The Statement of Stockholders

1
The Statement of Stockholders Equity

• Module 5

2
Statement of Shareholders Equity

• Documents changes in balance sheet equity
  accounts from one accounting period to the next
• Provides an important link between the balance
  sheet and the income statement
• Company may report info in note or supplementary
  schedule rather than formal statement if
  desired.(many do!)

3
Statement of S/E

• In a nutshell, it simply explains how each
  account got from the balance at the beginning of
  the period to the balance at the end of the
  period and describes events that caused the
  balances to change
• Federal Express Statement of Changes in
  Stockholders' Equity

4
Retained Earnings

• Changes in R/E account are primarily result of
  net income/loss and dividends
• Balance can also be affected by prior period
  adjustments and some changes in accounting
  principles
• Changes in R/E are watched by analysts and the
  details on what caused the changes are documented
  in the Statement of Stockholders Equity

5
Ownership of a Corporation

• Owners of common stock generally receive the
  following rights
• Voting (in person or by proxy).
• Distributions of profits (in the form of
  Dividends).
• Distributions of assets in a liquidation.
• Offers to purchase shares of a new stock issue
  (pro rata basis).

6
(No Transcript)
7
Authorized, Issued, and Outstanding Capital Stock
Authorized Shares
The maximum number of shares of capital stock
that can be sold to the public is called the
authorized number of shares.
8
Authorized, Issued, and Outstanding Capital Stock
Authorized Shares
Issued shares have been sold.
Unissued shares have never been sold.
9
Authorized, Issued, and Outstanding Capital Stock
Authorized Shares
owned by stockholders.
Outstanding Shares
Unissued Shares
Issued Shares
10
Authorized, Issued, and Outstanding Capital Stock
Authorized Shares
owned by stockholders.
Outstanding Shares
Unissued Shares
Issued Shares
Treasury Shares
reacquired by the corporation.
11
Sale and Issuance of Capital Stock

• An initial public offering (IPO) is the very
  first time a corporation sells stock to the
  public.
• SEC's IPO Information

12
Common Stock

• Basic voting stock of the corporation
• Ranks after preferred stock for dividend and
  liquidation distribution.
• Dividend rates are determined by the board of
  directors based on the corporations
  profitability and other factors.

13
Par Value and No-par Value Stock

• Par value
• Is a nominal value per share of capital stock
  specified in the charter.
• Has no relationship to market value.
• Serves as the basis for legal capital.
• Legal capital is the amount of capital, required
  by the state, that must remain invested in the
  business.
• It serves as a cushion for creditors.

14
Par Value and No-par Value Stock

• No-par value is capital stock that does not have
  an amount per share specified in the charter.
• When no-par stock is issued by a corporation, the
  amount of legal capital is defined by the state.
• Stated value is an amount per share that is
  specified by the corporation when it issues
  no-par stock.

15
Preferred Stock

• Has dividend and liquidation preference over
  common stock.
• Cumulative preferred stock has a preference for
  all past dividends over any paid to common
  shareholders.
• Generally does not have voting rights.
• Usually has a par or stated value.
• Usually has a fixed dividend rate that is stated
  as a percentage of the par value.

16
Special Features of Preferred Stock

• Convertible preferred stock may be exchanged for
  common stock. (Its up to the stockholder to
  decide.)
• Callable preferred stock may be repurchased by
  the corporation at a predetermined price. (Its
• the companys choice.)

17
(No Transcript)
18
Accounting for Capital Stock Transactions

• Two primary sources of stockholders equity
• Contributed capital
• Par or stated value of issued stock.
• Additional paid-in capital in excess of par or
  stated value.
• Retained earnings
• The cumulative net income earned by the
  corporation less the cumulative dividends
  declared by the corporation.

19
Accounting for the Issue of Common Stock

• When stock is issued, the equity account Common
  Stock is credited (increased) for the par or
  stated value of the stock.
• If the stock sold for more than par, the
  additional amount is credited (increased) to the
  equity account Paid in Capital in Excess of Par,
  Common Stock.

20
Treasury Stock

• A corporations own stock that had been issued
  but was subsequently reacquired and is still
  being held by that corporation.
• Why would a corporation reacquire its own stock?
• To reduce the shares outstanding.
• Because the market price is low.
• To increase earnings per share, if shares wont
  be reissued soon.
• To use in employee stock option programs.

21
Treasury Stock

• is considered issued stock but not outstanding
  stock.
• has no voting or dividend rights.
• is a contra equity account.
• reduces total stockholders equity on the Balance
  Sheet.

22
Accounting for Cash Dividends

• Dividends must be declared by the board of
  directors before they can be paid.
• The corporation is not legally required to
  declare (and subsequently pay) dividends.
• Once a cash dividend is declared, a liability
  (Dividends Payable) is created.
• Cash dividends require sufficient cash and
  retained earnings, but NOT necessarily Net
  Income in the current year, to cover the
  dividend.

