Reporting and Interpreting Owners’ Equity Chapter 11 Reporting and Interpreting Owners’ Equity

Understanding The Business Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability

Understanding The Business Because a corporation is a separate legal entity, it can . . . Own assets. Sue and be sued. Incur liabilities. Enter into contracts.

Ownership of a Corporation Voting (in person or by proxy). Proportionate distributions of profits. Proportionate distributions of assets in a liquidation. Stockholders Rights

Ownership of a Corporation Elected by shareholders Appointed by directors

Authorized, Issued, and Outstanding Capital Stock Shares The maximum number of shares of capital stock that can be sold to the public.

Authorized, Issued, and Outstanding Capital Stock Shares Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold.

Authorized, Issued, and Outstanding Capital Stock Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders. Authorized Shares Outstanding Shares Unissued Shares Issued Shares Treasury Shares

Earnings Per share (EPS) Income Average Number of Shares Outstanding EPS = Outback’s income for 2000 is $141,000,000 and the average number of shares outstanding is 77,500,000. Earnings per share is probably the single most widely watched financial ratio.

Earnings Per share (EPS) Income Average Number of Shares Outstanding EPS = $141,000,000 77,500,000 Shares EPS = = $1.82 per share Earnings per share is probably the single most widely watched financial ratio.

Earnings Per share (EPS) Earnings per share is probably the single most widely watched financial ratio.

Types of Capital Stock Common Stock Preferred Stock

Ranks after preferred stock Dividend set by board of directors Common Stock Basic voting stock Ranks after preferred stock Dividend set by board of directors

Par Value and No-par Value Stock Nominal value Legal capital Legal capital is the amount of capital, required by the state, that must remain invested in the business.

Par Value and No-par Value Stock  Par Value Market Value I get it!

No-par Value Stock Some states do not require that a par value be stated in the charter. Some states do not require a par value to be stated in the charter.

Accounting for Capital Stock Two primary sources of stockholders’ equity Retained earnings Contributed capital Par value Additional paid-in capital

Sale and Issuance of Capital Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public. Subsequent sales of new stock to the public. Outback Outback issues new stock.

Secondary Markets Transactions between two investors that do not affect the corporation’s accounting records. I’d like to sell some of my Outback stock. I’d like to buy some of your Outback stock.

Sale and Issuance of Capital Stock On July 6, Outback issued 100,000 shares of $0.01 par value common stock for $22 per share. Prepare the journal entry to record this transaction.

Sale and Issuance of Capital Stock On July 6, Outback issued 100,000 shares of $0.01 par value common stock for $22 per share. 100,000 shares × $0.01 par value = $1,000 100,000 shares × $22 per share = $2,200,000

Capital Stock Sold for Noncash Assets and/or Services Outback Issues stock Provides accounting services Accountant Record assets or services received at the market value of the stock at the date of the transaction.

Capital Stock Sold for Noncash Assets and/or Services Outback Issues stock Provides accounting services Accountant If the market value of the stock cannot be determined, then the market value of the assets or services received should be used.

Capital Stock Sold for Noncash Assets and/or Services On March 14, Outback issued 10,000 shares of its $0.01 par value common stock to the Rose Law firms. The stock was selling for $15 per share. Prepare the journal entry to record this transaction.

Capital Stock Sold for Noncash Assets and/or Services On March 14, Outback issued 10,000 shares of its $0.01 par value common stock to the Rose Law firms. The stock was selling for $15 per share. 10,000 shares × $0.01 par value = $100 10,000 shares × $15 per share = $150,000

Management compensation package includes salary and stock options. Outback If Outback does not have new stock to issue when the stock options are exercised, then . . Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the stock’s value in the secondary market. Management

Treasury Stock Outback buys its own stock in Outback Stockholders the secondary market. (Treasury stock) Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the stock’s value in the secondary market. Management

No voting or dividend rights Treasury Stock No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost.

The journal entry for May 1 is . . . . Treasury Stock On May 1, Outback reacquired 100,000 shares of its common stock at $20 per share. The journal entry for May 1 is . . . .

The journal entry for December 3 is . . . Treasury Stock On December 3, Outback reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is . . . 10,000 shares × $20 cost = $200,000 10,000 shares × $30 = $300,000

Accounting for Cash Dividends Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash.

Dividend Dates Declaration date Board of directors declares the dividend. Record a liability.

Dividend Dates Date of Record X Stockholders holding shares on this date will receive the dividend. (No entry) X

Dividend Dates Date of Payment Record the dividend payment to stockholders.

Outback does not pay a cash dividend. The 2000 market price is $27. Dividend Yield Ratio Dividend Yield Dividends Per Share Market Price Per Share = Outback does not pay a cash dividend. The 2000 market price is $27. This ratio is often used to compare the dividend-paying performance of different investment alternatives.

Dividend Yield Ratio Dividend Yield Dividends Per Share Market Price Per Share = Dividend Yield $0.00 $27.00 = = 0.0% This ratio is often used to compare the dividend-paying performance of different investment alternatives.

Dividend Yield Ratio This ratio is often used to compare the dividend-paying performance of different investment alternatives.

Accounting for Stock Dividends Distribution of additional shares of stock to stockholders. No change in total stockholders’ equity. All stockholders retain same percentage ownership. No change in par values.

Record at current market value of stock. Record at par value of stock. Stock Dividends Small Large Stock dividend < 25% Stock dividend > 25% Record at current market value of stock. Record at par value of stock.

Banana Splits On Sale Now Stock Splits Distributions of 100% or more of stock to stockholders. Ice Cream Parlor Banana Splits On Sale Now

Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change

Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate

Dividends on Preferred Stock Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

Dividends on Preferred Stock If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.

Dividends on Preferred Stock Kites, Inc. has the following stock outstanding: Common stock: $1 par, 100,000 shares Preferred stock: 3%, $100 par, cumulative, 5,000 shares Preferred stock: 6%, $50 par, noncumulative, 3,000 shares Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000. How much will each class of stock receive?

Dividends on Preferred Stock

Dividends on Preferred Stock

Dividends on Preferred Stock

Dividends on Preferred Stock

Dividends On June 1, 2003, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000.

Dividends On June 1, 2000 a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000. $100 × 8% = $8 dividend per share $8 × 2,500 = $20,000 total dividend

Focus on Cash Flows Outback

Restrictions on Retained Earnings If I loan you $150,000, I will want you to restrict your retained earnings. Why would you want to do that?

Restrictions on Retained Earnings Because I want to restrict the amount you can pay out in dividends.

Accounting and Reporting for Three Types of Businesses

C’mon Chester! With your smarts and my savvy, we could make a great partnership!! End of Chapter 11