1. 11-1 Classified by Purpose  Not-for-Profit  For Profit Classified by Ownership  Publicly held  Privately held ► McDonald’s ► Nike ► PepsiCo ► Google ► Salvation Army ► American Cancer Society ► Churches ► Mars Candy ► Toys’ R Us ► Cox ► Caesars The Corporate Form of Organization

2. 11-2  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Government Regulations  Additional Taxes  Corporate Management Characteristics that distinguish corporations from proprietorships and partnerships. Advantages Disadvantages

3. 11-3 Stockholders Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources TreasurerController Corporation organization chart Characteristics of a Organization

4. 11-4  Formed by grant of a state charter.  Corporation develops by-laws. Initial Steps: Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Del, N J). Corporation can do business in ANY (or all) states. Forming a Corporation

5. 11-5 Owners’ equity (stockholders’ equity) accounts reported on a balance sheet for a proprietorship, and a corporation. Corporate Capital

6. 11-6 Paid-in Capital Retained Earnings Account Account Paid-in Capital in Excess of Par Account Account Two Primary Sources of “Equity” Common Stock Account Account Preferred Stock Account Account Paid-in capital: total amount of assets paid in by stockholders. Retained earnings: cumulative profits (- losses - dividends) since corporation began. (Basically, net earnings from “Day 1” not distributed to stockholders). Corporate Capital

7. 11-7 Retained earnings: cumulative profits (- losses - dividends) since corporation began. (Basically, net earnings from “Day 1” not distributed to stockholders). Retained Earnings Retained earnings are NOT “extra-cash” available to a corp. They represent how business has managed its profits (whether it has distributed them as dividends or reinvested them in business). When reinvested, those retained earnings may show up as an increase to assets (could include cash) or reductions to liabilities.

8. 11-8 1.Vote in election of board of directors. 2.Share the earnings through receipt of dividends. Ownership Rights of Stockholders 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right). 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.

9. 11-9 Class A COMMON STOCK PAR VALUE $1 PER SHARE Stock Certificate Name of corporation Stockholder’s name Class Shares Signature of corporate official Prenumbered Illustration 11-4 Ownership Rights of Stockholders

10. 11-10 Shares (Stock Certificates)

11. 11-11  Charter sets number of shares that a corporation can sell. Authorized Shares Stock (Shares) Terminology Outstanding (Issued) Shares (held by investors)  Sells (issues) stock to investors or an investment bank. Market Value of Shares  Price determined by “the market” (buyers and sellers) … New York Stock Exchange; NASDAQ etc.

12. 11-12 https://finance.yahoo.com/

13. 11-13  Stock of publicly held … (NOT privately held) companies is traded on organized exchanges.  Interaction between buyers and sellers determines the prices per share.  Prices tend to follow the trend of a company’s earnings and dividends.  Factors beyond a company’s control, may cause day-to- day fluctuations in market prices. Market Value of Stock

14. 11-14  Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors.  Today many states do not require a par value (no-par value stock is quite common today).  In many states the board of directors assigns a stated value to no-par shares. Par … No-Par … Stated Value Stock Issue Considerations

15. 11-15 Ex: Corporation issues 2,000 shares of $1 par value common stock. Prepare journal entry to “issue stock at par (stated value)”. Cash 2,000 *Common stock 2,000 Issuing Par (or Stated) Value Stock for Cash (* 2,000 shares x $1 par each) Name could be: Paid-In Capital (Common Stock)

16. 11-16 Ex: Corporation issues 2,000 shares of $1 par (or stated) value common stock. Prepare journal entry to issue stock at a market price of $5 per share. Cash 5,000 Common stock 1,000 Paid-in capital in 4,000 Issuing Par (or Stated) Value Stock for Cash excess of par value (1,000 x $1) ($5,000 cash - $1,000 par) If stock description had referred to “stated” value instead of par, then “par” would be change to the word “stated” in account name.

17. 11-17 Balance Sheet Presentation

18. 11-18 What is stock has no-par or no stated value? Ex: Corporation issues 1,000 shares of stock at $40. Cash 40,000 * Common stock40,000 Accounting for Common Stock Issues Issuing No-Par (No Stated Value) Stock for Cash * The account name could also be: Paid-In-Capital – Common Stock

19. 11-19 Ex: Attorneys have helped J Company incorporate. They bill JCorp $5,000. They agree to accept 4,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction. Organizational expense5,000 Common stock (4,000 x $1) 4,000 Paid-in capital in excess of par1,000 Accounting for Common Stock Issues

20. 11-20 Ex: ARI is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. They issue 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction. Land (10,000 x $8) 80,000 Common stock (10,000 x $5) 50,000 Paid-in capital in excess of par30,000 Accounting for Common Stock Issues

21. 11-21

22. 11-22 Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. Corporations purchase their outstanding stock: 1.To reissue the shares to officers and employees under bonus and stock compensation plans. 2.To enhance the stock’s market value. 3.To have additional shares available for use in the acquisition of other companies. 4.To increase earnings per share. LO 3 Explain the accounting for treasury stock. Accounting for Treasury Stock

