Financial Accounting

Module 7 - Solution

Oktay Urcan
QUESTION ONE
Safety Network Corporation reported the following
summarized balance sheet at December 31, 2015:
Assets
Current assets $33,400
Property and equipment, net 51,800
Total asset $85,200

Liabilities
Liabilities $37,800

Stockholders’ equity
Common stock, $1 par 6,000
Paid-in capital in excess of par, common 19,400
Retained earnings 22,000
Total liabilities and equity $85,200
Safety Network Corporation - Shareholders’ Equity
QUESTION ONE
During 2016, Safety Network Corporation
completed these transactions that affected
stockholders’ equity:
March 13 Issued 2,000 shared of common stock for $4 per share.
July 7 Declared dividends of $2 per common share.
July 24 Paid the cash dividend.
October 26 Reacquired 500 shares of common stock as treasury stock,
paying $7 per share.
November 20 Sold 200 shares of the treasury stock for $8 per share.

Safety Network Corporation - Shareholders’ Equity

QUESTION ONE
1. What are the journal or worksheet entries
for Safety Network’s transactions?
ASSET LIABILITES SAHREHOLDERS’ EQUITY
Cash Dividends Common APIC Treasury Retained
Payable Stock Stock Earnings
Issue common share 8,000 2,000 6,000
Dividends declared 16,000 (16,000)
Dividend payment (16,000) (16,000)
Share repurchase (3,500) (3,500)
TS sale 1,600 200 1,400

Safety Network Corporation - Shareholders’ Equity

QUESTION ONE
2. What is Safety Network’s stockholders’
equity at December 31, 2016? Net income
for 2016 was $27,000.
Calculation Value
Common stock 6,000 + 2,000 $8,000
Paid in capital 19,400 + 6,000 + 200 $25,600
Retained earnings 22,000 – 16,000 + 27,000 $33,000
Treasury stock -3,500 + 1,400 ($2,100)

Total shareholders’ equity $64,500

Safety Network Corporation - Shareholders’ Equity
QUESTION TWO
The following pages contain Statement of
Changes in Shareholders’ Investment for Verizon
from the 2005 annual report. Using this
information, please answer the following
questions:

1. What was the number of common shares

outstanding at the end of 2005?
2,774,865-11,456=2,763,409 (in thousands)
Verizon - Shareholders’ Equity
QUESTION
Consolidated statements of changes in shareowners’ investment
(dollars in millions, except per share amounts, and shares in thousands)

Years Ended December 31, 2005 2004 2003

TWO
Shares Amount Shares Amount Shares Amount

Common Stock

Balance at beginning of year 2,774, 865 $277 2,77,314 $277 2,751,650 $275

Shares issued

Employee plans _ _ 2,501 _ 20,664 2

Shareowner plans _ _ 50 _ _ _

Shares retired _ _ _ _ _ _

Balance at end of year 2,774,865 277 2,774,865 277 2,772,314 277

Contributed Capital

Balance at beginning of year 25,404 25,363 24,685

Shares issued-employee and (24) 2 725

shareowner plans

Tax benefit from exercise of stock _ 41 12

options

Other (11) (2) (59)

Balance at end of year 25,369 25,404 25,363

Treasury Stock

Balance at beginning of year (5,213) (142) (4,554) (115) (8,624) (218)

Shares purchased (7,859) (271) (9,540) (370) _ _

Shares distributed

Employee plans 1,594 59 8,881 343 4,047 102

Shareowner plans 22 1 _ _ 23 1

Verizon - Shareholders’ Equity Balance at end of year (11,456) (353) (5,213) (142) (4,554) (115)
QUESTION TWO

2. a. How many shares of common

stock did Verizon repurchase in
2005?
7,859 (in thousands)

Verizon - Shareholders’ Equity

 Consolidated statements of changes in shareowners’ investment
(dollars in millions, except per share amounts, and shares in thousands)

