Stockholders' Equity

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Stockholders Equity
Chapter 9
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IHOP Corp. Stockholders Equity
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IHOP Corp. Stockholders Equity
(In thousands, except shares amounts)
December 31 2000 1999
Additional paid-in capital 69,655
66,485 Retained earnings 193,632
158,294 Treasury stock, at cost (2000 287,750
shares 1999 none (5,170)
Other 1,675 1,500 Total
shareholders equity 259,995 226,480
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Learning Objective 1
Explain the advantages and disadvantages of a
corporation.
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What is the Best Way toOrganize a Business?
Proprietorship
Partnership
Corporation
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Characteristics of a Corporation
Separate legal entity
Continuous life and transferability of ownership
Limited liability
Separation of ownership and management
Corporate taxation
Government regulation
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Advantages and Disadvantagesof a Corporation
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Organizing a Corporation
Charter
Incorporators
Set bylaws
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Authority Structureof a Corporation
Stockholders
Board of Directors
Chairperson of the Board (CEO)
President (Chief Operating Officer)
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Authority Structureof a Corporation
President (Chief Operating Officer)
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Stockholders Rights
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Stockholders Equity
Owners equity in a corporation has two main
components
Paid-in capital (contributed capital)
Retained earnings
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Capital Stock
Corporate ownership is evidenced by a stock
certificate which may be for any number of shares.
The total number of shares authorized is limited
by charter.
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Capital Stock
Common Stock
The most basic form of capital stock issued by
every corporation.
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Capital Stock
Par Value Stock
It is an arbitrary amount assigned by a company
to a share of its stock.
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Learning Objective 2
Measure the effect of issuing stock on a
companys financial position.
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Issuing Stock
Corporations need money to operate from sources
other than borrowing.
They sell (issue) stock directly to the
stockholders or use the service of an underwriter.
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Common Stock at Par
Suppose IHOPs common stock carries a par value
of 10 per share.
The company issues 6,200,000 shares of common
stock at par.
What is the entry?
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Common Stock at Par
January 8 Cash (6,200,000 10) 62,000,000 Commo
n Stock 62,000,000 To issue common stock
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Common Stock Above Par
IHOPs common stock has a par value of 0.01 per
share.
The company issues 6,200,000 shares of common
stock at 10 per share.
What is the entry?
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Common Stock Above Par
July 23 Cash (6,200,000 10)
62,000,000 Common Stock (6,200,000
0.01) 62,000 Paid-in
Capital in Excess of Par Common (6,200,000
9.99) 61,938,000 To issue common stock
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Common Stock Above Par
Stockholders Equity
Common Stock, .01 par 40 million shares
authorized, 6.2 million shares issued
62,000 Paid-in capital in excess of par
61,938,000 Total paid-in capital
62,000,000 Retained earnings
194,000,000 Total stockholders
equity 256,000,000
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No-Par Common Stock
When a company issues no-par stock, it debits the
asset received and credits the stock account.
August 14 Cash (3,000 20) 60,000 Common
Stock 60,000 To issue no-par common stock
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Preferred Stock
Accounting for preferred stock follows
the pattern illustrated for common stock.
Stockholders equity on the balance sheet lists
preferred stock, common stock, and retained
earnings in that order.
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Ethical Considerations
Issuing stock for assets other than cash can pose
an ethical challenge.
The company issuing the stock often wishes to
record a large amount for the noncash
asset received and for the stock that it is
issuing.
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Learning Objective 3
Describe how treasury stock transactions affect a
company.
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Treasury Stock Transactions
Treasury stock are shares that a company has
issued and later reacquired.
Reasons for purchasing their own stock
Stock purchase plan distribution
Increase net assets
Avoidance of a takeover
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IHOP Corp. Before Purchaseof Treasury Stock
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IHOP Corp. Purchaseof Treasury Stock
November 12, 2000 Treasury Stock 5,170 Cash
5,170 Purchased treasury stock
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IHOP Corp. After Purchaseof Treasury Stock
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Sale of Treasury Stock
Assume that on July 22, 2002, the shares of
treasury stock are sold for 5,300.
Cash 5,300 Treasury Stock 5,170
Paid-In Capital from Treasury Stock
Transactions 130 Sold treasury stock
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IHOP Corp. After Saleof Treasury Stock
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Retirement of Stock
It decreases the outstanding stock of the
corporation.
Retired shares cannot be reissued.
There is no gain or loss on retirement.
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Retained Earnings,Dividends, and Splits
The Retained Earnings account carries the balance
of the businesss net income less its net losses
and less any declared dividends accumulated over
the corporation's lifetime.
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Retained Earnings,Dividends, and Splits
A dividend is a corporations return to its
stockholders of some of the benefits of earnings.
A stock split is an increase in the number of
authorized, issued, and outstanding shares.
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Dividend Dates
Three relevant dates for dividends are
Declaration date
Date of record
Payment date
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Learning Objective 4
Account for dividends and measure their impact on
a company.
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Preferred Stock Dividends
When a company has issued both preferred and
common stock, the preferred stockholders receive
their dividends first.
Pinecraft Industries, Inc., has both common stock
and 90,000 shares of preferred stock outstanding.
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Preferred Stock Dividends
Preferred dividends are paid at the annual rate
of 1.75 per share.
Assume that in 2004, the company declares an
annual dividend of 1,500,000.
Preferred dividend (90,000 1.75 per share)
157,500 Common dividend (remainder
1,500,000 157,500) 1,342,500 Total
dividend 1,500,000
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Expressing the Dividend Rateon Preferred Stock
Percentage rate
Dollar amount
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Preferred Stock Dividends
The preferred stock of Pinecraft is cumulative.
Suppose the company passed the 2004 preferred
dividend of 157,500.
In 2005, the company declares a 500,000 dividend.
Retained Earnings 500,000 Dividends
Payable, Preferred 315,000 Dividends
Payable, Common (500,000 315,000) 185,0
00 To declare a cash dividend (157,500 2
years)
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Why Issue a Stock Dividend?
To continue dividends but conserve cash
To reduce the per-share market price of its stock
GAAP Identifies
Small stock dividends 25 or less
Large stock dividends above 25
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Stock Dividend
IHOP declared a 10 stock dividend in 2001.
Assume IHOP had 20,000,000 shares of common stock
outstanding.
The stock is trading for 15 per share.
How would this stock dividend be recorded?
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Stock Dividend

