Financial Accounting chp 11

1,790 views

Published on

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,790
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
51
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Financial Accounting chp 11

  1. 1. Slide11-1 Chapter 11 STOCKHOLDERS’ EQUITY: PAID-IN CAPITALMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  2. 2. Slide11-2 Corporations An entity created by law. Privately, or Existence is Closely, Held Ownership separate from can be owners. Has rights and privileges. Publicly HeldMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  3. 3. Slide11-3 Advantages of Incorporation Limited personal liability for stockholders. Transferability of ownership. Professional management. Continuity of existence.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  4. 4. Slide11-4 Disadvantages of Incorporation Heavy taxation. Greater regulation. Cost of formation. Separation of ownership and management.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  5. 5. Slide11-5 Publicly Owned Corporations Face Different Rules By LAW, publicly owned corporations must:  Prepare financial statements in accordance with GAAP.  Have their financial statement audited by an independent CPA.  Comply with federal securities laws.  Submit financial information for SEC review.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  6. 6. Slide11-6 Formation of a Corporation  Each corporation is The costs associated with formed according to incorporation are usually the laws of the state expensed immediately, but amortized over 5 years for where it is located. tax purposes.  The application for corporate status is called the Articles of Incorporation.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  7. 7. Slide11-7 Rights of Stockholders  Voting (in person or by proxy).  Proportionate Rights distribution of dividends.  Proportionate Stockholders distribution of assets in a liquidation.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  8. 8. Slide11-8 Rights of Stockholders C orporate O rganization C hart Stockholder Stockholders Ultimateledgers are often S to ckho ld ers usually meet control maintained by a once a year. stock transfer agent or stock B o a rd o f D irecto rs registrar. P resid ent S ecreta ry T rea surer C o ntro ller O ther V ice P resid entsMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  9. 9. Slide11-9 Rights of Stockholders Each unit of ownership is called a share of stock. A stock certificate serves as proof that a stockholder has purchased shares.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  10. 10. Slide11-10 Rights of Stockholders When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  11. 11. Slide11-11 Functions of the Board of Directors Corporate O rganization Chart Stockholders Overall Selected by a responsibility vote of the Board of Directors for managing stockholders the company. President Secretary Treasurer Controller Other Vice PresidentsMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  12. 12. Slide11-12 Functions of the Corporate Officers C orporate O rganization C hart Contractual and legal representation S to c k ho ld e rs Custodian of Chief funds Accountant B o a rd o f D ire c to rs P re sid e nt S e c re ta ry T re a sure r C o ntro ller O ther V ice P resid entsMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  13. 13. Slide11-13 Paid-In Capital of a Corporation S to c k h o ld e rs e q u ity is in c re a se d in tw o w a y s. C o n trib u tio n s b y R e te n tio n o f p ro fits in ve sto rs in e x c h a n g e e a rn e d b y th e fo r c a p ita l sto c k . c o rp o ra tio n . Pa id -in C a p ita l R e ta in e d E a rn in g sMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  14. 14. Slide11-14 Authorization and Issuance of Capital Stock Authorized Shares The maximum number of shares of capital stock that can be sold to the public.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  15. 15. Slide11-15 Authorization and Issuance of Capital Stock Authorized Shares Issued Unissued shares are shares are authorized authorized shares of shares of Usually stock that stock that shares are have been never have sold sold. been sold. through an underwriter.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  16. 16. Slide11-16 Authorization and Issuance of Capital Stock Authorized Outstanding shares are issued shares that are Shares owned by stockholders. Outstanding Unissued Issued Shares Shares Shares Treasury shares are Treasury issued shares that Shares have been reacquired by the corporation.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  17. 17. Slide11-17 Stockholders’ Equity 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.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  18. 18. Slide11-18 Stockholders’ Equity Common stock can be issued in three forms: Par Value No-Par Stated Value Common Common Common Stock Stock Stock Let’s examine All proceeds Treated like par this form of credited to value common stock. Common Stock stockMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  19. 19. Slide11-19 Issuance of Par Value Stock Record: The cash received. The number of shares issued × the par value per share in the Common Stock account. The remainder is assigned to Contributed Capital in Excess of Par. Prepare the journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share which occurred on September 1, 2003.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  20. 20. Slide11-20 Issuance of Par Value Stock The journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share on September 1, 2003, should include a credit to common stock for the par value of the shares issued. Date Description Debit Credit 1-Sep Cash 250,000 Common Stock 20,000 Contributed Capital in Excess of Par 230,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  21. 21. Slide11-21 Issuance of Par Value Stock Stockholders Equity with Common Stock Stockholders Equity Contributed capital: Common Stock - $2 par value; 50,000 shares authorized; 10,000 shares issued and outstanding $ 20,000 Contributed Capital in Excess of Par 230,000 Retained earnings 65,000 Total stockholders equity $ 315,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  22. 22. Slide11-22 Preferred Stock A separate class of stock, typically having priority over common shares in . . .  