QUESTION Years Ended December 31,

Common Stock
Shares
2005

Amount Shares
2004

Amount Shares
2003

Amount

TWO Balance at beginning of year

Shares issued

Employee plans
2,774, 865

_
$277

_
2,77,314

2,501
$277

_
2,751,650

20,664
$275

Shareowner plans _ _ 50 _ _ _

Shares retired _ _ _ _ _ _

Balance at end of year 2,774,865 277 2,774,865 277 2,772,314 277

Contributed Capital

Balance at beginning of year 25,404 25,363 24,685

Shares issued-employee and (24) 2 725

shareowner plans

Tax benefit from exercise of stock _ 41 12

options

Other (11) (2) (59)

Balance at end of year 25,369 25,404 25,363

Treasury Stock

Balance at beginning of year (5,213) (142) (4,554) (115) (8,624) (218)

Shares purchased (7,859) (271) (9,540) (370) _ _

Shares distributed

Employee plans 1,594 59 8,881 343 4,047 102

Shareowner plans 22 1 _ _ 23 1

Verizon - Shareholders’ Equity Balance at end of year (11,456) (353) (5,213) (142) (4,554) (115)
QUESTION TWO

b. What was the average price per

share Verizon paid for the shares it
repurchased in 2005?
$271 million / 7.859 million = $34.48
per share

Verizon - Shareholders’ Equity

 Consolidated statements of changes in shareowners’ investment

QUESTION
(dollars in millions, except per share amounts, and shares in thousands)

Years Ended December 31, 2005 2004 2003

Shares Amount Shares Amount Shares Amount

Common Stock

TWO Balance at beginning of year

Shares issued

Employee plans
2,774, 865

_
$277

_
2,77,314

2,501
$277

_
2,751,650

20,664
$275

Shareowner plans _ _ 50 _ _ _

Shares retired _ _ _ _ _ _

Balance at end of year 2,774,865 277 2,774,865 277 2,772,314 277

Contributed Capital

Balance at beginning of year 25,404 25,363 24,685

Shares issued-employee and (24) 2 725

shareowner plans

Tax benefit from exercise of stock _ 41 12

options

Other (11) (2) (59)

Balance at end of year 25,369 25,404 25,363

Treasury Stock

Balance at beginning of year (5,213) (142) (4,554) (115) (8,624) (218)

Shares purchased (7,859) (271) (9,540) (370) _ _

Shares distributed

Employee plans 1,594 59 8,881 343 4,047 102

Shareowner plans 22 1 _ _ 23 1

Verizon - Shareholders’ Equity Balance at end of year (11,456) (353) (5,213) (142) (4,554) (115)
QUESTION TWO

c. How many shares did Verizon

(re)issue in 2005?
1,594+22=1,616 (in thousands)

Verizon - Shareholders’ Equity

 Consolidated statements of changes in shareowners’ investment

QUESTION
(dollars in millions, except per share amounts, and shares in thousands)

Years Ended December 31, 2005 2004 2003

Shares Amount Shares Amount Shares Amount

TWO
Common Stock

Balance at beginning of year 2,774, 865 $277 2,77,314 $277 2,751,650 $275

Shares issued

Employee plans _ _ 2,501 _ 20,664 2

Shareowner plans _ _ 50 _ _ _

Shares retired _ _ _ _ _ _

Balance at end of year 2,774,865 277 2,774,865 277 2,772,314 277

Contributed Capital

Balance at beginning of year 25,404 25,363 24,685

Shares issued-employee and (24) 2 725

shareowner plans

Tax benefit from exercise of stock _ 41 12

options

Other (11) (2) (59)

Balance at end of year 25,369 25,404 25,363

Treasury Stock

Balance at beginning of year (5,213) (142) (4,554) (115) (8,624) (218)

Shares purchased (7,859) (271) (9,540) (370) _ _

Shares distributed

Employee plans 1,594 59 8,881 343 4,047 102

Shareowner plans 22 1 _ _ 23 1

Verizon - Shareholders’ Equity Balance at end of year (11,456) (353) (5,213) (142) (4,554) (115)
QUESTION TWO

d. What was the average price Verizon

received from issuing shares to employees
and shareowners in 2005?
(59 + 1 – 24) million / 1.616 million = $22 per share