• Retained Earnings
• (20,000,000 10 15) 30,000,000
• Common Stock
• (20,000,000 10 0.01) 20,000
• Paid-in Capital in Excess of Par
  Common 29,980,000
• Distributed a 10 stock dividend

For a large stock dividend, debit Retained
Earnings and credit Common Stock for the par
value of the shares.
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Stock Splits
A stock split is an increase in the number
of authorized, issued, and outstanding shares of
stock, coupled with a proportionate reduction in
the stocks par value.
A stock split decreases the market price of stock.
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Stock Splits
The market price of a share of Quaker Oats has
been approximately 25.
Assume that the company wants to decrease it to
12.50.
This 2-for-1 split means that the company would
have twice as many shares outstanding after the
split as is had before the split.
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Learning Objective 5
Use different stock values in decision making.
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Stock Values
Market value
Redemption value
Liquidation value
Book value
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Book Value
Book value per share of preferred stock
(Redemption value Dividends in arrears)
Number of shares of preferred outstanding
Book value per share of common stock (Total
stockholders equity Preferred equity) Number
of shares of common stock outstanding
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Book Value
Assume that a companys balance sheet reports the
following
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Book Value
Suppose that four years (including the current
year) cumulative preferred dividends are in
arrears and that preferred stock has a
redemption value of 130 per share.
The book-value-per-share computations for this
company are as follows
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Book Value
Preferred equity Redemption value (400 shares
130) 52,000 Cumulative dividends (40,000
0.06 4 years) 9,600 Preferred
equity 61,600
Common equity Total stockholders
equity 241,000 Less preferred
equity 61,600 Common
equity 179,400 Book value per share
179,400 5,000 shares 35.88 5,500
shares issued minus 500 treasury shares
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Learning Objective 6
Evaluate a companys return on assets and return
on stockholders equity.
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Return on Assets
Rate of return on total assets (Net income
Interest expense) Average total assets
It is a measure of a companys ability
to generate profits from the use of its assets.
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Return on Equity
Rate of return on common stockholders equity
(Net income Preferred dividends) Average
common stockholders equity
It is a measure of the income earned from
the common stockholders investment in the
company.
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Return on Equity
IHOPs return on equity (14.5) is higher than
its return on assets (10.5).
This difference results from the
interest-expense component of return on assets.
Leverage
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Learning Objective 7
Report stockholders equity transactions on the
statement of cash flows.
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Reporting StockholdersEquity Transactions
During 2000, IHOP issued stock, repurchased
stock, but paid no dividends.
Following is their report of cash flows
from financing activities illustrating the
effect on their stockholders equity.
Proceeds from issuance of common stock
172,000 Purchase of treasury stock
(5,170,000) Net cash used by financing
activities (4,998,000)
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Variations in Reporting Stockholders Equity
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Variations in Reporting Stockholders Equity
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End of Chapter 9