stockholders’ equity
DESCRIPTION
Stockholders’ EquityTRANSCRIPT
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Stockholders’ EquityChapter 10
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Explain the features of a corporation
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ADVANTAGES DISADVANTAGES
• Can raise more capital than a proprietorship or partnership can
• Continuous life• Transferability of
ownership• Limited liability
• Separation of ownership and management
• Corporate taxation• Government regulation
Corporate Characteristics
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Organizing a Corporation
•Corporate organizers (incorporators) obtain a charter from the state▫Charter includes authorization to issue
shares of stock•Incorporators:
▫Pay fees▫Sign the charter▫File documents with the state▫Agree to set of bylaws
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StockholdersStockholders
Chairperson of the Board (CEO)Chairperson of the Board (CEO)
Board of DirectorsBoard of Directors
President (Chief Operating Officer)President (Chief Operating Officer)
Vice-Presidents
Vice-Presidents
Chief Financial Officer
Chief Financial Officer
SecretarySecretary
ControllerController TreasurerTreasurer
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Stockholder Rights
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Stockholders’ Equity
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COMMON PREFERRED
• Basic form of stock• Has four basic rights• Shareholders benefit most
if corporation succeeds▫ Take more risk
• Has advantages over common▫ Receive dividends first▫ Receive assets first in
liquidation• Shareholders earn a fixed
dividend• Very few corporations
issue
Classes of Stock
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Comparison of Issuing Stock and Debt
Common stock
Preferred stock
Long-term debt
Obligation to repay principal
No No Yes
Dividends/interest Dividends are not tax-deductible
Dividends are not tax-deductible
Interest expense is tax-deductible
Obligation to pay dividends/interest
Only after declaration
Only after declaration
At fixed rates and date
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Par Value
•Arbitrary amount assigned to share of stock
•Usually set low to avoid legal issues▫Most states do not allow companies to
issue stock below par•No-par stock
▫May have a stated value
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Account for the issuance of stock
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Issuing Stock at Par
JOURNAL
Date Accounts and explanation Debit Credit
Cash 50,000
Common Stock 50,000
Issued stock at par value
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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
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A company neither earns a profit nor incurs a loss
when it sells it stock to, or buys stock from, its own
shareholders.
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Issuing No-Par Stock
JOURNAL
Date
Accounts and explanation Debit Credit
Cash 300,000
Common Stock 300,000
Issued no-par stock
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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
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Stock Issued for Services
•Expense recognized for fair value of services rendered
JOURNAL
Date
Accounts and explanation Debit Credit
Legal Expense 25,000
Common Stock 2,500
Paid-in Capital in Excess of Par–Common
22,500
Issued stock in exchange for legal services
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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▫Allows preferred shareholders to exchange
preferred shares for common
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Distinct Number of Shares
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Show how treasury stock affects a company
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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▫Use in share repurchase program
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Recording Treasury Stock•Recorded at cost
▫Not par value•Classified as a contra-stockholders’ equity
account▫Debit balance
JOURNAL
Date
Accounts and explanation Debit Credit
Treasury Stock 95,000
Cash 95,000
Purchased treasury stock.
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Retiring Stock
•Cancel stock certificates•Cannot be reissued
JOURNAL
Date
Accounts and explanation Debit Credit
Common Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock
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Resale of Treasury Shares
JOURNAL
Date
Accounts and explanation Debit Credit
Cash 100,000
Treasury stock 95,000
Additional Paid-in Capital 5,000
Sold treasury stock.
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Exercise 10-24AJOURNAL
Date Accounts and explanation Debit Credit
Jan 21
Cash 23,400
Common Stock 2,250
Paid-in Capital in Excess of Par—Common
21,150
Issued shares.
Jun 23
Treasury Stock 7,500
Cash 7,500
Purchased treasury stock.
Jul 12 Cash 8,800
Treasury Stock 6,000
Additional Paid-in Capital 2,800
Sold treasury stock.
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Exercise 10-24A
Effect on Stockholders’ Equity
1-21 Common stock issued $23,400
6-23 Purchase of treasury stock
(7,500)
7-15 Sale of treasury stock 8,800
Total change $24,700
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Account for retained earnings, dividends and splits
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Retained Earnings
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Retained Earnings Balance
Credit balance
Lifetime earnings
Lifetime losses & dividends
>
Debit balance
Lifetime earnings
Lifetime losses & dividends
<
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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▫Company not obligated to pay dividend
until declared
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Dividend Dates
JOURNAL
Date Accounts and explanation Debit Credit
Retained Earnings
Dividends Payable
1. Declaration date1. Declaration date
2. Date of record2. Date of record
3. Payment date3. Payment date
JOURNAL
Date Accounts and explanation Debit Credit
Dividends Payable
Cash
No entry
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Analyzing Retained Earnings
Retained Earnings
Beginning balance
Ending balance
Net Income
Dividends
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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▫Passed dividends are owed to preferred
shareholders In arrears
▫Almost debt
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Exercise 10-28APreferred dividend = $1.00 x 6% x 90,000 shares
$5,400$5,400
Preferred Common
2012 - $90,000
Dividends in arrears (2 years x 5,400) $10,800
Current year 5,400
16,200
Remainder to common $73,800
2013 - $270,000
Preferred – current year 5,400
Remainder to common $264,600
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Stock Dividends
•Proportional distribution of stock to shareholders
•Increase stock account and decrease Retained Earnings▫Total equity is unchanged
•Reasons stock dividends are distributed▫Continue dividends, but conserve cash▫Reduce market price of shares
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SMALL LARGE
• 25% or less of outstanding shares
• Recorded at market value
• Greater than 25% of outstanding shares
• Recorded at par value
Size of Stock Dividends
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Stock Splits
•Increase in shares with a proportionate reduction in par value
•Decreases market price of shares•No accounts affected
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Effect on Total
Transaction Assets = Liabilities +
Stockholders’ 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
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Use stock values in decision making
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Stock Values
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DuPont Analysis
Return on assets
Net profit
margin
Net profit
margin
Asset turnover
Asset turnover
Leverage ratio
Return on equity
Leverage ratio
Leverage ratio
Return on
equity
Return on
equity
Net incom
e
Net incom
e
Net salesNet
sales
Net salesNet
sales
Average total
assets
Average total
assets
Average total
assets
Average total
assetsAverage common equity
Average common equity
Net incom
e
Net incom
eAverage common equity
Average common equity
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Report equity transactions in the financial statements
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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
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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
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