PRINCIPLES OF FIANNCIAL ACCOUNTING CHAPTER 11
Characteristics of a Corporation Separate Legal Existence Limited liability Ease of transfer of ownership Ability to acquire capital Continuous life Broader management skills More government regulations Double taxation
Stock Authorized, issued, outstanding Treasury stock Par, no par, stated value stock Legal Capital Contributed capital Par value + Paid in capital in excess of par Earned capital Retained Earnings
Preferred Stock Preference to dividends Cumulative stock Liquidation preference
Cash dividends Date of declaration Entry required (DR) + Dividends or - RE; (CR) + Dividends Payable Date of Record Date of Payment Entry required (DR)- Dividends Payable, (CR) - Cash
Stock Dividends vs stock split Stock Dividends - An increase in paid-in capital and a decrease in retained earnings (use market value at the date of declaration) Stock split – Par value is reduced. It has no effect on paid-in capital or retained earnings.
Retained Earnings A debit balance (negative balance) is called a deficit. Restrictions on RE are called appropriations. The restrictions reduce the amount that is available for dividends.
Ratio analysis Cash Dividends declared on common stock / net income = Payout ratio Cash dividends declared per share/Stock Price at year-end = Dividend Yield
More ratios: Net income – Preferred stock dividends / average common shares outstanding = Earnings per share Stock Price per share / Earnings per share = Price-earnings ratio
Assignment E11-2 E11-4 E11-6 E11-8 BYP11-1 BYP11-11