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Accounting for Corporations Chapter 13
Learning objectives <ul><li>Identify characteristics of corporations and their organization.  </li></ul><ul><li>Describe t...
Corporate Form of Organization Privately Held Publicly Held Existence is separate from owners. An entity created by law. H...
<ul><li>Advantages </li></ul><ul><li>Separate Legal Entity </li></ul><ul><li>Limited Liability of Stockholders </li></ul><...
Organizing and Managing a Corporation Stockholders Board of Directors President, Vice-President, and Other Officers Employ...
Organizing and Managing a Corporation Ultimate control. Stockholders usually meet once a year. Selected by a vote of the s...
<ul><li>Vote at stockholders’ meetings. </li></ul><ul><li>Sell stock. </li></ul><ul><li>Purchase additional shares of stoc...
Stock Certificates and Transfer Each unit of ownership is called a  share of stock . A stock certificate serves as proof t...
Basics of Capital Stock Total amount of stock that a corporation’s charter authorizes it to sell.
Basics of Capital Stock Total amount of stock that has been issued to stockholders.
Selling (Issuing) Stock Par value  is an arbitrary amount assigned to each share of stock when it is authorized. Market pr...
Issuing Par Value Stock Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 p...
Issuing Par Value Stock Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 p...
Issuing Par Value Stock
Issuing Stock for Noncash Assets <ul><li>Record: </li></ul><ul><li>The asset received at its market value. </li></ul><ul><...
Issuing Stock for Noncash Assets Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock ...
<ul><li>A separate class of stock, typically having priority over common shares in . . . </li></ul><ul><ul><li>Dividend di...
Preferred Stock <ul><li>Dillon Snowboards issues 50 shares of $100 par value preferred stock for $6,000  cash on July 1, 2...
Reasons for Issuing Preferred Stock <ul><li>To raise capital without sacrificing control. </li></ul><ul><li>To appeal to i...
<ul><li>To pay a cash dividend the corporation must have: </li></ul><ul><li>A sufficient balance in retained earnings and ...
<ul><li>Regular cash dividends provide a return to investors and almost always affect the stock’s market value. </li></ul>...
<ul><li>Three important dates </li></ul>Entries for Cash Dividends Date of Declaration Record liability for dividend. Divi...
<ul><li>On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The divi...
Entries for Cash Dividends <ul><li>On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common s...
Entries for Cash Dividends <ul><li>On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common s...
<ul><li>Created when a company incurs cumulative losses or pays dividends greater than total profits earned in other years...
<ul><li>The corporation distributes additional shares of its own stock to its stockholders without receiving any payment i...
Stock Dividends <ul><li>A company has 1,000 common shares outstanding. Market price is $12. The company announces a 20% st...
<ul><li>Small Stock Dividend </li></ul><ul><ul><li>Distribution is    25% of the previously outstanding shares. </li></ul...
<ul><li>Here is the stockholders’ equity section of Quest’s balance sheet prior to the declaration of a  small  stock divi...
<ul><li>On December 31, 2005, Quest declared a 2% stock dividend, when the stock was selling for $10 per share.  The stock...
Before the stock dividend. After the stock dividend.
<ul><li>Router, Inc. shows the following stockholders’ equity section just prior to issuing a  large  stock dividend. </li...
<ul><li>On December 31, 2005, Router declared a 40% stock dividend, when the stock was selling for $8 per share.  State la...
<ul><li>A distribution of additional shares of stock to stockholders according to their percent ownership. </li></ul>Stock...
<ul><li>Thomas, Inc. has the following stockholders’ equity section just prior to a 2-for-1 stock split. </li></ul>Stock S...
<ul><li>After the 2-for-1 split the stockholders’ equity section of the balance sheet looks like this . . . </li></ul>Stoc...
Stock Splits <ul><li>The split does not affect any equity amounts reported on balance sheet or any individual stockholder’...
<ul><li>Corporations acquire shares of their own stock. </li></ul>Treasury Stock Why would a company do that? <ul><li>Use ...
Treasury Stock
<ul><li>On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000.  </li></ul>Purchas...
<ul><li>On June 30, Whitt sold 100 shares of its treasury stock for $4 per share.  </li></ul>Selling Treasury Stock at Cos...
