by ZIN Production

1. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Financial & Managerial
Accounting
Financial & Managerial
Accounting
The Basis for Business Decisions
FOURTEENTH EDITION
Williams Haka Bettner Carcello

2. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
STOCKHOLDERS’ EQUITY:
Paid-In Capital
Chapter
11

3. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Existence is
separate from
owners.
Existence is
separate from
owners.
An entity
created by law.
An entity
created by law.
Has rights and
privileges.
Has rights and
privileges.
Privately, or
Closely, Held
Publicly Held
Ownership
can be
CorporationsCorporations

4. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO1
To discuss the
advantages and
disadvantages of
organizing a business
as a corporation.

5. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Limited personal
liability for
stockholders
Limited personal
liability for
stockholders
Transferability of
ownership
Transferability of
ownership
Professional
management
Professional
management
Continuity of
existence
Continuity of
existence
Advantages of IncorporationAdvantages of Incorporation

6. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Heavy taxationHeavy taxation
Greater regulationGreater regulation
Cost of formationCost of formation
Separation of
ownership and
management
Separation of
ownership and
management
Disadvantages of IncorporationDisadvantages of Incorporation

7. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO2
To distinguish between
publicly owned and
closely held
corporations.

8. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Publicly Owned Corporations Face
Different Rules
Publicly Owned Corporations Face
Different Rules
By LAW, publicly owned corporations must:By LAW, publicly owned corporations must:
 Prepare financial statements in accordancePrepare financial statements in accordance
with GAAP.with GAAP.
 Have their financial statement audited by anHave their financial statement audited by an
independent CPA.independent CPA.
 Comply with federal securities laws.Comply with federal securities laws.
 Submit financial information for SEC review.Submit financial information for SEC review.
By LAW, publicly owned corporations must:By LAW, publicly owned corporations must:
 Prepare financial statements in accordancePrepare financial statements in accordance
with GAAP.with GAAP.
 Have their financial statement audited by anHave their financial statement audited by an
independent CPA.independent CPA.
 Comply with federal securities laws.Comply with federal securities laws.
 Submit financial information for SEC review.Submit financial information for SEC review.

9. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
The costs associated with
incorporation are usually
expensed immediately, but
amortized over 5 years for
tax purposes.
The costs associated with
incorporation are usually
expensed immediately, but
amortized over 5 years for
tax purposes.
Formation of a CorporationFormation of a Corporation
• Each corporation is
formed according
to the laws of the
state where it is
located.
• The application for
corporate status is
called the Articles
of Incorporation.

10. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO3
To explain the rights of
stockholders and the
roles of corporate
directors and officers.

11. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Stockholders
Right
s
Voting (in person
or by proxy).
Proportionate
distribution of
dividends.
Proportionate
distribution of
assets in a
liquidation.
Rights of StockholdersRights of Stockholders

12. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
C o r p o r a te O r g a n iz a tio n C h a r t
S e c r e t a r y T r e a s u r e r C o n t r o lle r O t h e r V ic e
P r e s id e n t s
P r e s id e n t
B o a r d o f D ir e c t o r s
S t o c k h o ld e r sUltimate
control
Ultimate
control
Stockholders
usually meet
once a year.
Stockholders
usually meet
once a year.
Rights of StockholdersRights of Stockholders

13. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
C o r p o r a te O r g a n iz a tio n C h a r t
S e c r e t a r y T r e a s u r e r C o n t r o lle r O t h e r V ic e
P r e s id e n t s
P r e s id e n t
B o a r d o f D ir e c t o r s
S t o c k h o ld e r sUltimate
control
Ultimate
control
Stockholders
usually meet
once a year.
Stockholders
usually meet
once a year.
Stockholder
ledgers are often
maintained by a
stock transfer
agent or stock
registrar.
Stockholder
ledgers are often
maintained by a
stock transfer
agent or stock
registrar.
Rights of StockholdersRights of Stockholders

14. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Each unit of
ownership is
called a share of
stock.
Stock certificates
serve as proof
that a
stockholder has
purchased
shares.
Each unit of
ownership is
called a share of
stock.
Stock certificates
serve as proof
that a
stockholder has
purchased
shares.
Rights of StockholdersRights of Stockholders

15. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
When the stock
is sold, the
stockholder
signs a transfer
endorsement on
the back of the
stock certificate.
Rights of StockholdersRights of Stockholders

16. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
C o r p o r a te O r g a n iz a tio n C h a r t
S e c r e t a r y T r e a s u r e r C o n t r o lle r O t h e r V ic e
P r e s id e n t s
P r e s id e n t
B o a r d o f D ir e c t o r s
S t o c k h o ld e r s
Overall
responsibility
for managing
the company.
Overall
responsibility
for managing
the company.
Selected by a
vote of the
stockholders
Selected by a
vote of the
stockholders
Functions of the Board of DirectorsFunctions of the Board of Directors

17. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
C o r p o r a te O r g a n iz a tio n C h a r t
S e c r e t a r y T r e a s u r e r C o n t r o lle r O t h e r V ic e
P r e s id e n t s
P r e s id e n t
B o a r d o f D ir e c t o r s
S t o c k h o ld e r s
Chief
Accountant
Chief
Accountant
Contractual and legal
representation
Contractual and legal
representation
Custodian of
funds
Custodian of
funds
Functions of the Corporate OfficersFunctions of the Corporate Officers

18. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO4
To account for paid-in
capital and prepare the
equity section of a
corporate balance
sheet.

19. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
P a id - i n C a p i t a l
C o n t r i b u t i o n s b y
in v e s t o r s in e x c h a n g e
f o r c a p i t a l s t o c k .
R e t a i n e d E a r n i n g s
R e t e n t i o n o f p r o f its
e a r n e d b y t h e
c o r p o r a t i o n .
S t o c k h o ld e r s ' e q u i t y is
i n c r e a s e d in tw o w a y s .
Stockholders’ Equity of a
Corporation
Stockholders’ Equity of a
Corporation

20. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
The maximum
number of
shares of capital
stock that can be
sold to the
public.
Authorized
Shares
Authorized
Shares
Authorization and Issuance
of Capital Stock
Authorization and Issuance
of Capital Stock

21. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
Usually
shares are
sold
through an
underwriter.
Usually
shares are
sold
through an
underwriter.
Authorized
Shares
Authorized
Shares
Authorization and Issuance
of Capital Stock
Authorization and Issuance
of Capital Stock

22. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
UnissuedUnissued
SharesShares
Treasury
Shares
Outstanding
Shares
Treasury shares are
issued shares that
have been reacquired
by the corporation.
Issued
Shares
Issued
Shares
Outstanding shares are
issued shares that are
owned by
stockholders.
Authorized
Shares
Authorized
Shares
Authorization and Issuance
of Capital Stock
Authorization and Issuance
of Capital Stock

23. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
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.
Market price is
the amount that
each share of
stock will sell
for in the
market.
Stockholders’ EquityStockholders’ Equity

24. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Common stock can be issued in three forms:Common stock can be issued in three forms:
No-Par
Common
Stock
No-Par
Common
Stock
Par Value
Common
Stock
Par Value
Common
Stock
Stated Value
Common
Stock
Stated Value
Common
Stock
All proceeds
credited to
Common Stock
All proceeds
credited to
Common Stock
Treated like
par value
common stock
Treated like
par value
common stock
Stockholders’ EquityStockholders’ Equity
Let’s examine
this form of
stock.
Let’s examine
this form of
stock.

25. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Matrix, Inc. issues 10,000 shares of its
$2 par value stock for $25 per share on
September 1, 2007.
Matrix, Inc. issues 10,000 shares of its
$2 par value stock for $25 per share on
September 1, 2007.
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.
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.
Issuance of Par Value StockIssuance of Par Value Stock

26. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Issuance of Par Value StockIssuance of Par Value Stock
Matrix, Inc. issues 10,000 shares of its
$2 par value stock for $25 per share on
September 1, 2007.
Matrix, Inc. issues 10,000 shares of its
$2 par value stock for $25 per share on
September 1, 2007.
10,000 × $2 = $20,00010,000 × $2 = $20,000

27. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Issuance of Par Value StockIssuance of Par Value Stock

28. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO5
To contrast the features
of common stock with
those of preferred
stock.

29. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
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.
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.
Cumulative
dividend
rights.
Cumulative
dividend
rights.
Normally has
no voting
rights.
Normally has
no voting
rights.
Usually
callable by
the company.
Usually
callable by
the company.
Other Features Include:
Preferred StockPreferred Stock

30. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Vs. NoncumulativeCumulative
Dividends in
arrears must be
paid before
dividends may be
paid on common
stock.
Dividends in
arrears must be
paid before
dividends may be
paid on common
stock.
Undeclared
dividends from
current and prior
years do not have
to be paid in future
years.
Undeclared
dividends from
current and prior
years do not have
to be paid in future
years.
Cumulative Preferred StockCumulative Preferred Stock

31. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Example: Consider the following partial Statement of
Stockholders’ Equity.
During 2007, the directors declare cash dividends
of $5,000. In 2008, the directors declare cash
dividends of $42,000.
Stock Preferred as to DividendsStock Preferred as to Dividends

32. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Stock Preferred as to DividendsStock Preferred as to Dividends

33. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
I just converted 100
shares of preferred stock
into 1,000 shares of
common stock and ended
up with a higher dividend
yield!
I just converted 100
shares of preferred stock
into 1,000 shares of
common stock and ended
up with a higher dividend
yield!
Gee, I can’t
do that with
MYMY preferred
stock!
Gee, I can’t
do that with
MYMY preferred
stock!
Some preferred
stock is convertible
into shares of
common stock.
Other Features of Preferred StockOther Features of Preferred Stock

34. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Preferred StockPreferred Stock

35. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO6
To discuss the factors
affecting the market
price of preferred stock
and common stock.

36. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Accounting by
the issuer.
Accounting by
the issuer.
Accounting by
the investor.
Accounting by
the investor.
Common stock is
carried at original issue
price.
Common stock is
carried at original issue
price.
Investments in
marketable securities
are carried at market
value.
Investments in
marketable securities
are carried at market
value.
Market ValueMarket Value

37. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Factors affecting market price of preferred stock:Factors affecting market price of preferred stock:
• Dividend rateDividend rate
• RiskRisk
• Level of interest ratesLevel of interest rates
Factors affecting market price of preferred stock:Factors affecting market price of preferred stock:
• Dividend rateDividend rate
• RiskRisk
• Level of interest ratesLevel of interest rates
The return based on the
market value is called the
“dividend yield.”
The return based on the
market value is called the
“dividend yield.”
Market Price of Preferred StockMarket Price of Preferred Stock

38. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Factors affecting
market price of
common stock:
Investors’
expectations of
future profitability.
Risk that this level
of profitability will
not be achieved.
Factors affecting
market price of
common stock:
Investors’
expectations of
future profitability.
Risk that this level
of profitability will
not be achieved.
Changes in market value
have no impact on the
books of the issuer.
Changes in market value
have no impact on the
books of the issuer.
Market Price of Common StockMarket Price of Common Stock

39. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO7
To explain the
significance of par
value, book value, and
market value of capital
stock.

40. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Book Value per Share
of Common Stock
Book Value per Share
of Common Stock
Total Stockholders’ Equity
Number of Common Shares Outstanding
Preferred stock and preferred
dividends in arrears are deducted
from total stockholders’ equity.
Book Value Market Value=

41. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO8
To explain the purpose
and effects of a stock
split.

42. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Ice Cream Parlor
Banana Splits
On Sale Now
Stock SplitsStock Splits
 Companies use
stock splits to
reduce market
price.
 Outstanding shares
increase, but par
value is decreased
proportionately.
 Companies use
stock splits to
reduce market
price.
 Outstanding shares
increase, but par
value is decreased
proportionately.

43. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Assume a corporation has 5,000 shares of
$1 par value common stock outstanding
before a 2–for–1 stock split.
Increase
Decrease
No
Change
Stock SplitStock Split

44. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO9
To account for
treasury stock
transactions.

45. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
No votingNo voting
oror
dividenddividend
rightsrights
Contra
equity
account
When stock is reacquired, the corporation
records the treasury stock at cost.
When stock is reacquired, the corporation
records the treasury stock at cost.
Treasury
shares are
issued
shares that
have been
reacquired
by the
corporation.
Treasury
shares are
issued
shares that
have been
reacquired
by the
corporation.
Treasury StockTreasury Stock

46. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
On May 1, 2007, East, Inc. reacquires 3,000 shares
of its common stock at $55 per share.
Prepare the journal entry for May 1.
Treasury Stock - ExampleTreasury Stock - Example

47. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
On December 3, 2007, East Corp. reissued 1,000
shares of the stock at $75 per share.
Prepare the journal entry for December 3.
Treasury Stock - ExampleTreasury Stock - Example
1,000 shares × $55 cost = $55,0001,000 shares × $55 cost = $55,000
1,000 shares × $75 = $75,0001,000 shares × $75 = $75,000

48. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Stockholders’ Equity - PresentationStockholders’ Equity - Presentation

49. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
End of Chapter 11End of Chapter 11