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ch11 Analyzing Stock Holders Equity
ch11 Analyzing Stock Holders Equity
11
REPORTING AND
ANALYZING
STOCKHOLDER’S EQUITY
11-3
Reporting and Analyzing Stockholders’ Equity
The Financial
Accounting Dividends Statement
Corporate Stock Issue Preferred
for Treasury and Retained Presentation
Form of Considerations Stock
Stock Earnings and Corporate
Organization Performance
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The Corporate Form of Organization
11-5
The Corporate Form of Organization
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Advantages
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations Disadvantages
Additional Taxes
Characteristics of a Corporation
Separate Legal Existence Corporation acts
under its own name
Limited Liability of Stockholders rather than in the
Transferable Ownership Rights name of its
stockholders.
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
Separate Legal Existence
Limited to their
Limited Liability of Stockholders
investment.
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Shareholders may
Transferable Ownership Rights
sell their stock.
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights Corporation can
Ability to Acquire Capital obtain capital
through the issuance
Continuous Life of stock.
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights Continuance as a
Ability to Acquire Capital going concern is not
affected by the
Continuous Life withdrawal, death, or
Corporate Management incapacity of a
stockholder,
Government Regulations
employee, or officer.
Additional Taxes
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital Separation of
ownership and
Continuous Life
management
Corporate Management prevents owners from
having an active role
Government Regulations
in managing the
Additional Taxes company.
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital Corporations pay
income taxes as
Continuous Life
a separate legal
Corporate Management entity and
Government Regulations stockholders pay
Additional Taxes taxes on cash
dividends.
Stockholders
Illustration 11-1
Corporation
organization chart Chairman and
Board of
Directors
President and
Chief Executive
Officer
Treasurer Controller
Characteristics of a Corporation
Other Forms of Business Organization
Limited partnerships
Limited liability partnerships (LLPs)
Limited liability companies (LLCs)
S Corporation
► no double taxation
► cannot have more than 75 shareholders
Forming a Corporation
Initial Steps:
File application with the Secretary of State.
State grants charter.
Corporation develops by-laws.
Authorized Stock
Charter indicates the amount of stock that a
corporation is authorized to sell.
Name of corporation
Stockholder’s
name
Signature of
corporate official
Issuance of Stock
Corporation can issue common stock
► directly to investors or
► indirectly through an investment banking firm.
Review Question
Which of these statements is false?
a. Ownership of common stock gives the owner a
voting right.
b. The stockholders’ equity section begins with paid-in
capital.
c. The authorization of capital stock does not result in a
formal accounting entry.
d. Legal capital is intended to protect stockholders.
Common Stock
Account
Paid-in Capital in
Paid-in Capital
Excess of Par
Account
Preferred Stock
Account
Two Primary
Sources of Retained Earnings
Account
Equity
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
Common Stock
Account
Paid-in Capital in
Paid-in Capital
Excess of Par
Account
Preferred Stock
Account
Two Primary
Sources of Retained Earnings
Account
Equity
Cash 1,000
Common stock (1,000 x $1) 1,000
Cash 5,000
Common stock (1,000 x $1) 1,000
Paid-in capital in excess of par value 4,000
Review Question
ABC Corp. issues 1,000 shares of $10 par value common
stock at $12 per share. When the transaction is recorded,
credits are made to:
a. Common Stock $10,000 and Paid-in Capital in Excess of
Stated Value $2,000.
b. Common Stock $12,000.
c. Common Stock $10,000 and Paid-in Capital in Excess of
Par Value $2,000.
d. Common Stock $10,000 and Retained Earnings $2,000.
Common Stock
Account
Paid-in Capital in
Paid-in Capital
Excess of Par
Account
Preferred Stock
Account
Two Primary
Sources of Retained Earnings
Account
Equity
Less:
Treasury Stock
Account
Review Question
Treasury stock may be repurchased:
a. to reissue the shares to officers and employees under
bonus and stock compensation plans.
b. to signal to the stock market that management believes
the stock is underpriced.
c. to have additional shares available for use in the
acquisition of other companies.
d. more than one of the above.