<ul><li>On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share. </li></ul>Selling Tr...
<ul><li>On August 27, Whitt sold an additional 400 shares of its treasury stock for $1.50 per share. </li></ul>Selling Tre...
Reporting Income and Equity Net Income Discontinued Segments Changes in Accounting Principle Extraordinary Items Continuin...
Continuing Operations Revenues, expenses and income generated by the company’s continuing operations. Net Income Continuin...
Discontinued Segments Income from operating the discontinued segment prior to its disposal  and  gain or loss on the sale ...
Extraordinary Items A gain or loss that is  unusual  in nature and  infrequent  in occurrence. Net Income Extraordinary It...
Changes in Accounting Principles The increase or decrease in income when changing from one generally accepted accounting p...
Income Statement
<ul><li>Earnings per share is one of the most widely cited items of accounting information. </li></ul>Earnings Per Share B...
<ul><li>Derby, Inc. reports net income of $75,000 and paid preferred dividends of $10,000 during 2005.  The company starte...
Changes in Shares Outstanding <ul><li>Derby, Inc. reports net income of $75,000 and paid preferred dividends of $10,000 du...
<ul><li>The right to purchase common stock at a fixed price over a specified period of time.  As the stock’s price rises a...
<ul><li>Options are given to key employees to motivate them to: </li></ul><ul><ul><li>focus on company performance, </li><...
 
<ul><li>Total cumulative amount of reported net income less any net losses and dividends declared since the company starte...
Restricted Retained Earnings Legal Contractual Most states restrict the amount of treasury stock purchases to the amount o...
<ul><li>A corporation’s directors can voluntarily limit dividends because of a special need for cash such as the purchase ...
<ul><li>Correction of material errors in past years’ financial statements. If an amount is incorrectly expensed, add amoun...
Statement of Stockholders’ Equity This is a more inclusive statement than the statement of retained earnings.
<ul><li>Records amount of stockholders’ equity applicable to common shares on a per share basis. </li></ul>Book Value per ...
<ul><li>Records amount of stockholders’ equity applicable to preferred shares on a per share basis. </li></ul>Book Value p...
<ul><li>Tells us the annual amount of cash dividends distributed to common stockholders relative to the stock’s market pri...
Price Earnings This ratio reveals information about the stock market’s expectations for a company’s future growth in earni...
Homework for Chapter 13 <ul><li>Ex 13-16, 13-17 </li></ul><ul><li>Problem 13-2A, 13-4A </li></ul><ul><li>Due on July 12, 2...
End of Chapter 13
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Chap013.ppt

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Chap013.ppt

  1. 1. Accounting for Corporations Chapter 13
  2. 2. Learning objectives <ul><li>Identify characteristics of corporations and their organization. </li></ul><ul><li>Describe the components of stockholders’ equity. </li></ul><ul><li>Explain characteristics of common and preferred stock. </li></ul><ul><li>Explain the form and content of a complete income statement. </li></ul><ul><li>Explain the items reported in retained earnings. </li></ul><ul><li>Record the issuance of corporate stock. </li></ul><ul><li>Distribute dividends between common stock and preferred stock. </li></ul><ul><li>Record transactions involving cash dividends. </li></ul><ul><li>Account for stock dividends and stock splits. </li></ul><ul><li>Record purchases and sales of treasury stock and the retirement of stock. </li></ul>
  3. 3. Corporate Form of Organization Privately Held Publicly Held Existence is separate from owners. An entity created by law. Has rights and privileges. Ownership can be
  4. 4. <ul><li>Advantages </li></ul><ul><li>Separate Legal Entity </li></ul><ul><li>Limited Liability of Stockholders </li></ul><ul><li>Transferable Ownership Rights </li></ul><ul><li>Continuous Life </li></ul><ul><li>Stockholders Are Not Corporate Agents </li></ul><ul><li>Ease of Capital Accumulation </li></ul><ul><li>Disadvantages </li></ul><ul><li>Governmental Regulation </li></ul><ul><li>Corporate Taxation </li></ul>Characteristics of Corporations
  5. 5. Organizing and Managing a Corporation Stockholders Board of Directors President, Vice-President, and Other Officers Employees of the Corporation
  6. 6. Organizing and Managing a Corporation Ultimate control. Stockholders usually meet once a year. Selected by a vote of the stockholders. Overall responsibility for managing the company.
