Reporting and Analyzing Stockholders Equity

1
Chapter 11

• Reporting and Analyzing Stockholders Equity

2
Corporation

• Possesses legal entity
• Created by law
• Has most of the rights and privileges of a person
• Classified by purpose and ownership
• Purpose - profit or nonprofit
• Ownership - publicly held (may have thousands of
  stockholders, regularly traded on the stock
  exchange) or privately held (few stockholders,
  stock not available for sale for the general
  public)

3
Characteristics of a Corporation

• Separate legal existence
• Limited liability of stockholders
• Transferable ownership rights
• Ability to acquire capital
• Continuous life
• Corporation management
• Government regulations
• Additional taxes

4
Stockholder Rights

• Once chartered, the corporation sells stock
• If only one class of stock - called common stock
• Ownership rights specified in the articles of
  incorporation or by-laws
• Illustration 11-3
• Proof of stock ownership is a printed or engraved
  form known as stock certificate Illustration
  11-4

5
Questions in Issuing Stock

• How many shares should be authorized for sale?
• How should the stock be issued?
• At what price should the shares be issued?
• What value should be assigned to the stock?
• Authorized stock - Maximum amount of stock a
  corporation is allowed to sell as authorized by
  corporate charter
• Outstanding stock - Number of shares of issued
  stock
• that are being held by stockholders

6
Setting Price of Stock

• Company's anticipated future earnings
• Its expected dividend rate per share
• Its current financial position
• Current state of the economy
• Current state of the securities market

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Par and No-Par Value Stocks

• Par value stock
• Is capital stock that has been assigned an
  arbitrary value per share in the corporate
  charter
• Is usually low because some states levy a tax
  on the corporation based on par value
• The legal capital per share that must be
  retained in the business
• No-par value stock
• Capital stock that has not been assigned a value
  per share in the corporate charter.
• Stated value of no-par value stock
• Amount per share assigned by the board of
  directors to no-par stock
• Par value and stated value have no relationship
  to market value

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Relationship of Par and No-Par Value to Legal
Capital
9
Stockholders Equity Section

• Paid-in (contributed) capital
• Amount paid to corporation by stockholders for
  shares of ownership
• Retained earnings (earned capital)
• Earned capital held for future use in the
  business

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Accounting for Common Stock Issues

• The issue of common stock affects only paid-in
  capital accounts
• When the issuance of common stock for cash is
  recorded, the par value of the shares is credited
  to Common Stock
• The portion of the proceeds above or below par
  value is recorded in a separate paid-in capital
  account

11
Issuing Stock

• Assume Hydro-Slide, Inc., issues 1,000 shares
  of 1 par value of common stock at par for cash.
• Cash 1,000 Common
  Stock 1,000
• If Hydro-Slide, Inc., issues an additional 1,000
  shares of the 1 par value common stock for cash
  at 5 per share, the entry is
• Cash 5,000
• Common Stock 1,000
• Paid-in Capital in 4,000
• Excess of Par Value
• Illustration 11-6

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Treasury Stock

• Corporation's own stock
• Issued, fully paid for, reacquired by the
  corporation, held in its treasury for future use
• Reissue shares to officers and employees under
  bonus and stock compensation plans
• Increase trading of company's stock in
  securities market in hopes of enhancing market
  value
• Have additional shares available for use in
  acquisition of other companies
• Reduce number of shares outstanding thereby
  increasing earnings per share.
• Prevent a hostile takeover

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Treasury Stock

• On February 1, 2001, Mead acquires 4,000 shares
  of its stock at 8 per share
• Treasury Stock 32,000
• Cash 32,000
• The Treasury Stock account would increase by the
  cost of the shares purchased - 32,000
• The original paid-in capital account, Common
  Stock, would not be affected because the number
  of issued shares does not change
• Treasury stock is deducted from total paid-in
  capital and retained earnings in the
  stockholders' equity section of the balance sheet
• Illustrations 11-7 and 11-8
• Authorized, Issued, Outstanding shares

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Preferred Stock

• Preferred stockholders do not have voting rights
• Capital stock that has contractual preferences
  over common stock in certain areas
• Dividends
• Assets in the event of liquidation
• Assume Corporation issues 10,000 shares of 10
  par value preferred stock for 12 cash per share.
  
