 1

Stockholders’ Equity Chapter 10 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

Stockholders’ Equity Chapter 10 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 2

Learning Objective 1 Explain the features of a corporation Copyright © 2012 Pearson Education

Learning Objective 1 Explain the features of a corporation Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 3

Corporate Characteristics ADVANTAGES DISADVANTAGES • Separate legal entity • Continuous life • Transferability of

Corporate Characteristics ADVANTAGES DISADVANTAGES • Separate legal entity • Continuous life • Transferability of ownership • Limited liability • Separation of ownership and management • Corporate taxation • Government regulation Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 4

Organizing a Corporation • Corporate organizers (incorporators) obtain a charter from the state ▫

Organizing a Corporation • Corporate organizers (incorporators) obtain a charter from the state ▫ Charter includes authorization to issue shares of stock • Incorporators: ▫ ▫ Pay fees Sign the charter File documents with the state Agree to set of bylaws Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 5

Stockholders Board of Directors Chairperson of the Board President (Chief Operating Officer) Vice. Presidents

Stockholders Board of Directors Chairperson of the Board President (Chief Operating Officer) Vice. Presidents Controller Chief Financial Officer Secretary Treasurer Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 6

Stockholder Rights Vote Dividends Liquidation Preemption Copyright © 2012 Pearson Education Inc. Publishing as

Stockholder Rights Vote Dividends Liquidation Preemption Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 7

Stockholders’ Equity ? ? • Amount stockholders have contributed • Amount earned by profitable

Stockholders’ Equity ? ? • Amount stockholders have contributed • Amount earned by profitable operations Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 8

Classes of Stock COMMON PREFERRED • Basic form of stock • Has four basic

Classes of Stock COMMON PREFERRED • Basic form of stock • Has four basic rights • Shareholders benefit most if corporation succeeds • Has advantages over common ▫ Take more risk ▫ Receive dividends first ▫ Receive assets first in liquidation • Shareholders earn a fixed dividend • Very few corporations issue Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 9

Comparison of Issuing Stock and Debt Common stock Preferred stock Long-term debt Obligation to

Comparison of Issuing Stock and Debt Common stock Preferred stock Long-term debt Obligation to repay principal No No Yes Dividends/interest Dividends are not tax deductible Interest expense is tax deductible Obligation to pay dividends/interest Only after declaration At fixed rates and date Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 10

Par Value • Arbitrary amount assigned to share of stock • Usually set low

Par Value • Arbitrary amount assigned to share of stock • Usually set low to avoid legal issues ▫ Most states do not allow companies to issue stock below par • No-par stock ▫ May have a stated value Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 11

Learning Objective Two Account for the issuance of stock Copyright © 2012 Pearson Education

Learning Objective Two Account for the issuance of stock Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 12

Issuing Stock at Par JOURNAL Date Accounts and explanation Debit Cash 50, 000 Common

Issuing Stock at Par JOURNAL Date Accounts and explanation Debit Cash 50, 000 Common stock Credit 50, 000 Issued stock at par value Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 13

Issuing Stock above Par JOURNAL Date Accounts and explanation Cash Debit Credit 300, 000

Issuing Stock above Par JOURNAL Date Accounts and explanation Cash Debit Credit 300, 000 Common stock Paid-in capital in excess of par - Common 50, 000 250, 000 Issued stock above par value Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 14

A company neither earns a profit nor incurs a loss when it sells it

A company neither earns a profit nor incurs a loss when it sells it stock to, or buys stock from, its own shareholders. Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 15

Issuing No-Par Stock JOURNAL Date Accounts and explanation Cash Debit Credit 300, 000 Common

Issuing No-Par Stock JOURNAL Date Accounts and explanation Cash Debit Credit 300, 000 Common stock 300, 000 Issued no-par stock Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 16

Stock Issued for Non-Cash Assets • Asset received is recorded at current market value

Stock Issued for Non-Cash Assets • Asset received is recorded at current market value JOURNAL Date Accounts and explanation Equipment Debit Credit 100, 000 Common stock 20, 000 Paid-in capital in excess of par - Common 80, 000 Issued stock in exchange for equipment Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 17

Stock Issued for Services • Expense recognized for fair value of services rendered JOURNAL

Stock Issued for Services • Expense recognized for fair value of services rendered JOURNAL Date Accounts and explanation Legal expense Debit Credit 25, 000 Common stock Paid-in capital in excess of par - Common 2, 500 22, 500 Issued stock in exchange for legal services Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 18

Preferred Stock • Follows same pattern as accounting for common stock • May have

Preferred Stock • Follows same pattern as accounting for common stock • May have separate accounts for paid-in capital in excess of par for preferred and common • Can be issued with conversion feature ▫ Allows preferred shareholders to exchange preferred shares for common Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 19

Number of Shares Authorized Issued Outstanding Copyright © 2012 Pearson Education Inc. Publishing as

Number of Shares Authorized Issued Outstanding Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 20

Learning Objective Three Show treasury stock affects a company Copyright © 2012 Pearson Education

Learning Objective Three Show treasury stock affects a company Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 21

Treasury Stock • Issued shares reacquired by the company • Reasons: ▫ Make shares

Treasury Stock • Issued shares reacquired by the company • Reasons: ▫ Make shares available for employee stock purchase plans ▫ Plan to “buy low” and “sell high” ▫ Avoid takeover ▫ Increase earnings per share ▫ Use in share repurchase program Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 22

Recording Treasury Stock • Recorded at cost ▫ Not par value • Classified as

Recording Treasury Stock • Recorded at cost ▫ Not par value • Classified as a contra-stockholders’ equity account ▫ Debit balance JOURNAL Date Accounts and explanation Treasury stock Debit Credit 95, 000 Cash 95, 000 Purchased treasury shares Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 23

Retiring Stock • Cancel stock certificates • Cannot be reissued JOURNAL Date Accounts and

Retiring Stock • Cancel stock certificates • Cannot be reissued JOURNAL Date Accounts and explanation Debit Credit Common stock Additional paid-in capital Retained earnings Treasury stock Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 24

Resale of Treasury Shares JOURNAL Date Accounts and explanation Cash Debit Credit 100, 000

Resale of Treasury Shares JOURNAL Date Accounts and explanation Cash Debit Credit 100, 000 Treasury stock Paid-in capital from treasury stock transactions 95, 000 Purchased treasury shares Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 25

Exercise 10 -24 A JOURNAL Date Accounts and explanation Debit Credit 1 -21 6

Exercise 10 -24 A JOURNAL Date Accounts and explanation Debit Credit 1 -21 6 -23 7 -12 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 26

Exercise 10 -24 A Effect on Stockholders’ Equity 1 -21 Common stock issued 6

Exercise 10 -24 A Effect on Stockholders’ Equity 1 -21 Common stock issued 6 -23 Purchase of treasury stock 7 -15 Sale of treasury stock Total change Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 27

Learning Objective Four Account for retained earnings, dividends and splits Copyright © 2012 Pearson

Learning Objective Four Account for retained earnings, dividends and splits Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 28

Retained Earnings Cumulative Net income Net losses Copyright © 2012 Pearson Education Inc. Publishing

Retained Earnings Cumulative Net income Net losses Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. Dividends declared 29

Retained Earnings Balance Credit balance Debit balance Lifetime earnings > Lifetime losses & dividends

Retained Earnings Balance Credit balance Debit balance Lifetime earnings > Lifetime losses & dividends < Lifetime losses & dividends Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 30

Cash Dividends • Company must have both: ▫ Enough Retained earnings to declare the

Cash Dividends • Company must have both: ▫ Enough Retained earnings to declare the dividend ▫ Enough Cash to pay the dividend • Board of directors has authority to declare a dividend ▫ Company not obligated to pay dividend until declared Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 31