Verizon - Shareholders’ Equity

 Consolidated statements of changes in shareowners’ investment
(dollars in millions, except per share amounts, and shares in thousands)

QUESTION Years Ended December 31,

Common Stock
Shares
2005

Amount Shares
2004

Amount Shares
2003

Amount

TWO Balance at beginning of year

Shares issued

Employee plans
2,774, 865

_
$277

_
2,77,314

2,501
$277

_
2,751,650

20,664
$275

Shareowner plans _ _ 50 _ _ _

Shares retired _ _ _ _ _ _

Balance at end of year 2,774,865 277 2,774,865 277 2,772,314 277

Contributed Capital

Balance at beginning of year 25,404 25,363 24,685

Shares issued-employee and (24) 2 725

shareowner plans

Tax benefit from exercise of stock _ 41 12

options

Other (11) (2) (59)

Balance at end of year 25,369 25,404 25,363

Treasury Stock

Balance at beginning of year (5,213) (142) (4,554) (115) (8,624) (218)

Shares purchased (7,859) (271) (9,540) (370) _ _

Shares distributed

Employee plans 1,594 59 8,881 343 4,047 102

Shareowner plans 22 1 _ _ 23 1

Balance at end of year (11,456) (353) (5,213) (142) (4,554) (115)

Verizon - Shareholders’ Equity
QUESTION THREE

Using the attached excerpts from Coca-

Cola’s 2006 Annual Report answer the
following questions. In addition:
All numbers in Coca-Cola’s 2006 Financial
Statements are in $ millions.
Provide calculations when necessary.

Coca-Cola - Shareholders’ Equity

QUESTION THREE

1. Shares Issued and Outstanding

a. How many shares of common stock
were authorized at fiscal year-end 2006?
How many had been issued as of fiscal
year-end 2006?
Authorized: 5600; Issued: 3511 (see
Consolidated Balance Sheet)
Coca-Cola - Shareholders’ Equity
QUESTION THREE
December 31, 2006 2005

(In millions except par value)

SHAREOWNERS’ EQUITY

Common stock, $0.25 par value; Authorized --- 5,600 shares;

Issued --- 3,511 and 3,507 shares, respectively 878 877

Capital surplus 5,983 5,492

Reinvested earnings 33,468 31,299

Accumulated other comprehensive income (loss) (1,291) (1,669)

Treasury stock, at cost --- 1,193 and 1,138 shares, (22,118) (19,644)
respectively
TOTAL SHAREOWNERS’ EQUITY 16,920 16,355
Coca-Cola - Shareholders’ Equity
QUESTION THREE

b. Coca-Cola also has repurchased

some of its own shares of stock that
had been previously issued
(Treasury Stock). How many shares
did Coca Cola hold as treasury
stock at the end of 2006?
1,193 (see Consolidated Balance Sheet)
Coca-Cola - Shareholders’ Equity
QUESTION THREE
December 31, 2006 2005

(In millions except par value)

SHAREOWNERS’ EQUITY

Common stock, $0.25 par value; Authorized --- 5,600 shares;

Issued --- 3,511 and 3,507 shares, respectively 878 877

Capital surplus 5,983 5,492

Reinvested earnings 33,468 31,299

Accumulated other comprehensive income (loss) (1,291) (1,669)

Treasury stock, at cost --- 1,193 and 1,138 shares, (22,118) (19,644)
respectively
TOTAL SHAREOWNERS’ EQUITY 16,920 16,355
Coca-Cola - Shareholders’ Equity
QUESTION THREE

c. How many total shares were

outstanding at fiscal year-end 2006?
3511-1193=2318 (see Consolidated
Balance Sheet)

Coca-Cola - Shareholders’ Equity

QUESTION THREE
December 31, 2006 2005

(In millions except par value)

