Accounting for Stock ActivitiesPresentation Transcript
Income Statement Sections
Continuing Operations: revenues, expenses and income generated by the company’s continuing operations.
Discontinued Operations: Income from operating the discontinued segment prior to its disposal and gain or loss on the sale of the net assets of the segment.
Extraordinary Items: A gain or loss that is unusual in nature and infrequent in occurrence.
The corporation distributes additional shares of its own stock to its shareholders without receiving any payment in return.
Transfers a portion of equity from retained earnings to contributed capital (capitalizes retained earnings). The market value of the shares to be distributed is capitalized.
Entries—do not affect a corporation’s assets or total shareholders’ equity.
Why a stock dividend?
Can be used to keep the market price on the stock affordable.
Can conserve cash for business expansion.
Can provide evidence of management’s confidence that the company is doing well.
Example: X-Quest declares a 10% stock dividend on December 31 when it has 10,000 shares outstanding. The market price of X-Quest’s stock on December 31 is $15 per share.
Retained Earnings 15,000 Common Shares Dividend Distributable 15,000 To record declaration of stock dividend of 1,000 common shares 10,000 shares * 10% = 1,000 shares 1,000 shares x $15 per share = $15,000
On the date of distribution, X-Quest records the following entry:
Common Shares Dividend Distributable 15,000 Common Shares 15,000 To record distribution of stock dividend of 1,000 common shares
A distribution of additional shares of stock to shareholders according to their percent ownership.
Involves calling in the outstanding shares and replacing them with more than one new share for each old share.
No journal entries are required with a stock split.
The only change to shareholders’ equity is the number of shares.
Reverse stock splits reduce number of shares
Repurchase of Shares
Corporation may repurchase shares of its own outstanding share capital. Shares may then be retired or cancelled.
No gain is ever reported on share repurchases, however, Contributed Capital from Retirement of Common Shares may remain if shares are retired for less than the average issue price.
When shares are retired for more than the average issue price, Retained Earnings is debited for the excess paid over the issue price.
If there is a balance in Contributed Capital from Retirement of Common Shares, this account is debited first to the extent of its balance.
Earnings Per Share
Earnings per share is one of the most widely cited items of accounting information.
Calculating weighted average common shares outstanding.
Analyze for how long each group of common shares was outstanding during the year.
Multiply by the number of shares.
Add all weighted averages together to get the weighted average for the year.
Basic earnings per share = (Net income - Preferred dividends) Weighted-average common shares outstanding