  7. 7. <ul><li>Vote at stockholders’ meetings. </li></ul><ul><li>Sell stock. </li></ul><ul><li>Purchase additional shares of stock. </li></ul><ul><li>Receive dividends, if any. </li></ul><ul><li>Share equally in any assets remaining after creditors are paid in a liquidation. </li></ul>Rights of Stockholders
  8. 8. Stock Certificates and Transfer Each unit of ownership is called a share of stock . A stock certificate serves as proof that a stockholder has purchased shares. When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.
  9. 9. Basics of Capital Stock Total amount of stock that a corporation’s charter authorizes it to sell.
  10. 10. Basics of Capital Stock Total amount of stock that has been issued to stockholders.
  11. 11. Selling (Issuing) Stock Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market price is the amount that each share of stock will sell for in the market. 
  12. 12. Issuing Par Value Stock Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 per share. Let’s record this transaction. <ul><li>Record: </li></ul><ul><li>The cash received. </li></ul><ul><li>The number of shares issued × the par value per share in the Common Stock account. </li></ul><ul><li>The remainder is assigned to Contributed Capital in Excess of Par . </li></ul>
  13. 13. Issuing Par Value Stock Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 per share. Let’s record this transaction.
  14. 14. Issuing Par Value Stock
  15. 15. Issuing Stock for Noncash Assets <ul><li>Record: </li></ul><ul><li>The asset received at its market value. </li></ul><ul><li>The number of shares issued × the par value per share in the Common Stock account. </li></ul><ul><li>The remainder is assigned to Contributed Capital in Excess of Par . </li></ul>Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for land valued at $2,500,000. Let’s record this transaction.
  16. 16. Issuing Stock for Noncash Assets Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for land valued at $2,500,000. Let’s record this transaction.
  17. 17. <ul><li>A separate class of stock, typically having priority over common shares in . . . </li></ul><ul><ul><li>Dividend distributions. </li></ul></ul><ul><ul><li>Distribution of assets in case of liquidation. </li></ul></ul>Preferred Stock Usually has a stated dividend rate. Normally has no voting rights.
  18. 18. Preferred Stock <ul><li>Dillon Snowboards issues 50 shares of $100 par value preferred stock for $6,000 cash on July 1, 2005. </li></ul><ul><li>Dr. Cash 6,000 </li></ul><ul><li>Cr. Preferred Stock, $100 par value 5,000 </li></ul><ul><li>Cr. Contributed Capital in Excess </li></ul><ul><li>of par value, preferred stock 1,000 </li></ul>
  19. 19. Reasons for Issuing Preferred Stock <ul><li>To raise capital without sacrificing control. </li></ul><ul><li>To appeal to investors who may believe the common stock is too risky or that the expected return on common stock is too low. </li></ul>
  20. 20. <ul><li>To pay a cash dividend the corporation must have: </li></ul><ul><li>A sufficient balance in retained earnings and </li></ul><ul><li>The cash necessary to pay the dividend. </li></ul>Cash Dividends
  21. 21. <ul><li>Regular cash dividends provide a return to investors and almost always affect the stock’s market value. </li></ul>Cash Dividends Dividends Stockholders June 30 Corporation
  22. 22. <ul><li>Three important dates </li></ul>Entries for Cash Dividends Date of Declaration Record liability for dividend. Dividends Date of Record No entry required. Date of Payment Record payment of cash to stockholders.
  23. 23. <ul><li>On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19. </li></ul>Entries for Cash Dividends Date of Declaration Record liability for dividend. Dividends
  24. 24. Entries for Cash Dividends <ul><li>On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19. </li></ul>Date of Record No entry required. No entry required on February 19.
  25. 25. Entries for Cash Dividends <ul><li>On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19. </li></ul>Date of Payment Record payment of cash to stockholders.