SHAREOWNERS’ EQUITY

Common stock, $0.25 par value; Authorized --- 5,600 shares;

Issued --- 3,511 and 3,507 shares, respectively 878 877

Capital surplus 5,983 5,492

Reinvested earnings 33,468 31,299

Accumulated other comprehensive income (loss) (1,291) (1,669)

Treasury stock, at cost --- 1,193 and 1,138 shares, (22,118) (19,644)
respectively
TOTAL SHAREOWNERS’ EQUITY 16,920 16,355
Coca-Cola - Shareholders’ Equity
QUESTION THREE

2. Common Stock
a. What is the par value of each share of
common stock issued?
$0.25/share (see Consolidated Balance Sheet)

Coca-Cola - Shareholders’ Equity

QUESTION THREE
December 31, 2006 2005

(In millions except par value)

SHAREOWNERS’ EQUITY

Common stock, $0.25 par value; Authorized --- 5,600 shares;

Issued --- 3,511 and 3,507 shares, respectively 878 877

Capital surplus 5,983 5,492

Reinvested earnings 33,468 31,299

Accumulated other comprehensive income (loss) (1,291) (1,669)

Treasury stock, at cost --- 1,193 and 1,138 shares, (22,118) (19,644)
respectively
TOTAL SHAREOWNERS’ EQUITY 16,920 16,355
Coca-Cola - Shareholders’ Equity
QUESTION THREE

b. How much money in excess of the

par value of the stock had been
contributed by shareholders by the
end of 2006?
5,983 (see Consolidated Balance Sheet)

Coca-Cola - Shareholders’ Equity

QUESTION THREE
December 31, 2006 2005

(In millions except par value)

SHAREOWNERS’ EQUITY

Common stock, $0.25 par value; Authorized --- 5,600 shares;

Issued --- 3,511 and 3,507 shares, respectively 878 877

Capital surplus 5,983 5,492

Reinvested earnings 33,468 31,299

Accumulated other comprehensive income (loss) (1,291) (1,669)

Treasury stock, at cost --- 1,193 and 1,138 shares, (22,118) (19,644)
respectively
TOTAL SHAREOWNERS’ EQUITY 16,920 16,355
Coca-Cola - Shareholders’ Equity
QUESTION THREE

c. How much did Coca Cola pay for

Treasury Stock it held at fiscal year-
end 2006?
22,118 (see bottom of Consolidated
Balance Sheet)

Coca-Cola - Shareholders’ Equity

QUESTION THREE
December 31, 2006 2005

(In millions except par value)

SHAREOWNERS’ EQUITY

Common stock, $0.25 par value; Authorized --- 5,600 shares;

Issued --- 3,511 and 3,507 shares, respectively 878 877

Capital surplus 5,983 5,492

Reinvested earnings 33,468 31,299

Accumulated other comprehensive income (loss) (1,291) (1,669)

Treasury stock, at cost --- 1,193 and 1,138 shares, (22,118) (19,644)
respectively
TOTAL SHAREOWNERS’ EQUITY 16,920 16,355
Coca-Cola - Shareholders’ Equity
QUESTION THREE
3. Transactions related to Shareholders’ Equity
a. record the declaration and payment of dividends
in 2006.
Cash Dividend Payable Retained Earnings
Declaration $2,911 ($2,911)
Payment ($2,911) ($2,911)
See Dividends declared in Consolidated Statement of
Shareholders Equity
See Cash in Consolidated Statement of Cash Flows (financing
section)
Coca-Cola - Shareholders’ Equity
 THE COCA-COLA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS’ EQUITY
Year Ended December 31, 2006 2005 2004

QUESTION (In millions except per share data)

NUMBER OF COMMON SHARES OUTSTANDING

THREE
Balance at beginning of year 2,369 2,409 2,442

Stock issued to employees exercising stock options 4 7 5

Purchases of stock for treasury¹ (55) (47) (38)

