CORPORATIONS: DIVIDENDS & RETAINED EARNINGS 15 Dividends  a distribution of earnings to stockholders  proportional to ownership  cash, stock, or property

Cash 500 Common Stock 6,000 Retained Earnings 3,100 Accts Receiv 1,200 Equipment 7,400 9,100 Dividends & the Balance Sheet What does a company need to declare a dividend? Must be paid from R/E. A cash dividend requires cash!

Declared a 50¢ per share cash dividend to stockholders of record on (100,000 shares of stock are outstanding.) Retained Earnings50,000 Dividends Payable50,000 AssetsLiab. Stckhlds Equity Net Income Entries for Cash Dividends

Paid the dividend. Dividends Payable50,000 Cash50,000 AssetsLiab. Stckhlds Equity Net Income

Buffet Turner Gates Total1,000301,030 Shares Owned 3% Stock BeforeDividendAfter  stockholder expectations  reinvest R/E in the business 50% 30% 20% Stock Dividends Why?

6-1-03Declared a 1% stock dividend on 50,000 shares of $5 par stock (market value = $30). Retained Earnings15,000 Com Stock Divid Distributable2,500 Pd in Capital in Excess of Par12,500 AssetsLiab. Stckhlds Equity Net Income Stock Dividend Entries

7-1-03Paid the dividend. Com Stk Divid Distributable2,500 Common Stock2,500

Common Stock 250,000 Retained Earnings 120,000 Pd-in Cap Excess 750,000 2, ,500 12, ,500 15, ,000 Total Equity (before stock dividend) $1,120,000 Total Equity (after) $1,120,000

 double or triple number of shares outstanding  reduce the par value of each share  no effect on paid-in capital or R/E Par Value: $30 Par Value: $15 Stock Splits Issuing new shares of stock to shareholders.

Retained Earnings 0 5,200 3,400 1,000 2,300 3,100 The start of business. Net income. Net loss. Dividend.

Cash 500 Retained Earnings 3,100 Retained Earnings Restrictions  restricted = unavailable for dividends  keeping assets in the company  reasons:  legal (e.g. treasury stock)  contractual  voluntary (e.g. expansion)  Note: restricting retained earnings is not the same as setting aside cash

Retained Earnings 0 5,200 3,400 1,000 2,300 3,100 Accrued revenue was understated by $250 in ,350 Record correction. Prior Period Adjustments  General rule:  transactions are not recorded directly to R/E  everything goes through Income Summary  Exception  corrections of errors in previous years are recorded directly to R/E

Stockholders’ Equity Total Total Stockholders’ Equity Paid-in Capital Total Retained Earnings Less: Treasury stock Capital Stock Additional Pd-in Capital Common stock divid distributable Note any restrictions in the footnotes. included as part of common stock

Return on Common S/E = Net Income – Preferred Dividends Average Common S/E $2,300 - $1,000 ($7,800 + $9,100) / 2 = = 15.4% Average of the beginning and ending Common S/E Analysis of S/E

Earnings per share (EPS) = Net Income – Preferred Dividends Average Common Shares Outstanding $2,300 - $1,000 2,000 = = $0.65