23. 11-23 Purchase of Treasury Stock  Debit Treasury Stock for the price paid to reacquire the shares.  Treasury stock is a contra stockholders’ equity account, not an asset.  Purchase of treasury stock reduces stockholders’ equity. LO 3 Explain the accounting for treasury stock. Accounting for Treasury Stock

24. 11-24 Treasury stock (4,000 x $8) 32,000 Cash 32,000 Illustration: On February 1, 2014, Mead acquires 4,000 shares of its stock at $8 per share. LO 3 Explain the accounting for treasury stock. Illustration 11-8 Accounting for Treasury Stock

25. 11-25 LO 3 Explain the accounting for treasury stock. Stockholders’ Equity with Treasury stock Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed. Illustration 11-9 Accounting for Treasury Stock

26. 11-26

27. 11-27 Sale of Treasury Stock  Above Cost  Below Cost Both increase total assets and stockholders’ equity. LO 3 Explain the accounting for treasury stock. Accounting for Treasury Stock Disposal of Treasury Stock

28. 11-28 Treasury stock 8,000 Illustration: On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock, previously acquired at $8 per share. LO 3 Explain the accounting for treasury stock. July 1 Paid-in capital treasury stock 2,000 Cash 10,000 A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders. Accounting for Treasury Stock Above Cost

29. 11-29 Paid-in capital treasury stock 800 Illustration: On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share. LO 3 Explain the accounting for treasury stock. Oct. 1 Treasury stock 6,400 Cash 5,600 Accounting for Treasury Stock Below Cost Illustration 11-10

30. 11-30 Paid-in capital treasury stock 1,200 Illustration: On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share. LO 3 Explain the accounting for treasury stock. Dec. 1 Retained earnings 1,000 Cash 15,400 Treasury stock 17,600 Limited to balance on hand Accounting for Treasury Stock Below Cost

31. 11-31 Features often associated with preferred stock. 1. Preference as to dividends. 2. Preference as to assets in liquidation. 3. Nonvoting. LO 4 Differentiate preferred stock from common stock. Accounting for preferred stock at issuance is similar to that for common stock. Accounting for Preferred Stock

32. 11-32 Illustration: Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock. LO 4 Differentiate preferred stock from common stock. Cash120,000 Preferred stock (10,000 x $10) 100,000 Paid-in capital in excess of par – Preferred stock20,000 Preferred stock may have a par value or no-par value. Accounting for Preferred Stock

33. 11-33   Right to receive dividends before common stockholders.   Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount.   Cumulative dividend – holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends. LO 4 Differentiate preferred stock from common stock. Accounting for Preferred Stock Dividend Preferences

34. 11-34 LO 4 Differentiate preferred stock from common stock. Accounting for Preferred Stock Cumulative Dividend Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par value, cumulative preferred stock outstanding. Each $100 share pays a $7 dividend (.07 x $100). The annual dividend is $35,000 (5,000 x $7 per share). If dividends are two years in arrears, preferred stockholders are entitled to receive the following dividends in the current year.

35. 11-35   Most preferred stocks have a preference on corporate assets if the corporation fails.   Provides security for the preferred stockholder.   Preference to assets may be for the par value of the shares or for a specified liquidating value. LO 4 Differentiate preferred stock from common stock. Accounting for Preferred Stock Liquidation Preferences

36. 11-36 Distribution of cash or stock to stockholders on a pro rata (proportional) basis. Types of Dividends: LO 5 Prepare the entries for cash dividends and stock dividends. 1.Cash dividends. 2.Property dividends. Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share. 3.Stock dividends. 4.Scrip. Dividends

37. 11-37 Three dates: LO 5 Prepare the entries for cash dividends and stock dividends. Dividends Illustration 11-12

38. 11-38 For a corporation to pay a cash dividend, it must have: 1. 1.Retained earnings - Payment of cash dividends from retained earnings is legal in all states. 2. 2.Adequate cash. 3. 3.A declaration of dividends by the Board of Directors. LO 5 Prepare the entries for cash dividends and stock dividends. Dividends Cash Dividends

39. 11-39 Illustration: On Dec. 1, the directors of Media General declare a 50¢ per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22. December 1 (Declaration Date) Cash dividends 50,000 Dividends payable 50,000 December 22 (Date of Record) January 20 (Payment Date) LO 5 Prepare the entries for cash dividends and stock dividends. Dividends payable 50,000 Cash 50,000 No entry Cash Dividends

40. 11-40 Allocating Cash Dividends Between Preferred and Common Stock LO 5 Prepare the entries for cash dividends and stock dividends. Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends. Dividends

41. 11-41 LO 5 Prepare the entries for cash dividends and stock dividends. Illustration: On December 31, 2014, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2014, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend. Cash dividends 6,000 Dividends payable 6,000 Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000 Dividends

42. 11-42 LO 5 Prepare the entries for cash dividends and stock dividends. * 1,000 shares x $100 par x 8% = $8,000 * ** 2012 Pfd. dividends $8,000 – declared $6,000 = $2,000 ** Illustration: At December 31, 2015, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of stock. $ 50,000 2,000 8,000 $ 40,000 Dividends

43. 11-43 LO 5 Prepare the entries for cash dividends and stock dividends. Cash dividends 50,000 Dividends payable 50,000 Illustration: At December 31, 2015, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend. Dividends

44. 11-44

45. 11-45 LO 5 Prepare the entries for cash dividends and stock dividends. Results in decrease in retained earnings and increase in paid-in capital. Illustration 11-14 Dividends Stock Dividends Pro rata distribution of the corporation’s own stock.

