Understanding The Business Because a corporation is a separate legal entity , it can . . . Simple to become an owner Easy to transfer ownership Provides limited liability Advantages of a corporation Own assets. Sue and be sued. Incur liabilities. Enter into contracts.
Ownership of a Corporation Voting (in person or by proxy ). Proportionate distributions of profits (dividends). Proportionate distributions of assets in a liquidation. Rights Stockholders’
Ownership of a Corporation Appointed by directors
Authorized, Issued, and Outstanding Shares Authorized shares are the maximum number of shares of capital stock that can be sold to the public. Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold.
Authorized, Issued, and Outstanding Shares Unissued Shares Treasury Shares Outstanding Shares Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders.
Earnings Per Share (EPS) Kroger’s income for 2009 is $1,249,000,000 and the average number of shares outstanding is 652,000,000. Earnings per share is probably the single most widely watched financial ratio. *If there are preferred dividends, the amount is subtracted from net income. $1,249,000,000 652,000,000 Shares EPS = = $1.92 per share Net Income * Average Number of Shares Outstanding for the Period EPS =
Earnings Per Share (EPS)
Common Stock Transactions Two primary sources of stockholders’ equity Retained earnings Contributed capital Common stock, par value Capital in excess of par value
Common Stock Transactions Dividend set by board of directors Basic voting stock Ranks after preferred stock
Common Stock Transactions Legal capital is the amount of capital, required by the state, that must remain invested in the business. Par Value Nominal value Legal capital
Common Stock Transactions Par Value Market Value Some states do not require that a par value be stated in the charter. Some states do not require a par value to be stated in the charter.
Initial Sale of Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public . Subsequent sales of new stock to the public. Kroger issues new stock. Kroger
Initial Sale of Stock Prepare the journal entry to record this transaction. On July 6, Kroger issued 100,000 shares of $1 par value common stock for $20 per share. 100,000 shares × $20 per share = $2,000,000 100,000 shares × $1 par value = $100,000
Sale of Stock in Secondary Markets
Transactions between two investors that do not affect the corporation’s accounting records.
I’d like to sell some of my Kroger stock. I’d like to buy some of your Kroger stock.
Stock Issued for Employee Compensation Employee Stock options allow employees to purchase stock from the corporation at a predetermined, fixed price. Employee compensation package includes salary and stock options . If Kroger does not have new stock to issue when the stock options are exercised, then . . Kroger
Repurchase of Stock Kroger buys its own stock in the secondary market. (Treasury stock) Repurchased stock is called treasury stock. A corporation records treasury stock at cost . Treasury stock has no voting or dividend rights. Treasury stock is not an asset. It is a contra equity account. Stockholders Kroger
Repurchase of Stock On May 1, Kroger reacquired 100,000 shares of its common stock at $20 per share. The journal entry for May 1 is . . . .
Reissuance of Treasury Stock 10,000 shares × $30 = $300,000 10,000 shares × $20 cost = $200,000 On December 3, Kroger reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is . . .
Dividends on Common Stock Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash.
Board of directors declares the dividend.
Record a liability.
Date of Record
Stockholders holding shares on this date will receive the dividend. (No entry)
Date of Payment
Record the dividend payment to stockholders.
Dividend Yield Ratio This ratio is often used to compare the dividend-paying performance of different investment alternatives. In 2009, Kroger paid a dividend of $0.36 per share and the market price of a share of Kroger stock was $22. Dividend Yield Dividends Per Share Market Price Per Share = Dividend Yield $0.36 per share $22 per share = = 1.6%
Stock Dividends Distribution of additional shares of stock to owners. No change in total stockholders’ equity. All stockholders retain same percentage ownership. No change in par values. Stock dividend < 20-25% Record at current market value of stock. Small
Stock Splits Stock splits change the par value per share, but the total par value is unchanged. Assume that a corporation had 3,000 shares of $2 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change
Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate
International Perspective—IFRS What’s in a Name?
Issued capital or share capital
US GAAP and IFRS use different words to describe the same corporate equity accounts.
Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.
Cumulative Dividend Preference: Any unpaid dividends from previous years ( dividends in arrears ) must be paid before common dividends are paid.
Dividends on Preferred Stock If the preferred stock is noncumulative , any dividends not declared in previous years are lost permanently.
Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000.
How much will each class of stock receive?
Dividends on Preferred Stock
Dividends on Preferred Stock
Restrictions on the Payment of Dividends Why would you want to do that? If I loan you $150,000, I will want you to restrict your retained earnings.
Focus on Cash Flows
Chapter Supplement ─ Accounting for Owners’ Equity for Sole Proprietorships and Partnerships A sole proprietorship is owned by a one person. Two equity accounts Capital Drawings
Sole Proprietorships On January 2, J. Doe started a retail store by investing $150,000 of his own money. The journal entry to record this business formation is: Each month, J. Doe withdraws $1,000 for personal living expenses. The January 30 journal entry to record the first withdrawal is:
Sole Proprietorships During the first year, J. Doe’s income totaled $18,000, and his withdrawals totaled $12,000. The equity section of J. Doe’s balance sheet at the end of the first year is:
Partnerships A partnership is owned by two or more individuals. Partnerships require clear agreements about authority, risks, and the sharing of profits and losses. Separate capital and drawings accounts are maintained for each partner. Partnership income is divided among the partners according to the partnership agreement. Complete control by partners No income taxes on business Unlimited liability Ease of formation Advantages Primary disadvantage
On January 2, Able and Baker formed a partnership. Able contributed $60,000 cash. Baker contributed $40,000 cash. The partners agreed to divide partnership income in the ratio of their contributions (60:40). The journal entry to record this business formation is:
Partnerships The partners agreed that each month Able would withdraw $1,000 and Baker would withdraw $650. The January 30 journal entry to record the first withdrawal is:
Partnerships During the first year, partnership income totaled $30,000. Withdrawals totaled $12,000 for Able and $7,800 for Baker. The equity section of the partnership balance sheet at the end of the first year is:
Accounting and Reporting for Three Types of Businesses