  26. 26. <ul><li>Created when a company incurs cumulative losses or pays dividends greater than total profits earned in other years. </li></ul>Deficits and Cash Dividends
  27. 27. <ul><li>The corporation distributes additional shares of its own stock to its stockholders without receiving any payment in return. </li></ul>Stock Dividends <ul><li>Why a stock dividend? </li></ul><ul><li>Can be used to keep the market </li></ul><ul><li>price on the stock affordable. </li></ul><ul><li>Can provide evidence of </li></ul><ul><li>management’s confidence that </li></ul><ul><li>the company is doing well. </li></ul>Stockholders 100 Shares $1 par value HotAir, Inc. Common Stock 100 shares $1 par
  28. 28. Stock Dividends <ul><li>A company has 1,000 common shares outstanding. Market price is $12. The company announces a 20% stock dividend. The market price will be $10. However, due to the expectation of future more cash dividend, the market price may increase to 10.5 or so. </li></ul>
  29. 29. <ul><li>Small Stock Dividend </li></ul><ul><ul><li>Distribution is  25% of the previously outstanding shares. </li></ul></ul><ul><ul><li>Capitalize retained earnings for the market value of the shares to be distributed. </li></ul></ul>Stock Dividends <ul><li>Large Stock Dividend </li></ul><ul><ul><li>Distribution is > 25% of the previously outstanding shares. </li></ul></ul><ul><ul><li>Capitalize retained earnings for the minimum amount required by state law, usually par or stated value of the shares. </li></ul></ul>
  30. 30. <ul><li>Here is the stockholders’ equity section of Quest’s balance sheet prior to the declaration of a small stock dividend. </li></ul>Recording a Small Stock Dividend
  31. 31. <ul><li>On December 31, 2005, Quest declared a 2% stock dividend, when the stock was selling for $10 per share. The stock will be distributed to stockholders on January 20, 2006. Let’s make the December 31 entry. </li></ul>Recording a Small Stock Dividend 100,000 × 2% = 2,000 × $10 = $20,000/ 10000*.02=2000shares 2,000 × $1 par = $ 2,000/2000*$10=20000RE, 2000*$1=2000
  32. 32. Before the stock dividend. After the stock dividend.
  33. 33. <ul><li>Router, Inc. shows the following stockholders’ equity section just prior to issuing a large stock dividend. </li></ul>Recording a Large Stock Dividend
  34. 34. <ul><li>On December 31, 2005, Router declared a 40% stock dividend, when the stock was selling for $8 per share. State law requires that large stock dividends be capitalized at par value per share. </li></ul>Recording a Large Stock Dividend 50,000 × 40% = 20,000 shares × $1 par value = $20,000
  35. 35. <ul><li>A distribution of additional shares of stock to stockholders according to their percent ownership. </li></ul>Stock Splits Common Stock $10 par value 100 shares Old Shares New Shares Common Stock $5 par value 200 shares
  36. 36. <ul><li>Thomas, Inc. has the following stockholders’ equity section just prior to a 2-for-1 stock split. </li></ul>Stock Splits
  37. 37. <ul><li>After the 2-for-1 split the stockholders’ equity section of the balance sheet looks like this . . . </li></ul>Stock Splits No accounting entry is made.
  38. 38. Stock Splits <ul><li>The split does not affect any equity amounts reported on balance sheet or any individual stockholder’s percent ownership. Both the contributed capital and retained earnings accounts are unchanged by a split. </li></ul>
  39. 39. <ul><li>Corporations acquire shares of their own stock. </li></ul>Treasury Stock Why would a company do that? <ul><li>Use the shares to acquire control of another corporation. </li></ul><ul><li>To avoid a hostile takeover. </li></ul><ul><li>Use the shares for employee stock options. </li></ul><ul><li>To maintain a strong market for its stock or show management confidence in the current price. </li></ul>
  40. 40. Treasury Stock
  41. 41. <ul><li>On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000. </li></ul>Purchasing Treasury Stock Treasury stock is shown as a reduction in total stockholders’ equity on the balance sheet.
