0 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 4 The Accounting Cycle for a Merchandising Corporation Chapter 14Accounting for Sales and Cash Receipts Chapter 15Accounting for Purchases and Cash Payments Chapter 16Special Journals: Sales and Cash Receipts Chapter 17Special Journals: Purchases and Cash Payments Chapter 18Adjustments and the Ten-Column Work Sheet Chapter 19Financial Statements for a Corporation Chapter 20Completing the Accounting Cycle for a Merchandising Corporation Chapter 21Accounting for Publicly Held Corporations

1 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 21 Accounting for Publicly Held Corporations What You’ll Learn  Describe the characteristics of the corporate form of business organization.  Prepare journal entries to record the issue of stock to investors.  Prepare journal entries to record the distribution of earnings to owners.  Prepare financial statements for publicly held corporations.  Define the accounting terms introduced in this chapter.

2 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 21, Section 1 Publicly Held Corporations What Do You Think? What is a major advantage for a corporation making stock available to the public?

3 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Investors from the general public purchase stock of publicly held corporations. You Will Learn  the unique features of a corporation.  how to account for the issue of stock. Publicly Held Corporations SECTION 21.1

4 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  closely held corporation  publicly held corporation  board of directors  authorized capital stock  par value  common stock  proxy  preferred stock  Paid-in Capital in Excess of Par Publicly Held Corporations SECTION 21.1

5 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Characteristics of a Corporation A closely held corporation is one that is owned by a few persons or by a family, and the stock is not sold to the public. A publicly held corporation is one whose stock is widely owned, has a large market, and is usually traded on a stock exchange.closely held corporation publicly held corporation The corporation has several unique features:  Legal Permission to Operate  Separate Legal Entity  Stockholders  Professional Management – stockholders elect a board of directors to govern the affairs of the corporation board of directors Publicly Held Corporations SECTION 21.1

6 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Capital Stock A corporation has a maximum number of shares it may issue called authorized capital stock. The corporation must assign a value, par value, to each share before selling to the public. The two main types of capital stock areauthorized capital stockpar value  common and  preferred. Publicly Held Corporations SECTION 21.1

7 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Common Stock If only one class of capital stock is issued, it is called common stock. Owners participate in the following ways: common stock  They elect and exercise control through the board of directors. Elections are held at stockholders’ meetings. A stockholder may send a proxy to vote in his or her place.proxy  They share in earnings of the corporation by receiving dividends.  They are entitled to share in the assets of the corporation if it goes out of business. Publicly Held Corporations SECTION 21.1

8 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Preferred Stock A corporation can issue preferred stock to appeal to many investors. Owners participate in the following ways:preferred stock  They are entitled to receive dividends before common stockholders.  They are given preference over common stockholders to distribution of corporate assets if the company goes out of business. Preferred stockholders give up two rights:  to vote  to participate in the control of the corporation Publicly Held Corporations SECTION 21.1

9 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Issuing Common Stock When common stock is issued, the Common Stock account is credited for the par value of the stock. Publicly Held Corporations SECTION 21.1

10 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Issuing Common Stock at Par Value Publicly Held Corporations SECTION 21.1

11 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Issuing Common Stock in Excess of Par Value When a stock sells for more than par value, the excess is credited to a separate stockholders’ equity account, Paid-in Capital in Excess of Par. This account follows the rules of debit and credit of other stockholders’ equity accounts. Paid-in Capital in Excess of Par Publicly Held Corporations SECTION 21.1

12 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Issuing Common Stock in Excess of Par Value Publicly Held Corporations SECTION 21.1

13 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Issuing Preferred Stock When preferred stock is issued, the Preferred Stock account is credited for the stock’s par value. Publicly Held Corporations SECTION 21.1

14 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  closely held corporation A corporation, often owned by a few people or by a family, that does not offer its stock for sale to the general public.  publicly held corporation A corporation whose stock is widely held, has a large market, and is usually traded on a stock exchange.  board of directors A group of people, elected by the stockholders, who govern and are responsible for the affairs of a corporation. Publicly Held Corporations SECTION 21.1

15 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  authorized capital stock The maximum number of shares of stock a corporation may issue.  par value The dollar amount assigned to each share of stock before it is sold to the public; used to determine the amount credited to the capital stock account.  common stock The stock issued by a corporation when it issues only one class of stock. Publicly Held Corporations SECTION 21.1

16 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  proxy A document that transfers a stockholder’s voting rights to someone else.  preferred stock Stock whose owners have certain privileges over common stockholders.  Paid-in Capital in Excess of Par The account that represents the amount of cash received by a corporation over the stock’s par value. Publicly Held Corporations SECTION 21.1

17 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 21, Section 2 Distribution of corporate Earnings What Do You Think? How do corporations distribute earnings to stockholders?