46. 11-46 Reasons why corporations issue stock dividends: 1. 1.Satisfy stockholders’ dividend expectations without spending cash. 2. 2.Increase marketability of the corporation’s stock. 3. 3.Emphasize a portion of stockholders’ equity has been permanently reinvested in the business. LO 5 Prepare the entries for cash dividends and stock dividends. Dividends Stock Dividends

47. 11-47   Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market value)   Large stock dividend (greater than 20–25% of issued stock, recorded at par value) LO 5 Prepare the entries for cash dividends and stock dividends. * Accounting based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares. * Dividends Stock Dividends

48. 11-48 10% stock dividend is declared Stock dividends (50,000 x 10% x $15) 75,000 Common stock dividends distributable 50,000 Paid-in capital in excess of par value 25,000 Stock issued Common stock dividends distributable 50,000 Common stock (50,000 x 10% x $1) 50,000 Illustration: Medland Corporation has a balance of $300,000 in retained earnings. It declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. The current fair market value of its stock is $15 per share. LO 5 Prepare the entries for cash dividends and stock dividends. Dividends

49. 11-49 Stockholders’ Equity with Dividends Distributable LO 5 Prepare the entries for cash dividends and stock dividends. Dividends Illustration 11-15 Statement presentation of common stock dividends distributable

50. 11-50 LO 5 Prepare the entries for cash dividends and stock dividends. Effects of Stock Dividends Dividends Illustration 11-16

51. 11-51 Which of the following statements about small stock dividends is true? a.A debit to Stock Dividends for the par value of the shares issued should be made. b.A small stock dividend decreases total stockholders’ equity. c.Market value per share should be assigned to the dividend shares. d.A small stock dividend ordinarily will have no effect on book value per share of stock. Question LO 5 Prepare the entries for cash dividends and stock dividends. Dividends

52. 11-52 In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n): a.deduction from total paid-in capital and retained earnings. b.current liability. c.deduction from retained earnings. d.addition to capital stock. LO 5 Prepare the entries for cash dividends and stock dividends. Dividends Question

53. 11-53 LO 5 Prepare the entries for cash dividends and stock dividends. Dividends  Reduces the market value of shares.  No entry recorded for a stock split.  Decrease par value and increase number of shares. Stock Split

54. 11-54 LO 5 Prepare the entries for cash dividends and stock dividends. Effects of Stock Splits Dividends Illustration 11-17

55. 11-55

56. 11-56   Net income increases Retained Earnings and a net loss decreases Retained Earnings.   Part of the stockholders’ claim on the total assets of the corporation.   Debit balance in Retained Earnings is identified as a deficit. LO 6 Identify the items reported in a retained earnings statement. Retained Earnings Illustration 11-20

57. 11-57 Restrictions can result from: 1. 1.Legal restrictions. 2. 2.Contractual restrictions. 3. 3.Voluntary restrictions. LO 6 Identify the items reported in a retained earnings statement. Companies generally disclose retained earnings restrictions in the notes to the financial statements. Retained Earnings Restrictions Retained Earnings

58. 11-58  Correction of an error in previously issued financial statements.  Result from: ► mathematical mistakes. ► mistakes in application of accounting principles. ► oversight or misuse of facts.  Adjustment made to the beginning balance of retained earnings. LO 6 Identify the items reported in a retained earnings statement. Prior Period Adjustments Retained Earnings

59. 11-59 Before issuing the report for the year ended December 31, 2014, you discover a $50,000 error (net of tax) that caused the 2013 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2013. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2014? LO 6 Identify the items reported in a retained earnings statement. Retained Earnings Statement

60. 11-60 LO 6 Identify the items reported in a retained earnings statement. Retained Earnings Statement

61. 11-61 LO 6 Identify the items reported in a retained earnings statement. Debits and Credits to Retained Earnings Illustration 11-24 Retained Earnings Statement

62. 11-62 All but one of the following is reported in a retained earnings statement. The exception is: a.cash and stock dividends. b.net income and net loss. c.some disposals of treasury stock below cost. d.sales of treasury stock above cost. Question LO 6 Identify the items reported in a retained earnings statement. Retained Earnings Statement

63. 11-63 LO 7 Illustration 11-26 Statement Presentation and Analysis Presentation Note R: Retained earnings is restricted for the cost of treasury stock, $80,000.

64. 11-64 Net Income Available to Common Stockholders Return on Common Stockholders’ Equity = Average Common Stockholders’ Equity LO 7 Prepare and analyze a comprehensive stockholders’ equity section. Ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders. Statement Presentation and Analysis Analysis