Dividend distributions (rate is usually stated).  Distribution of assets in case of liquidation. Other Features Include: Cumulative Usually Normally has dividend callable by no voting rights. the company. rights.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  23. 23. Slide11-23 Cumulative Preferred Stock Cumulative Vs. Noncumulative Dividends in Undeclared arrears must be dividends from paid before current and prior dividends may be years do not have paid on common to be paid in future stock. years.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  24. 24. Slide11-24 Stock Preferred as to Dividends Example: Consider the following partial Statement of Stockholders’ Equity. Common stock, $50 par value; 4,000 shares authorized, issued and outstanding $ 200,000 Preferred stock, 9%, $100 par value; 1,000 shares authorized, issued and outstanding 100,000 Total contributed capital $ 300,000 During 2002, the directors declare cash dividends of $5,000. In year 2003, the directors declare cash dividends of $42,000.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  25. 25. Slide11-25 Stock Preferred as to Dividends Preferred Common If Preferred Stock is Noncumulative: Example: Consider the following partial Statement of Year 2002 $5,000 dividends declared $ 5,000 $ - Stockholders’ Equity. Year 2003 Step 1: Current preferred dividend Common stock, $50 par value; 4,000 shares $ 9,000 authorized, issued and outstanding Step 2: Remainder to common shareholders $ 200,000 $ 33,000 Preferred stock, 9%, $100 par value; 1,000 If Preferred Stock is Cumulative: outstanding shares authorized, issued and 100,000 Total contributed capital Year 2002 $5,000 dividends declared $ 5,000 300,000 - $ $ Year 2003 During 2000, the directors declare cash dividends of Step 1: Dividends in arrears $ 4,000 Step 2: Currentyear 2001, the directors declare cash $5,000. In preferred dividend 9,000 Step 3: Remainder to common shareholders dividends of $42,000. $ 29,000 Totals $ 13,000 $ 29,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  26. 26. Slide11-26 Convertible Preferred Stock I just converted 100 shares Gee, I can’t of preferred stock into do that with 1,000 shares of common MY preferred stock and ended up with a stock! higher dividend yield! Some preferred stock is convertible into shares of common stock.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  27. 27. Slide11-27 Preferred Stock Stockholders Equity with Common and Preferred Stock Stockholders Equity Contributed capital: Preferred Stock - $100 par value; 1,000 shares authorized; 50 shares issued and outstanding $ 5,000 Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding 300,000 Contributed Capital in Excess of Par 1,000 Retained earnings 65,000 Total stockholders equity $ 371,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  28. 28. Slide11-28 Stock Issued for Assets Other Than Cash Companies sometimes issue stock in exchange for non- cash assets. Since no cash is received, record the transaction at the market value of the goods or services received.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  29. 29. Slide11-29 I love this stuff! Can we do some more?McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  30. 30. Slide11-30 Market Value Common stock is Accounting by carried at original issue the issuer. price. Investments in Accounting by marketable securities the investor. are carried at market value.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  31. 31. Slide11-31 Market Price of Preferred Stock Factors affecting market price The return based on of preferred stock: the market value is l Dividend rate called the “dividend l Risk yield.” l Level of interest ratesMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  32. 32. Slide11-32 Market Price of Common Stock Factors affecting Changes in market value market price of have no impact on the common stock: books of the issuer. l Investors’ expectations of future profitability. l Risk that this level of profitability will not be achieved.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  33. 33. Slide11-33 Stock Splits  Companies use stock splits to reduce market price. Ice Cream Parlor  Outstanding shares increase, but par value is decreased Banana Splits On Sale Now proportionately.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  34. 34. Slide11-34 Stock Splits - Example Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split. Before After Split Split Common Stock Shares 5,000 10,000 Increase Par Value per Share $ 1.00 $ 0.50 Decrease Total Par Value $ 5,000 $ 5,000 No ChangeMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  35. 35. Slide11-35 Treasury Stock Treasury No voting shares are Contra issued or shares that equity have been dividend account reacquired rights by the corporation. When stock is reacquired, the corporation records the treasury stock at cost.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  36. 36. Slide11-36 Treasury Stock - Example On May 1, 2003, East Corp. reacquired 3,000 shares of its common stock at $55 per share. Prepare the journal entry for May 1. D a te D e sc ri p ti o n De b it C re d i t 1-M ay T r e asu r y S to ck 165,000 C ash 165,000 3 0 0 0 sh a re s × $ 5 5 = $ 1 6 5 , 0 0 0McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  37. 37. Slide11-37 Treasury Stock - Example On December 3, 2003, East Corp. reissued 1,000 shares of the stock at $75 per share. Prepare the journal entry for December 3. 1,000 shares × $75 = $75,000 Date D a te Description D e sc ri p ti o n Debit De b it Credit C re d i t 3-Dec Cash 75,000 Treasury Stock 55,000 Contributed Capital in Excess of Par 20,000 1,000 shares × $55 cost = $55,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  38. 38. Slide11-38 Stockholders’ Equity - Presentation Stockholders Equity Contributed capital: Preferred Stock - $100 par value; 1,000 shares authorized; 50 shares issued & outstanding $ 5,000 Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding 300,000 Contributed Capital in Excess of Par 21,000 Retained earnings 65,000 Subtotal $ 391,000 Less: Treasury stock 110,000 Total Stockholders equity $ 281,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  39. 39. Slide11-39 End of Chapter 11 This isn’t what I meant when I asked for stock for my birthday!McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

×