23
Dividend Dates

• Date of declaration
• Date of record
• Date of actual payment to shareholders

7 24
30
24
Some interesting side trips

• Dividend calendar McGraw Hill
• Dividends are not always straightforward
• Dividend advice
• DRIPs

25
Dividends on Preferred Stock

• Current preferred dividends must be paid before
  paying any dividends to common stock.
• If a preferred dividend is not paid, the unpaid
  amount is either cumulative (a dividend in
  arrears) or noncumulative.
• Cumulative Unpaid dividends must be paid before
  common dividends.
• Noncumulative Unpaid dividends are lost.

26
Calculating Preferred and Common Dividends

• ABC Co. has 10 shares of 100 par, 6 cumulative
  preferred stock outstanding. Assume that NO
  dividends were paid in 19X1.
• At the end of 19X2, the Board of Directors
  declares a total of 200 worth of dividends for
  its preferred and common shareholders.
• How much will go to the preferred shareholders?

27
Preferred Shareholders get their dividends first

• Cumulative means that the preferred shareholders
  get all the past dividends that they were not
  paid (called dividends in arrears which must be
  footnoted, but NOT reported as a liability on the
  balance sheet) before common stockholders can
  receive a dividend.
• 10 preferred shares x 100 par x .06 60/year
• They get a total of 120 60 for 19X1 dividends
  in arrears and 60 for 19X2 current year
  dividend.
• Common shareholders get the remaining 80.
  (80/30 shares outstanding2.67 per share.)
  31 shares issued - 1 still in Treasury 30
  shares outstanding.

28
Cash Dividends

• Whats needed to pay cash dividends?
• retained earnings
• cash (but, could borrow cash to pay dividend)
• no restrictions from outsiders
• Effects of cash dividends on financial statements
• decreases Assets (when they are actually paid)
  and Retained Earnings (dividends).
• NO EFFECT on Net Income.

29
Accounting for Stock Dividends

• Stock dividends are distributions to stockholders
  of additional shares of stock, NOT CASH!
• Why issue a stock dividend?
• Low on cash (but want to reward stockholders)
  
• To decrease market price of stock. Why?
• To increase number of stockholders (assuming
  some of the newly issued stock will be sold).

30
Accounting for Stock Dividends

• All stockholders receive the same percentage
  increase in the number of shares they own (pro
  rata basis).
• No change in total stockholders equity.
• No change in par values.
• Effect on financial statements?

31
Retained Earnings

• Appropriating (or Restricting) Retained Earnings
• Board of Directors can restrict (imposed by
  outsiders) or appropriate (companys choice)
  portions of retained earnings.
• It is a way of communicating why more dividends
  are not being paid.
• Does NOT change TOTAL Ret. Earnings.
  
• An appropriation (or restriction) only
  separates the retained earnings into two
  categories, unappropriated and appropriated.
  (Must have Unappropriated or Unrestricted R.E. to
  declare dividends.)

32
Accounting for Stock Splits

• Distributions of 100 or more of stock to
  stockholders.
• Decreases par value per share of stock, but total
  par value stays the same.
• Increases number of outstanding shares.
• No change in total stockholders equity.

33
Stock Split example

• XYZ Co. has 1000 shares outstanding. Each
  share has a 10 par value, but is selling on the
  NYSE for 80 per share.
• The Company declares a 4 for 1 stock split.
• Complete the following
• Before After
• shares outstanding
• Par value per share
• Total par value
• Total stock market value
• Market value per share

1,000 10 10,000 80,000
80
4,000 2.50 10,000 80,000 20
34
Stock Split example continued

• XYZ Co. has 1000 shares outstanding. Each
  share has a 10 par value, but is selling on the
  NYSE for 80 per share.
• The Company declares a 4 for 1 stock split.
• Ms. Smith owned 100 shares before the split.
• Complete the following for Ms. Smiths stock
• Before After
• shares owned...
• Total company shares...
• of stock owned...
• Total market value of
• Ms. Smiths stock.

100 1,000 10 8,000

400 4,000 10 8,000

Remember, the stock price dropped from 80 to 20
per share.
35
Retained Earnings

• Represents the net income that has been earned
  less dividends that have been declared since the
  first day of operations for the company.

Example (amounts assumed)
Balance January 1, 20X1 500,000 Net
income for 20X1 30,000 - Dividends
for 20X1 Cash dividends (10,000)
Stock dividends ( 5,000) Balance
January 31, 20X1 515,000
36
Retained Earnings

• What affects Retained Earnings?
• net income (through closing entries)
• cash dividends
• stock dividends
• prior period adjustments
• Accounting ERRORS made in previous years that are
  being corrected now.

37
The End