Cash 120,000
Preferred stock (10,000 x $10) 100,000
Paid-in capital in excess of par –
Preferred stock 20,000
Dividend Preferences
Right to receive dividends before common
stockholders.
Liquidation Preference
Preference on corporate assets if the corporation fails.
Preference may be
Review Question
M-Bot Corporation has 10,000 shares of 8%, $100 par
value, cumulative preferred stock outstanding at December
31, 2010. No dividends were declared in 2008 or 2009. If M-
Bot wants to pay $375,000 of dividends in 2010, common
stockholders will receive:
a. $0.
b. $295,000.
c. $215,000.
d. $135,000.
Types of Dividends:
Cash Dividends
For a corporation to pay a cash dividend, it must have:
2. Adequate cash.
Review Question
Entries for cash dividends are required on the:
a. declaration date and the record date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the payment date.
Stock Dividends
Reasons why corporations issue stock dividends:
1. Satisfy stockholders’ dividend expectations without
spending cash.
Stock Split
Reduces the market value of shares.
Review Question
Which of these statements about stock dividends is true?
a. Stock dividends reduce a company’s cash balance.
b. A stock dividend has no effect on total stockholders’
equity.
c. A stock dividend decreases total stockholders’ equity.
d. A stock dividend ordinarily will increase total
stockholders’ equity.
Illustration 11-14
Illustration 11-16
Balance
Sheet
Presentation
Dividend Record
Illustration: The following is the calculation of the payout ratio for
Nike in 2009 and 2008.
Illustration 11-18
Illustration 11-18
Earnings Performance
Illustration: The following is the calculation of Nike’s return on
common stockholders’ equity ratios for 2009 and 2008. Illustration 11-20
This ratio shows how many dollars of net income a company earned for each dollar
of common stockholders’ equity.
SO 8 Evaluate a corporation’s dividend and earnings
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performance from a stockholder’s perspective.
Measuring Corporate Performance
Illustration 11-23
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SO 8
Entries for Stock
appendix 11A Dividends
Illustration: Record the journal entry when Medland issues the dividend
shares.
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Key Points
There are often terminology differences for equity accounts.
The following summarizes some of the common differences in
terminology.
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Key Points
The accounting for treasury stock differs somewhat between
IFRS and GAAP. (However, many of the differences are beyond
the scope of this course.) Like GAAP, IFRS does not allow a
company to record gains or losses on purchases of its own
shares. One difference worth noting is that, when a company
purchases its own shares, IFRS treats it as a reduction of
stockholders’ equity, but it does not specify which particular
stockholders’ equity accounts are to be affected. Therefore, it
could be shown as an increase to a contra equity account
(Treasury Stock) or a decrease to retained earnings or share
capital. IFRS requires that the number of treasury shares held
be disclosed.
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Key Points
A major difference between IFRS and GAAP relates to the
account Revaluation Surplus. Revaluation surplus arises under
IFRS because companies are permitted to revalue their
property, plant, and equipment to fair value under certain
circumstances. This account is part of general reserves under
IFRS and is not considered contributed capital.
As indicated earlier, the term reserves is used in IFRS to
indicate all noncontributed (non–paid-in) capital. Reserves
include retained earnings and other comprehensive income
items, such as revaluation surplus and unrealized gains or
losses on available-for-sale securities.
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Key Points
IFRS often uses terms such as retained profits or accumulated
profit or loss to describe retained earnings. The term retained
earnings is also often used.
The accounting related to prior period adjustments is
essentially the same under IFRS and GAAP.
Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and
shareholders’ funds.
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Looking into the Future
The IASB and the FASB are currently working on a project related
to financial statement presentation. An important part of this study
is to determine whether certain line items, subtotals, and totals
should be clearly defined and required to be displayed in the
financial statements. The options of how to present other
comprehensive income under GAAP will change in any converged
standard. Also, the FASB has been working on a standard that will
likely converge to IFRS in the area of hybrid financial instruments,
such as bonds that are convertible to common stock.
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Under IFRS, a purchase by a company of its own shares
is recorded by:
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The term reserves is used under IFRS with reference to all
of the following except:
c) retained earnings.
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Under IFRS, the amount of capital received in excess of
par value would be credited to:
a) Retained Earnings.
b) Contributed Capital.
c) Share Premium.
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