  42. 42. <ul><li>On June 30, Whitt sold 100 shares of its treasury stock for $4 per share. </li></ul>Selling Treasury Stock at Cost $8,000 ÷ 2,000 shares = $4 cost per treasury share
  43. 43. <ul><li>On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share. </li></ul>Selling Treasury Stock Above Cost
  44. 44. <ul><li>On August 27, Whitt sold an additional 400 shares of its treasury stock for $1.50 per share. </li></ul>Selling Treasury Stock Below Cost
  45. 45. Reporting Income and Equity Net Income Discontinued Segments Changes in Accounting Principle Extraordinary Items Continuing Operations
  46. 46. Continuing Operations Revenues, expenses and income generated by the company’s continuing operations. Net Income Continuing Operations
  47. 47. Discontinued Segments Income from operating the discontinued segment prior to its disposal and gain or loss on the sale of the net assets of the segment. Net Income Discontinued Segments
  48. 48. Extraordinary Items A gain or loss that is unusual in nature and infrequent in occurrence. Net Income Extraordinary Items
  49. 49. Changes in Accounting Principles The increase or decrease in income when changing from one generally accepted accounting principle to another. Net Income Changes in Accounting Principle
  50. 50. Income Statement
  51. 51. <ul><li>Earnings per share is one of the most widely cited items of accounting information. </li></ul>Earnings Per Share Basic earnings per share = Net income - Preferred dividends Weighted-average common shares outstanding
  52. 52. <ul><li>Derby, Inc. reports net income of $75,000 and paid preferred dividends of $10,000 during 2005. The company started the year with 10,000 shares of common stock outstanding. Derby sold an additional 4,000 share of stock on March 31, and purchased 2,000 treasury shares on September 30, 2005. </li></ul>Changes in Shares Outstanding
  53. 53. Changes in Shares Outstanding <ul><li>Derby, Inc. reports net income of $75,000 and paid preferred dividends of $10,000 during 2005. The company started the year with 10,000 shares of common stock outstanding. Derby sold an additional 4,000 share of stock on March 31, and purchased 2,000 treasury shares on September 30, 2005. </li></ul>EPS = $75,000 - $10,000 12,500 = $5.20
  54. 54. <ul><li>The right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above the fixed option price, the value of the option increases. </li></ul>Stock Options Option purchase price $30 per share. Market price of stock $75 per share.
  55. 55. <ul><li>Options are given to key employees to motivate them to: </li></ul><ul><ul><li>focus on company performance, </li></ul></ul><ul><ul><li>take a long-run perspective, and </li></ul></ul><ul><ul><li>remain with the company. </li></ul></ul>Stock Options
  56. 57. <ul><li>Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating. </li></ul>Statement of Retained Earnings
  57. 58. Restricted Retained Earnings Legal Contractual Most states restrict the amount of treasury stock purchases to the amount of retained earnings. Loan agreements can include restrictions on paying dividends below a certain amount of retained earnings.
  58. 59. <ul><li>A corporation’s directors can voluntarily limit dividends because of a special need for cash such as the purchase of new facilities. </li></ul>Appropriated Retained Earnings
  59. 60. <ul><li>Correction of material errors in past years’ financial statements. If an amount is incorrectly expensed, add amount to Retained Earnings. </li></ul>Prior Period Adjustments
  60. 61. Statement of Stockholders’ Equity This is a more inclusive statement than the statement of retained earnings.
  61. 62. <ul><li>Records amount of stockholders’ equity applicable to common shares on a per share basis. </li></ul>Book Value per Share—Common Book value per common share = Stockholders’ equity applicable to common shares Number of common shares outstanding
  62. 63. <ul><li>Records amount of stockholders’ equity applicable to preferred shares on a per share basis. </li></ul>Book Value per Share—Preferred Book value per preferred share = Stockholders’ equity applicable to preferred shares Number of preferred shares outstanding
  63. 64. <ul><li>Tells us the annual amount of cash dividends distributed to common stockholders relative to the stock’s market price. </li></ul>Dividend Yield Dividend Yield = Annual cash dividends per share Market value per share
  64. 65. Price Earnings This ratio reveals information about the stock market’s expectations for a company’s future growth in earnings, dividends, and opportunities. If earnings go up, will the market price of my stock follow? Price- Earnings = Market value per share Earnings per share
  65. 66. Homework for Chapter 13 <ul><li>Ex 13-16, 13-17 </li></ul><ul><li>Problem 13-2A, 13-4A </li></ul><ul><li>Due on July 12, 2006 (Wednesday) </li></ul>
  66. 67. End of Chapter 13

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