18 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea A corporation distributes a portion of its earnings to stockholders in the form of dividends. You Will Learn  how to account for dividends.  how to record dividend transactions. Distribution of Corporate Earnings SECTION 21.2

19 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term  dividend Distribution of Corporate Earnings SECTION 21.2

20 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Dividends Account Stockholders cannot withdraw cash whenever they want, but they receive dividends. A dividend is a distribution of cash to stockholders.dividend Dividends decrease retained earnings, so there must be an adequate balance in the Retained Earnings account. The Dividends account is used to record dividends declared and is closed to the Retained Earnings account at the end of the period. Distribution of Corporate Earnings SECTION 21.2

21 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Dividend Transactions A corporation authorized to issue two types of stocks uses separate dividend and dividend payable accounts for each type. Distribution of Corporate Earnings SECTION 21.2

22 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Dividends on Preferred Stock Preferred stockholders have the right to receive dividends before common stockholders. This amount is predetermined, or stated. Distribution of Corporate Earnings SECTION 21.2

23 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Date of Declaration A journal entry records the dividend on the date of declaration, the date the board declares it. Distribution of Corporate Earnings SECTION 21.2

24 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Date of Record On this date, the corporation checks its records and makes a list of stockholders entitled to receive the dividend. Distribution of Corporate Earnings SECTION 21.2

25 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Date of Payment A check for the total dividend payment is written and deposited in a dividends checking account. Checks are written on this account to each preferred stockholder. Distribution of Corporate Earnings SECTION 21.2

26 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Dividends on Common Stock Dividends on common stock can be declared in two ways.  The board of directors may declare a dividend amount per common share.  The board may decide to declare the total cash dividend for both preferred and common stock. Dividends can be paid annually, semiannually, or quarterly. Distribution of Corporate Earnings SECTION 21.2

27 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term Review  dividend A distribution of cash to stockholders of a corporation; reduces the corporation’s retained earnings. Distribution of Corporate Earnings SECTION 21.2

28 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 21, Section 3 Financial Reporting for a Publicly Held Corporation What Do You Think? Who is interested in a publicly held corporation’s financial statements versus those of a proprietorship?

29 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Corporate financial statements report stock issues and dividends. You Will Learn  about a corporate income statement.  how and why corporations prepare a statement of stockholders’ equity.  about a corporate balance sheet.  about a corporate statement of cash flows. Financial Reporting for a Publicly Held Corporation SECTION 21.3

30 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term  statement of stockholders’ equity Financial Reporting for a Publicly Held Corporation SECTION 21.3

31 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Income Statement The income statement of a publicly held corporation is similar to that of a closely held corporation. Financial Reporting for a Publicly Held Corporation SECTION 21.3

32 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Statement of Stockholders’ Equity Many corporations are preparing a statement of stockholders’ equity rather than a statement of retained earnings. This statement reports the changes in all stockholders’ equity accounts during the period.statement of stockholders’ equity Information reported on the statement includes  the number of shares of each type of stock issued,  the total amount received for those shares,  the net income or net loss for the period, and  dividends declared during the period. Financial Reporting for a Publicly Held Corporation SECTION 21.3

33 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Statement of Stockholders’ Equity Financial Reporting for a Publicly Held Corporation SECTION 21.3

34 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Balance Sheet The Dividends Payable accounts are reported in the liabilities section on the balance sheet. Each listing in the stockholders’ equity section of the balance sheet describes  the par value,  the number of shares authorized, and  the number of shares issued. Financial Reporting for a Publicly Held Corporation SECTION 21.3

35 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Balance Sheet Financial Reporting for a Publicly Held Corporation SECTION 21.3

36 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Statement of Cash Flows Stock issue results in cash inflow and payment of dividends is a cash outflow. Financial Reporting for a Publicly Held Corporation SECTION 21.3

37 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term Review  statement of stockholders’ equity A financial statement that reports the changes that have taken place in all of the stockholders’ equity accounts during the period. Financial Reporting for a Publicly Held Corporation SECTION 21.3

38 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 1 On February 14, Excalibur Corporation issued 2,000 shares of $25 par common stock at $35 per share. List the steps to record this transaction. Chapter 21 Review CHAPTER 21

39 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 1 Step 1: Identify the accounts affected. The accounts Cash in Bank, Common Stock, and Paid-in Capital in Excess of Par are affected. Step 2: Classify the accounts affected. Cash in Bank is an asset account; Common Stock and Paid-in Capital in Excess of Par are capital accounts. Step 3: Determine the amount of increase or decrease for each account affected. Cash in Bank is increased by $70,000 (2,000  $35). Common Stock is increased by $50,000 (2,000  $25) and Paid-in Capital in Excess of Par is increased by $20,000 (2,000  $10). Chapter 21 Review CHAPTER 21 (continued)

40 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 1 Step 4: Which account is debited? For what amount? Increases in the asset accounts are recorded as debits. Debit Cash in Bank for $70,000. Step 5: Which account is credited? For what amount? Increases in stockholder’s equity accounts are recorded as credits. Credit Common Stock for $50,000 and Paid-in Capital in Excess of Par for $20,000. Chapter 21 Review CHAPTER 21

41 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 2 List one advantage each for holding common and preferred stock. Chapter 21 Review CHAPTER 21

42 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 Common stock: Answers will vary, but advantages of holding common stock include these: (a) electing the corporation’s board of directors and, through it, exercising control over its operations, (b) sharing in the earnings of the corporation by receiving dividends, and (c) receiving a share of the assets if the business ceases operations and liquidates. Preferred stock: Answers will vary, but advantages of holding preferred stock include these: (a) receiving dividends before common stockholders in a set amount and (b) receiving preference over common stockholders in the distribution of assets upon liquidation. Chapter 21 Review CHAPTER 21

43 Glencoe Accounting Unit 4 Chapter 21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary