Reporting Stockholders Equity

ckChapter 11 Reporting and Analyzing farm animalholders Equity I. Characteristics of a Corporation (Publicly held (closely held)) * Separate legal existence * hold liability of live beginningholders limited to investment * Transferable ownership rights * Ability to acquire capital * Continuous life * Corporation management Sh atomic number 18holders Sh atomic number 18holders * Voting rights * Profit overlap * Preemptive right * Residual claim Board of Directors Board of Directors CEO(PRESIDENT) CEO(PRESIDENT) . other vps . other vps CIO CIO CFO CFO COO COO Treasurer Treasurer ControllerController * government activity regulations file application with state government- corportate charter by-law * Additional taxes. Double taxation II. Stock Issue 1. Basics of Stock Issue (1) Authorized Stock The maximum amount of stock that a corporation is authorized to sell by corporate charter. (2) Outstanding Stock Capital stock that has been issued and is being held by stockholders. inte lligent capital= of issued shares x par value per share (3) Par Value Stock Capital stock that has been assigned an arbitrary value per share in the corporate charter. 4) No-par value Stock Capital stock that has non been assigned a value in the corporate charter. (5) Stated Value of No-par value Stock Value per share assigned by the board of directors to no-par value stock. Authorized Issued Outstanding (6) paid-in Capital Amount paid to corporation by stockholders for shares of ownership. (7) contain dough Earned capital held for future use in the business. 2. Accounting for Common Stock Issues (1) Issuing Stock at Par Example 1 On March 1, 2002, XYZ Company issued 10,000 shares of $10 par value common stock at par. (2) Issuing Stock above ParExample 2 On June 10, XYZ Company issued 5,000 shares of $10 par value common stock at $12 per share. Cash 60,000(=5,00012) Common Stock50,000 Additional paid in capital14,000 (Paid in capital in redundance of par) What if the common st ock issued on June 10 is no par stock with a stated value of $10? Cash60,000 Common Stock50,000 Additional Paid in capital10,000 3. Treasury Stock * A corporations own stock that has been issued, fully paid for, and reacquired by the corporation but non retired. * Issued but not outstanding (1) Corporations acquire treasury stock to reissue shares to employees under bonus and stock compensation plans * increase trading of companys stock in securities market to enhance market value * reduce number of shares outstanding , and therefore increase earnings per share (EPS) * prevent a hostile takeover. (2) purchase Treasury Stock * Cost method Treasury stock is increased by the amount paid to reacquire the shares, and is decreased by the same amount when the shares are later sold. Example 3 On October 15, 2002, XYZ Company acquired 2,000 shares of the stock issued on June 10 in Example 2 at $9 per share.On the balance airplane Stockholders virtue Paid in capital Common stock (par) Ad ditional paid in capital kept up(p) earnings Less Treasury stock (a contra equity account) * Effect of purchasing treasury stock on common stock * Effect of purchasing treasury stock on stockholders equity III. pet Stock * Preferred stock has contractual provisions that give it preferences over common stock in dividends and assets in the event of liquidation. * Preferred stockholders do not have voting rights. Example 4 On November 5, 2002, XYZ Company issued 5,000 shares of $10 par value preferred stock for $13 per share.Cash65,000 Preferred Stock50,000 Additional Paid in capital15,000 1. Dividend Preference * Preferred stockholders have the right to share in the distribution of corporate income before common stockholders * The first claim to dividends does not check dividends * Cumulative Dividends Preferred stockholders receive current and unpaid prior-year dividends before common stockholders receive any dividends. When dividends are cumulative, preferred dividends that were not state in a given period are called dividends in arrears. Example 5XYZ Company issued 10,000 shares of 10%, $5 par value cumulative preferred stock On January 1, 1999. XYZ had not declared any dividends until December 31, 2002. 1999 10,000x 5 x 10% = 5,000 2000 5,000 2001 5,000 20025,000 Dec 31, 02 $20,000 in cash * Dividends in arrears are not liability. They should be tell in the notes to financial statements. 2. Liquidation Preference- Creditors Prefered stock holders common stock holders IV. Dividends * A distribution by the corporation to the stockholders on a pro rata basis. 1.Cash Dividends (1) To pay a cash dividend, a company must have * retained earnings * adequate cash * declared dividends (2) Some Important Dates * Declaration view the get out the board of directors formally authorizes the cash dividends and announces it to stockholders. Retained earnings Dividends payable * picture date The date ownership of outstanding shares is determined for dividend purposes . * Payment date The date dividends are paid. Dividends payable Cash * Cumulative effect of declaration and payment of cash dividends on accounting equation 2. Stock Dividends Companies pay stock dividends to * take stockholders dividend expectations without paying cash * Increase the marketability of its stock * Emphasize that a portion of stockholders equity has been permanently reinvested in the business. * Small Stock Dividend If the stock dividend is less than 20%-25% of the corporations issued stock, it is record at the fair market value per share. * Large Stock Dividend If the stock dividend is greater than 20%-25% of the corporations issued stock, it is recorded at par or stated value per share. Example 6On February 1, 2003, the balance of XYZ Companys retained earnings was $2,500,000. XYZ Company declared a 15% stock dividend on its 100,000 shares of $10 par value common stock. The current fair market value of XYZ Companys stock is $13 per share. Retained earnings195,000 Stock dividend Distributable150,000 Additional paid in capital45,000 On March 1, 2003, XYZ Company issued the dividend shares. Stock dividend distributable 150,000 Common Stock150,000 Effect of stock dividends on stockholders equity and its components S/E Retained earnings195,000 (Decrease)Common Stock150,000 (Increase) Additonal paid in capital45,000 (Increase) NET EFFECT No change V. Stock Splits * The issuance of additional shares of stock to stockholders accompanied by * A reduction in the par or stated value * An increase in number of shares. No entry * Effect of stock splits on stockholders equity and its components S/E Common Stock (Par value per share x total of issued shares) Add. Paid in capital Retained Earnings VI. Retained Earnings * Net income that is retained in the business. Revenues (Credit, transfer to credit of income)Income Summary(Transfer N. I to retained earnings credit) Retained Earnings Expenses (Transfer account to debid of income summary) * Deficit a de bit balance in retained earnings. Deficit is reported as a deduction in stockholders equity on the balance sheet. * Retained earnings restrictions- Debt covenants VII. monetary Statement Presentation 1. Balance Sheet S/E Paid-in-capital Common stock (par value) Preferred stock (par value) Additional paid in capital Retained earnings Less Treasury Stock 2. Statement of Cash Flows Cash Flows from Financing ActivitiesIssuance of stock (cash inflows) Repurchase of stock (cash outflows) Dividend payment (cash outflows) VIII. Ratio Analysis 1. Dividend Record * Payout Ratio Cash dividends declared on common stock/ Net income 2. Earnings Performance * Return on common stockholders equity ratio (NI-Prefered stockholders dividends)/ second-rate common stockholders equity 3. Debt versus Equity Decision Bond Common Stock Owners Control Not affected Diluted Tax Benefit Bond interests are tax deductible Dividends are not deductible Financial Ratio(EPS) Not affected Lower Fixed payment Yes No