• Cash 120,000
• Preferred Stock 100,000
• Paid-in Capital in Excess 20,000
• of Par Value--Preferred Stock

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Dividend Preferences

• Preferred stockholders have the right to share in
  the distribution of corporate income before
  common stockholders
• The first claim to dividends does not guarantee
  dividends
• Cumulative - Feature of preferred stock entitling
  the stockholder to receive current and unpaid
  prior-year dividends before common stockholders
  receive any dividends
• Dividends in arrears - Preferred dividends that
  were scheduled to be declared but were not
  declared during a given period
• No liability exists until a dividends is declared
  by board of directors.
• Liquidation preference - a feature that gives
  preferred stockholders preference to corporate
  assets in the event of liquidation

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Dividends

• Distribution by a corporation to its stockholders
  on a pro rata basis
• Pro rata means that if you own 10 of the common
  shares, you will receive 10 of the dividend
• Cash dividends a pro rata distribution of cash
  to stockholders
• A corporation must have 3 things to pay
  cashdividends
• Retained earnings
• Adequate cash
• Declared dividends

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Cash Dividends

• Three dates are important in connection with
  dividends
• the declaration date, the record date, the
  payment date
• On December 1, 2001 the directors of Media
  General declare a .50 per share cash dividend on
  100,000 shares of 10 par value common stock.
• The dividend is 50,000 (100,000 x .50)
• Declaration date
• Retained Earnings 50,000
• Dividends Payable
  50,000
• Record date - ownership of the outstanding shares
  is determined for dividend purposes. No Entry
  necessary.
• Payment date
• Dividends Payable 50,000
• Cash 50,000

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Stock Dividends

• Is a pro rata distribution of the corporation's
  own stock to stockholders
• Results in a decrease in retained earnings and an
  increase in paid-in capital
• Does not decrease total stockholders' equity or
  total assets
• Is often issued by companies that do not have
  adequate cash to issue a cash dividend
• You have a 2 ownership interest in Cetus Inc.,
  owning 20 of its 1,000 shares of common stock
• In a 10 stock dividend, 100 shares (1,000 x
  10) of stock would be issued. You would receive
  two shares (2 x 100), but your ownership
  interest would remain at 2 (22 /1,100)

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Stock Dividends

• Satisfy stockholders' dividend expectations
  without spending cash
• Increase marketability of its stock by increasing
  number of shares outstanding and decreasing
  market price per share
• Emphasize that a portion of stockholders' equity
  has been permanently reinvested in business and
  is unavailable for cash dividends

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Stock Dividends

• A small stock dividend (less than 20-25 of the
  corporation's issued stock) is recorded at the
  fair market value per share
• A large stock dividend (greater than 20-25 of
  the corporation's issued stock) is recorded at
  par or stated value per share. Medland
  Corporation has 300,000 in retained earnings and
  declares a 10 stock dividend on its 50,000
  shares of 10 par value common stock.
• The current fair market value of the stock is 15
  per share
• Retained Earnings 75,000
• Common Stock Dividends
  50,000 Distributable Paid-in Capital in
  Excess 25,000
  of Par Value

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Stock Split

• Issuance of additional shares of stock to
  stockholders
• A reduction in the par or stated value
• An increase in number of shares
• A stock split does not have any effect on total
  paid-in capital, retained earnings, and total
  stockholders' equity
• Because a stock split does not affect the
  balances in stockholders' equity accounts, no
  journal entry is necessary

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Retained Earnings

• Net income that is retained in the business
• The balance in retained earnings is part of the
  stockholders' claim on the total assets of the
  corporation
• Retained earnings does not represent a claim on
  any specific asset
• Deficit - Debit balance in retained earnings and
  is reported as a deduction in the stockholders'
  equity section of the balance sheet
• Restrictions - legal, contractual or voluntary
  circumstances that make a portion of retained
  earnings currently unavailable for dividends

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Ratios

• Earnings per Share
• Price Earnings Ratio
• Return on Common Stockholders Equity Ratio