Dividend Dates 1. Declaration date JOURNAL Date Accounts and explanation Debit 2. Date of

Dividend Dates 1. Declaration date JOURNAL Date Accounts and explanation Debit 2. Date of record Credit No entry 3. Payment date JOURNAL Date Accounts and explanation Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. Debit Credit 32

Analyzing Retained Earnings Dividends Beginning balance Net Income Ending balance Copyright © 2012 Pearson

Analyzing Retained Earnings Dividends Beginning balance Net Income Ending balance Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 33

Dividends on Preferred Stock • Paid dividends before common stockholders • Stated as a

Dividends on Preferred Stock • Paid dividends before common stockholders • Stated as a percent of par value or a dollar amount per share • May be cumulative ▫ Passed dividends are owed to preferred shareholders In arrears ▫ Almost debt Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 34

Exercise 10 -28 A Preferred dividend = $1. 00 x 6% x 90, 000

Exercise 10 -28 A Preferred dividend = $1. 00 x 6% x 90, 000 shares Preferred Common 2012 - $90, 000 Dividends in arrears Current year Remainder to common 2013 - $270, 000 Preferred – current year Remainder to common Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 35

Stock Dividends • Proportional distribution of stock to shareholders • Increase stock account and

Stock Dividends • Proportional distribution of stock to shareholders • Increase stock account and decrease Retained earnings ▫ Total equity is unchanged • Reasons stock dividends are distributed ▫ Continue dividends, but conserve cash ▫ Reduce market price of shares Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 36

Size of Stock Dividends SMALL LARGE • 25% or less of outstanding shares •

Size of Stock Dividends SMALL LARGE • 25% or less of outstanding shares • Recorded at market value • Greater than 25% of outstanding shares • Recorded at par value Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 37

Stock Splits • Increase in shares with a proportionate reduction in par value •

Stock Splits • Increase in shares with a proportionate reduction in par value • Decreases market price of shares • No accounts affected Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 38

Effect on Total: Transaction Assets = Liabilities Stockholders’ + Equity Issuance of stock Purchase

Effect on Total: Transaction Assets = Liabilities Stockholders’ + Equity Issuance of stock Purchase of treasury stock Sale of treasury stock Declaration of cash dividend Payment of cash dividend Stock split Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 39

Learning Objective Five Use stock values in decision making Copyright © 2012 Pearson Education

Learning Objective Five Use stock values in decision making Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 40

Stock Values Market value Redemption value Liquidation value Book value Copyright © 2012 Pearson

Stock Values Market value Redemption value Liquidation value Book value Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 41

Du. Pont Analysis Return on assets Leverage ratio Return on equity Net profit margin

Du. Pont Analysis Return on assets Leverage ratio Return on equity Net profit margin Asset turnover Leverage ratio Return on equity Net income Net sales Average total assets Average common equity Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 42

Learning Objective Six Report equity transactions in the financial statements Copyright © 2012 Pearson

Learning Objective Six Report equity transactions in the financial statements Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 43

Equity Transactions on the Cash Flow Statement Transaction Shown in the Financing Activity Section

Equity Transactions on the Cash Flow Statement Transaction Shown in the Financing Activity Section as a: Issue stock for cash Purchase treasury stock Sell treasury stock Pay dividends Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 44

Stockholders’ Equity on the Balance Sheet Stockholders’ Equity Preferred stock, 7%, $100 par, 5,

Stockholders’ Equity on the Balance Sheet Stockholders’ Equity Preferred stock, 7%, $100 par, 5, 000 shares authorized and issued $500, 000 Common stock, $1 par, 100, 000 shares authorized, 75, 000 shares issued 75, 000 Additional paid-in capital 2, 500, 000 Retained earnings 1, 300, 000 Less treasury stock, common Total stockholders’ equity (50, 000) $4, 325, 000 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 45

End of Chapter Ten Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

End of Chapter Ten Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 46

Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 47

Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 47