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Chapter 10 Financial 3 Ed

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Chapter 10 Financial 3 Ed

  1. 1. Financial Accounting Stockholders’ Equity Chapter 10 Spiceland | Thomas | Herrmann Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  2. 2. 10-2 Learning Objectives • Identify the advantages and disadvantages of the corporate form of ownership • Record the issuance of common stock • Contrast preferred stock with common stock and bonds payable • Account for treasury stock • Describe retained earnings and record cash dividends Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  3. 3. 10-3 Learning Objectives • Explain the effect of stock dividends and stock splits • Prepare and analyze the stockholders’ equity section of a balance sheet and the statement of stockholders’ equity • Evaluate company performance using information on stockholders’ equity Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  4. 4. 10-4 Stockholders’ Equity Primary Sections of Stockholders’ Equity Paid-in capital Amount stockholders have invested in the corporation Retained Earnings Amount of earnings the corporation has retained Treasury Stock Corporation’s own stock that it has reacquired Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  5. 5. 10-5 Part A Invested Capital Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  6. 6. 10-6 Learning Objective 1 Identify the advantages and disadvantages of the corporate form of ownership Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  7. 7. 10-7 Corporations • Articles of incorporation: corporate charter describing: • Nature of business activities • Shares of stock to be issued • Initial board of directors • The board of directors establish corporate policies and appoints officers who manage the corporation Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  8. 8. 10-8 Illustration 10.2—Organization Chart Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  9. 9. 10-9 Stages of Equity Financing • Corporations first raise money from founders of the business, friends, and family • To grow, companies seek investments from: • Angel investors • Venture capital firms • Initial public offering (IPO) Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  10. 10. 10-10 Illustration 10.3—Stages of Equity Financing Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  11. 11. 10-11 Public or Private Public • Allows public investment • Many shareholders • Stocks trade on stock exchanges or by overthe-counter (OTC) trading • Regulated by the (SEC) • Examples—Wal-Mart, Microsoft, Intel Private • • • • • Does not allow investment by the general public Fewer stockholders Stocks not traded in the open market Not regulated by the (SEC) Examples—Cargill (agricultural commodities) Koch Industries (oil and gas), Chrysler (cars) Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  12. 12. 10-12 Illustration 10.4—Stockholder Rights Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  13. 13. 10-13 Illustration 10.5—Advantages and Disadvantages of a Corporation Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  14. 14. 10-14 Learning Objective 2 Record the issuance of common stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  15. 15. 10-15 Common Stock • Treasury stock: repurchased shares, included as part of shares issued, but excluded from shares outstanding Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  16. 16. 10-16 Illustration 10.6—Authorized, Issued, and Outstanding Stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  17. 17. 10-17 Par Value • Legal capital per share of stock that’s assigned when the corporation is first established • Has no relationship to the market value today Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  18. 18. 10-18 Accounting for Common Stock Issues Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  19. 19. 10-19 Learning Objective 3 Contrast preferred stock with common stock and bonds payable Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  20. 20. 10-20 Preferred Stock • Issued in addition to common stock to attract wider investment • Preferred stockholders have: • First rights to a specified amount of dividends • Preference over common stockholders in the distribution of assets at the time of dissolution • Most preferred stock does not have voting rights Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  21. 21. 10-21 Illustration 10.7—Comparison of Financing Alternatives Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  22. 22. 10-22 Features of Preferred Stock • Flexibility allowed in its contractual provisions • Types: • Convertible: shares can be exchanged for common stock • Redeemable: shares can be returned to the corporation at a fixed price • Cumulative: shares receive priority for future dividends, if dividends are not paid in a given year • Dividends in arrears - unpaid dividends Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  23. 23. 10-23 Illustration 10.8—Allocate Dividends between Preferred and Common Stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  24. 24. 10-24 Illustration 10.9—Stockholders’ Equity Section Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  25. 25. 10-25 Learning Objective 4 Account for treasury stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  26. 26. 10-26 Treasury Stock • Corporation’s own stock that it has reacquired • Companies buy back their own stock for various reasons: • • • • To boost underpriced stock To distribute surplus cash without paying dividends To boost earnings per share To satisfy employee stock ownership plans Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  27. 27. 10-27 Purchase of Treasury Stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  28. 28. 10-28 Illustration 10.11—Stockholders’ Equity before and after Purchase of Treasury Stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  29. 29. 10-29 Reissuing Treasury Stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  30. 30. 10-30 Illustration 10.12—Stockholders’ Equity before and after Sale of Treasury Stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  31. 31. 10-31 Reissuing Treasury Stock Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  32. 32. 10-32 Part B Earned Capital Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  33. 33. 10-33 Learning Objective 5 Describe retained earnings and record cash dividends Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  34. 34. 10-34 Retained Earnings • Earnings retained in the corporation and not paid out as dividends • Equals all net income, less all dividends • Has a normal credit balance • Accumulated deficit: a debit balance in retained earnings Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  35. 35. 10-35 Dividends • Distributions by a corporation to its stockholders • Declaration date: date on which board of directors declare the cash dividend to be paid • Record date: specific date on which the company will determine who will receive the dividend (registered owners of stock) • Payment date: date of the actual cash distribution Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  36. 36. 10-36 Recording Cash Dividends Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  37. 37. 10-37 Learning Objective 6 Explain the effect of stock dividends and stock splits Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  38. 38. 10-38 Stock Dividends and Stock Splits • Stock dividends: additional shares of a company’s own stock given to stockholders as dividends • Stock split: a large stock dividend that includes a reduction in the par or stated value per share You own 100 shares and assume a You will get 10% stock dividend 10 additional shares 20% stock dividend 20 additional shares 100% stock dividend 100 additional shares Large stock dividend or stock split (2-for-1) Small stock dividend Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  39. 39. 10-39 Stock Splits or Large Stock Dividends • Stock split • Reduces par value per share and increases shares outstanding • No need to record transaction • Large stock dividends • Records an increase in common stock and decrease in retained earnings • Recorded at par value Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  40. 40. 10-40 Small Stock Dividends • Recorded at market value • Believed to have little impact on market price Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  41. 41. 10-41 Part C Reporting Stockholders’ Equity Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  42. 42. 10-42 Learning Objective 7 Prepare and analyze the stockholders’ equity section of a balance sheet and the statement of stockholders’ equity Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  43. 43. 10-43 Illustration 10.17—Stockholders’ Equity Section Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  44. 44. 10-44 Statement of Stockholders’ Equity • Summarizes the changes in the balance in each stockholders’ equity account over a period of time Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  45. 45. 10-45 Illustration 10.19—Statement of Stockholders’ Equity Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  46. 46. 10-46 Learning Objective 8 Evaluate company performance using information on stockholders’ equity Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  47. 47. 10-47 Return on Equity • Measures the ability of company management to generate earnings from the resources that owners provide Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  48. 48. 10-48 Return on the Market Value of Equity • Analysts often relate earnings to the market value of equity Net income Return on the = market value of equity Market value of equity Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  49. 49. 10-49 Earnings per Share • Measures net income earned per share of common stock • Useful in comparing earnings performance for the same company over time • Not useful for comparing earnings performance of one company with another Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  50. 50. 10-50 Price-Earnings Ratio • Indicates how the stock is trading relative to current earnings • Commonly are in the range of 15 to 20 • Growth stocks: stocks whose future earnings investors expect to be higher • Value stocks: stocks that are priced low in relation to current earnings Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  51. 51. 10-51 End of Chapter 10 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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