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Hhtfa8e ch09 stud devry Accounting 212 FINANCIAL ACCOUNTING
- 1. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 1
- 2. Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 2
- 3. Stockholders’ Equity Chapter 9 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 3
- 4. Explain the features of a corporation Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 4
- 5. Corporate Characteristics ADVANTAGES DISADVANTAGES Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 5
- 6. Organizing a Corporation • Corporate organizers (incorporators) obtain a charter from the state • Incorporators: ▫ Pay fees ▫ Sign the charter ▫ File documents with the state ▫ Agree to set of bylaws Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 6
- 7. Stockholders Board of Directors Chairperson of the Board President (Chief Operating Officer) Vice- Chief Financial Secretary Presidents Officer Controller Treasurer Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 7
- 8. Stockholder Rights Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 8
- 9. Stockholders’ Equity Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 9
- 10. Classes of Stock COMMON PREFERRED • Basic form of stock • Has advantages over • Has four basic rights common • Shareholders benefit • Shareholders earn a fixed most if corporation dividend succeeds • Very few corporations issue Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 10
- 11. Comparison of Issuing Stock and Debt Common Preferred Long-term stock stock debt Obligation to repay No No Yes principal Dividends/interest Dividends are Dividends are Interest not tax not tax expense is deductible deductible tax deductible Obligation to pay Only after Only after At fixed rates dividends/interest declaration declaration and date Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 11
- 12. Par Value • Arbitrary amount assigned to share of stock • Usually set low to avoid legal issues • No-par stock Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 12
- 13. Account for the issuance of stock Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 13
- 14. Issuing Stock at Par JOURNAL Date Accounts and explanation Debit Credit Cash 50,000 Common stock 50,000 Issued stock at par value Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 14
- 15. Issuing Stock above Par JOURNAL Date Accounts and explanation Debit Credit Cash 300,000 Common stock 50,000 Paid-in capital in excess of par - Common 250,000 Issued stock above par value Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 15
- 16. Issuing No-Par Stock JOURNAL Date Accounts and explanation Debit Credit Cash 300,000 Common stock 300,000 Issued no-par stock Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 16
- 17. Stock Issued for Non-Cash Assets • Asset received is recorded at current market value JOURNAL Date Accounts and explanation Debit Credit Equipment 100,000 Common stock 20,000 Paid-in capital in excess of par - Common 80,000 Issued stock in exchange for equipment Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 17
- 18. Preferred Stock • Follows same pattern as accounting for common stock • May have separate accounts for paid-in capital in excess of par for preferred and common • Can be issued with conversion feature Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 18
- 19. Number of Shares Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 19
- 20. Describe how treasury stock affects a company Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 20
- 21. Treasury Stock • Issued shares reacquired by the company • Reasons: ▫ Make shares available for employee stock purchase plans ▫ Plan to “buy low” and “sell high” ▫ Avoid takeover ▫ Increase earnings per share Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 21
- 22. Recording Treasury Stock • Recorded at cost • Classified as a contra-stockholders’ equity account JOURNAL Date Accounts and explanation Debit Credit Treasury stock 95,000 Cash 95,000 Purchased treasury shares Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 22
- 23. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 23
- 24. Resale of Treasury Shares JOURNAL Date Accounts and explanation Debit Credit Cash 100,000 Treasury stock 95,000 Paid-in capital from treasury stock transactions 5,000 Purchased treasury shares Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 24
- 25. Exercise 9-24A JOURNAL Date Accounts and explanation Debit Credit 1-17 Cash Common stock Paid-in capital in excess of part 5-23 Treasury stock Cash 6-11 Cash Treasury stock Paid-in capital - treasury stock transactions Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 25
- 26. Exercise 9-24A Effect on Stockholders’ Equity 1-17 Common stock issued 5-23 Purchase of treasury stock 6-11 Sale of treasury stock Total change Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 26
- 27. Retained Earnings Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 27
- 28. Retained Earnings Balance Lifetime Credit Lifetime balance earnings > losses & dividends Lifetime Debit Lifetime balance earnings < losses & dividends Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 28
- 29. Account for dividends Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 29
- 30. Cash Dividends • Company must have both: ▫ Enough Retained earnings to declare the dividend ▫ Enough Cash to pay the dividend • Board of directors has authority to declare a dividend Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 30
- 31. Dividend Dates 1. Declaration date JOURNAL Date Accounts and explanation Debit Credit Retained earnings Dividends payable 2. Date of record No entry 3. Payment date JOURNAL Date Accounts and explanation Debit Credit Dividends payable Cash Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 31
- 32. Analyzing Retained Earnings Retained Earnings Dividends Beginning balance Net Income Ending balance Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 32
- 33. Dividends on Preferred Stock • Paid dividends before common stockholders • Stated as a percent of par value or a dollar amount per share • May be cumulative Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 33
- 34. Exercise 9-28A Preferred dividend = $0.50 x 9% x 40,000 shares $1,800 Preferred Common 2010 - $60,000 Dividends in arrears (2 years x 1,800) Current year Remainder to common 2011 - $120,000 Preferred – current year Remainder to common Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 34
- 35. Stock Dividends • Proportional distribution of stock to shareholders • Increase stock account and decrease Retained earnings • Reasons stock dividends are distributed Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 35
- 36. Size of Stock Dividends SMALL LARGE • 25% or less of • Greater than 25% outstanding shares of outstanding • Recorded at shares market value • Recorded at par value Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 36
- 37. Stock Splits • Increase in shares with a proportionate reduction in par value • Decreases market price of shares • No accounts affected Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 37
- 38. Effect on Total: Stockholders’ Transaction Assets = Liabilities + Equity Issuance of stock Increase No effect Increase Purchase of treasury stock Decrease No effect Decrease Sale of treasury stock Increase No effect Increase Declaration of cash dividend No effect Increase Decrease Payment of cash dividend Decrease Decrease No effect Stock dividend No effect No effect No effect Stock split No effect No effect No effect Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 38
- 39. Use stock values in decision making Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 39
- 40. Stock Values Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 40
- 41. Compute return on assets and return on equity Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 41
- 42. Return on Assets Net income + Interest expense Average total assets Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 42
- 43. Return on Equity Net income – Preferred dividends Average common stockholders’ equity Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 43
- 44. Report equity transactions on the statement of cash flows Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 44
- 45. Equity Transactions on the Cash Flow Statement Transaction Shown in the Financing Activity Section as a: Issue stock for cash Inflow Purchase treasury stock Outflow Sell treasury stock Inflow Pay dividends Outflow Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 45
- 46. Stockholders’ Equity on the Balance Sheet Stockholders’ Equity Preferred stock, 7%, $100 par, 5,000 shares authorized and issued $500,000 Common stock, $1 par, 100,000 shares authorized, 75,000 shares issued 75,000 Additional paid-in capital 2,500,000 Retained earnings 1,300,000 Less treasury stock, common (50,000) Total stockholders’ equity $4,325,000 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 46
- 47. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 47