ACCT 201 ACCT 201 ACCT 201 Reporting and Analyzing Equity UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 11.

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ACCT 201 ACCT 201 ACCT 201 Reporting and Analyzing Equity UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 11

TopicLOReadHW Treasury StockP QS6, E9 Reporting Income Information C4, A E10, E13, E14 Retained EarningsC E12 Decision Analysis A2, A3, A E15, E16, E17 Chapter 11 - Day 2 - Agenda HW #10: P11-1A Due Today

ACCT 201 ACCT 201 ACCT 201 Treasury Stock Chapter 11

Treasury Stock ACCT 201 ACCT 201 ACCT 201 Corporations acquire shares of their own stock. Why would a company do that? Why would a company do that? Use the shares to acquire control of another corporation. To avoid a hostile takeover. Use the shares for employee stock options.

Treasury Stock ACCT 201 ACCT 201 ACCT 201

Purchasing Treasury Stock ACCT 201 ACCT 201 ACCT 201 On May, 8, 2002, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000. Treasury stock is shown as a reduction in total stockholders’ equity on the balance sheet. Treasury stock is shown as a reduction in total stockholders’ equity on the balance sheet.

Selling Treasury Stock at Cost ACCT 201 ACCT 201 ACCT 201 On June 30, 2002, Whitt sold 100 shares of its treasury stock for $4 per share. $8,000 ÷ 2,000 shares = $4 cost per treasury share

Selling Treasury Stock Above Cost On July 19, 2002, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share.

Selling Treasury Stock Below Cost On August 27, 2002, Whitt sold an additional 400 shares of its treasury stock for $1.50 per share.

ACCT 201 ACCT 201 ACCT 201 Reporting Income Information Chapter 11

Reporting Income Information ACCT 201 ACCT 201 ACCT 201 Net Income Continuing Operations Extraordinary Items Discontinued Segments Change in Accounting Principle

Reporting Income Information ACCT 201 ACCT 201 ACCT 201 Net Income Revenues, expenses and income generated by the company’s continuing operations. Revenues, expenses and income generated by the company’s continuing operations. Continuing Operations

Reporting Income Information ACCT 201 ACCT 201 ACCT 201 Net Income Income from operating the discontinued segment prior to its disposal and gain or loss on the sale of the net assets of the segment. Discontinued Segments

Reporting Income Information ACCT 201 ACCT 201 ACCT 201 Net Income A gain or loss that is unusual in nature and infrequent in occurrence. Extraordinary Items

Reporting Income Information ACCT 201 ACCT 201 ACCT 201 Net Income The increase or decrease in income when changing from one generally accepted accounting principle to another. Change in Accounting Principle

Reporting Income Information ACCT 201 ACCT 201 ACCT 201

Changes in Accounting Principle Chapter 11

Changes in Accounting Principles Campus, Inc. prepared the following schedule in connection with its change from double- declining balance to straight-line depreciation. Campus is subject to a 20% income tax rate Campus is subject to a 20% income tax rate

ACCT 201 ACCT 201 ACCT 201 Earnings Per Share Chapter 11

Earnings Per Share ACCT 201 ACCT 201 ACCT 201 Earnings per share is one of the most widely cited items of accounting information. Basic earnings per share = Net income - Preferred dividends Weighted-average common shares outstanding

Changes in Shares Outstanding Derby, Inc. reports net income of $75,000 and paid preferred dividends of $10,000 during The company started the year with 10,000 shares of common stock outstanding. Derby sold an additional 4,000 share of stock on March 31, and purchased 2,000 treasury shares on September 30, 2002.

Changes in Shares Outstanding Derby, Inc. reports net income of $75,000 and paid preferred dividends of $10,000 during The company started the year with 10,000 shares of common stock outstanding. Derby sold an additional 4,000 share of stock on March 31, and purchased 2,000 treasury shares on September 30, EPS = $75,000 - $10,000 12,500 = $5.20

ACCT 201 ACCT 201 ACCT 201 Complex Capital Structure Chapter 11

ACCT 201 ACCT 201 ACCT 201 Complex Capital Structure Capital structure includes dilutive securities such as: Stock options (rights to purchase common stock). Preferred stock convertible into common stock. These items may reduce the basic earnings per share.

ACCT 201 ACCT 201 ACCT 201 Complex Capital Structure The company may be required to report basic and diluted earnings per share on the face of the income statement.

ACCT 201 ACCT 201 ACCT 201 Stock Options Chapter 11

Stock Options ACCT 201 ACCT 201 ACCT 201 The right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above the fixed option price, the value of the option increases. Option purchase price $30 per share. Market price of stock $75 per share.

ACCT 201 ACCT 201 ACCT 201 Stock Options Options are given to key employees to motivate them to: focus on company performance, take a long-run perspective, and remain with the company.

ACCT 201 ACCT 201 ACCT 201 Retained Earnings Chapter 11

Retained Earnings ACCT 201 ACCT 201 ACCT 201 Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating.

Restricted Retained Earnings ACCT 201 ACCT 201 ACCT 201 LegalContractual Most states restrict the amount of treasury stock purchases to the amount of retained earnings. Loan agreements can include restrictions on paying dividends below a certain amount of retained earnings.

Appropriated Retained Earnings ACCT 201 ACCT 201 ACCT 201 A corporation’s directors can voluntarily limit dividends because of a special need for cash such as the purchase of new facilities.

ACCT 201 ACCT 201 ACCT 201 Prior Period Adjustments Chapter 11

Prior Period Adjustments Correction of material errors in past years’ financial statements.

ACCT 201 ACCT 201 ACCT 201 Changes in Accounting Estimates Chapter 11

ACCT 201 ACCT 201 ACCT 201 Changes in Accounting Estimates Many items reported in the financial statements are based on estimates. If new information comes to light that would cause us to change our estimate, we show the impact of the change in current and future periods.

Statement of Changes in Stockholders’ Equity

ACCT 201 ACCT 201 ACCT 201 Decision Analysis Chapter 11

ACCT 201 ACCT 201 ACCT 201 Dividend Yield Annual amount of cash dividends distributed to common stockholders relative to the stock’s market price. Dividend Yield = Annual cash dividends per share Market value per share

ACCT 201 ACCT 201 ACCT 201 Dividend Yield

ACCT 201 ACCT 201 ACCT 201 Price- Earnings = Market value per share Earnings per share Price Earnings This ratio reveals information about the stock market’s expectations for a company’s future growth in earnings, dividends, and opportunities.