Balance at end of year 2,318 2,369 2,409

COMMON STOCK

Balance at beginning of year $ 877 $ 875 $ 874

Stock issued to employees exercising stock options 1 2 1

Balance at end of year 878 877 875

CAPITAL SURPLUS

Balance at beginning of year 5,492 4,928 4,395

Stock issued to employees exercising stock options 164 229 175

Tax benefit from employees’ stock option and restricted stock plans 3 11 13

Stock-based compensation 324 324 345

Balance at end of year 5,983 5,492 4,928

REINVESTED EARNINGS

Balance at beginning of year 31,299 29,105 26,687

Net income 5,080 4,872 4,847

Dividends (per share - $1.24, $1.12 and $1.00 in 2006, 2005 and 2004, (2,911) (2,678) (2,429)
respectively)
Coca-Cola - Shareholders’ Equity Balance at end of year 33,468 31,299 29,105
QUESTION THREE
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31, 2006 2005 2004

(In millions)

FINANCING ACTIVITIES

Issuances of debt 617 178 3,030

Payments of debt (2,021) (2,460) (1,316)

Issuances of stock 148 230 193

Purchases of stock for treasury (2,416) (2,055) (1,739)

Dividends (2,911) (2,678) (2,429)

Net cash used in financing activities (6,583) (6,785) (2,261)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH

EQUIVALENTS 65 (148) 141

CASH AND CASH EQUIVALENTS

Net (decrease) increase during the year (2,261) (2,006) 3,345

Balance at beginning of year 4,701 6,707 3,362

Balance at end of year $ 2,440 $ 4,701 $ 6,707

Coca-Cola - Shareholders’ Equity

QUESTION THREE
3. Transactions related to Shareholders’
Equity
b. record the purchase of Treasury Stock in
2006.
Cash Common Stock Treasury Stock
Treasury stock ($2,416) ($2,416)
See Cash in Consolidated Statement of Cash
Flows (financing section)
Coca-Cola - Shareholders’ Equity
QUESTION THREE
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31, 2006 2005 2004
(In millions)
FINANCING ACTIVITIES
Issuances of debt 617 178 3,030
Payments of debt (2,021) (2,460) (1,316)
Issuances of stock 148 230 193
Purchases of stock for treasury (2,416) (2,055) (1,739)
Dividends (2,911) (2,678) (2,429)
Net cash used in financing activities (6,583) (6,785) (2,261)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 65 (148) 141
CASH AND CASH EQUIVALENTS
Net (decrease) increase during the year (2,261) (2,006) 3,345
Balance at beginning of year 4,701 6,707 3,362
Balance at end of year $ 2,440 $ 4,701 $ 6,707

Coca-Cola - Shareholders’ Equity

QUESTION THREE
4. Earnings per share
a. What is Coca Cola’s Basic Earnings per
Share for 2006?
$2.16/share (see Consolidated Statements of
Income)
Note, this is calculated as Coca Cola’s net
income ($5,080) divided by average shares
outstanding (2,348)
Coca Cola - Shareholders’ Equity
QUESTION THREE
Year Ended December 31 2006 2005 2004
(In millions except per share data)
THE COCA-
COLA NET OPERATING REVENUES
Costs of goods sold
$24,088
8,164
$23,104
8,195
$21,742
7,674
COMPANY AND GROSS PROFIT 15,924 14,909 14,068
Selling, general and administrative expenses 9,431 8,739 7,890
SUBSIDIARIES Other operating charges 185 85 480
OPERATING INCOME 6,308 6,085 5,698
CONSOLIDATE Interest income 193 235 157
D STATEMENTS Interest expense
Equity income – net
220
102
240
680
196
621
OF INCOME Other income (loss) – net 195 (93) (82)
Gains on issurances of stock by equity method investees - 23 24
INCOME BEFORE INCOME TAXES 6,578 6,690 6,222
Income taxes 1,498 1,818 1,375
NET INCOME $ 5,080 $ 4,872 $ 4,847
BASIC NET INCOME PER SHARE $ 2.16 $2.04 $2.00
DILUTED NET INCOME PER SHARE $ 2.16 $2.04 $2.00
AVERAGE SHARES OUTSTANDING 2,348 2,392 2.426
Effect of dilutive securities 2 1 3
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,350 2,393 2,429

Coca Cola - Shareholders’ Equity

QUESTION THREE
4. Earnings per share
b. What is Coca Cola’s Diluted Earnings per
Share for 2006?
$2.16/share (see Consolidated Statements of
Income)
Note, this is calculated as Coca Cola’s net
income ($5,080) divided by average diluted
shares outstanding (2,350)
Coca Cola - Shareholders’ Equity
QUESTION THREE
Year Ended December 31 2006 2005 2004
(In millions except per share data)

THE COCA- NET OPERATING REVENUES $24,088 $23,104 $21,742

Costs of goods sold 8,164 8,195 7,674
COLA COMPANY GROSS PROFIT 15,924 14,909 14,068
Selling, general and administrative expenses 9,431 8,739 7,890
AND Other operating charges 185 85 480
SUBSIDIARIES OPERATING INCOME
Interest income
6,308
193
6,085
235
5,698
157
CONSOLIDATED Interest expense 220 240 196
Equity income – net 102 680 621
STATEMENTS Other income (loss) – net 195 (93) (82)
OF INCOME Gains on issurances of stock by equity method investees
INCOME BEFORE INCOME TAXES
-
6,578
23
6,690
24
6,222
Income taxes 1,498 1,818 1,375
NET INCOME $ 5,080 $ 4,872 $ 4,847
BASIC NET INCOME PER SHARE $ 2.16 $2.04 $2.00
DILUTED NET INCOME PER SHARE $ 2.16 $2.04 $2.00
AVERAGE SHARES OUTSTANDING 2,348 2,392 2.426
Effect of dilutive securities 2 1 3
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,350 2,393 2,429

Coca Cola - Shareholders’ Equity

Relevance watch 1
Forbes: Stock Buybacks Made
Corporations Vulnerable (April 24, 2020)
Relevance watch 1
Instead of innovation, companies whose business
models were undergoing a high degree of uncertainty
and change repurchase stock.
Since Q1 2009, S&P 500 companies have spent,
cumulatively, $5.4 trillion on stock buybacks.
Perhaps no greater example is the U.S. airlines, an
industry that has collectively spent 96% of free cash
flow on buybacks over the last decade, leaving virtually
no cash cushion to prepare for a down cycle.
Relevance watch 1
Despite what many CEOs consistently say on earnings
calls—that buybacks “return value” to shareholders—
share repurchases in actuality put a company and its
shareholders in a much riskier position.
“Instead of using capital to invest in the future (i.e. electric
cars), car companies like GM buy back company stock.”
So do stock buybacks increase risk for long-term
shareholders?
Relevance watch 2
Relevance watch 2

One of the most important metrics a firm is

valuated by capital markets is EPS.
EPS = Net income / # of shares outstanding
Do firms reduce number of shares outstanding
by repurchasing their own shares and thereby
increase EPS?
Relevance watch 2
Relevance watch 2

We investigate whether firms use stock

repurchases to meet or beat analysts’
earnings per share (EPS) forecasts.
We find a disproportionately large number
of stock repurchases among firms that
would have missed analysts’ forecasts
without the repurchase.
Relevance watch 3
Reuters: Norwegian Air to sell new shares
at close to 80% discount (May 5, 2020)
Relevance watch 3
Norwegian Air converted $1B worth of debt to
shares. The new shares valued at 1 crown,
compared to 4.8 crown (the trading price right
before the conversion).
The airline’s objective was to obtain Norwegian
Government’s line of credit of $300M. To qualify
for the government support, the airline had to
deleverage by converting the bonds to shares.
Relevance watch 3
The airline’s financial moves reflected its
dire cash crunch.
The airline that brought Europe’s low-cost
business model to the transatlantic market,
flying more people to New York than any
other non-U.S. carrier, has now grounded
95% of its fleet and furloughed or laid off
most staff.