1 Learning Objectives After studying the material in this chapter you will be able to do the following: LO1 Recognize the differences among proprietorships, partnerships, corporations, and not-for-profit organizations and be familiar with accounting and reporting differences among these different types of entities. LO2 Characterize equity and the different types of equity securities, and explain the accounting for the issuance and repurchase of shares. LO3Describe the transactions and economic events affecting retained earnings, accumulated other comprehensive income, and contributed surplus. Copyright © 2013 McGraw-Hill Ryerson Limited

2 Retained Earnings All profits less dividends declared over life of corporation Profits reinvested into corporation Represents indirect investment by shareholders Usually no direct entries to retained earnings (limited exceptions) Copyright © 2013 McGraw-Hill Ryerson Limited LO3

3 Retained Earnings Copyright © 2013 McGraw-Hill Ryerson Limited LO3

4 Dividends Distribution of profits to shareholders Are discretionary and must be declared All shareholders of a class receive the same amount per share Not expensed for accounting or tax purposes Can be cash, property or stock Copyright © 2013 McGraw-Hill Ryerson Limited LO3

5 Dividends When declared, classified as a liability 3 important dates ▫Date of declaration ▫Date of record ▫Date of payment Copyright © 2013 McGraw-Hill Ryerson Limited LO3

6 Stock Dividends Issuance of a stock dividend: ▫Each shareholder receives additional shares ▫Percentage ownership remains constant ▫Decrease retained earnings account increase common shares account ▫Measured at market value just before issuance 0r assigned value by board of directors Copyright © 2013 McGraw-Hill Ryerson Limited LO3

7 Stock Splits Declaration of a stock split: ▫Divides an entity’s shares into a larger number of units ▫Like a large stock dividend ▫No accounting entries made ▫Reduces stock price in proportion ▫Makes shares more affordable ▫No real economic significance Copyright © 2013 McGraw-Hill Ryerson Limited LO3

8 Comprehensive Income Comprehensive income ▫An all inclusive measure of performance ▫A change in equity from transactions and economic events that do not include owners ▫Two parts Net income Other comprehensive income (OCI) Copyright © 2013 McGraw-Hill Ryerson Limited LO3

9 Comprehensive Income Copyright © 2013 McGraw-Hill Ryerson Limited LO3

10 Other Comprehensive Income Revenues, expenses, gains and losses not included in net income calculation including: ▫Gains and losses on: Pensions and post-retirement benefits Certain investment securities Translation of companies owned that are stated in foreign currencies Gains from writing up property, plant, and equipment if elected under IFRS Copyright © 2013 McGraw-Hill Ryerson Limited LO3

11 Contributed Surplus Captures other equity transactions: ▫Amounts paid for company shares in excess of par value ▫Receipt of donated assets ▫Equity component of some hybrid securities ▫Repurchase of shares for more than average per share cost ▫Employees’ stock-based compensation Copyright © 2013 McGraw-Hill Ryerson Limited LO3

12 Shareholders Equity - Summary The statement of shareholders’ equity provides a summary of changes in equity accounts Divides shareholders’ equity into: ▫Share capital ▫Contributed surplus ▫Retained Earnings ▫Accumulated OCI Copyright © 2013 McGraw-Hill Ryerson Limited LO3