1. Accounting, Fifth Edition11
REPORTING
AND ANALYZING STOCKHOLDERS’ EQUITY
Accounting, Fifth Edition

2. Learning Objectives
After studying this chapter, you should be able to:
Identify and discuss the major characteristics of a corporation.*
Record the issuance of common stock.
Explain the accounting for the purchase of treasury stock.
Differentiate preferred stock from common stock.
Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.
Identify the items that affect retained earnings.*
Prepare a comprehensive stockholders’ equity section.*
Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.*
*Self-study topics

3. Characteristics of a Corporation
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Advantages
Disadvantages
LO 1 Identify the major characteristics of a corporation.

4. The Corporate Form of Organization
Stockholders usually meet once a year.
Ultimate control.
Stockholders
Selected by a vote of the stockholders.
Chairman and
Board of
Directors
Overall responsibility for managing the company.
President and
Chief Executive
Officer
General
Counsel/
Secretary
Vice President
Marketing
Vice President
Finance/Chief
Financial Officer
Vice President
Operations/Chief
Operating Officer
Vice President
Human
Resources
Treasurer
Controller
Illustration 11-1 Corporation organization chart
LO 1 Identify and discuss the major characteristics of a corporation.

5. Other Forms of Business Organization
Limited partnerships
Limited liability partnerships (LLPs)
Limited liability companies (LLCs)
S Corporation
No double taxation.
Cannot have more than 75 shareholders.
LO 1 Identify and discuss the major characteristics of a corporation.

6. The Corporate Form of Organization
Forming a Corporation
Initial Steps:
File application with the Secretary of State.
State grants charter.
Corporation develops by-laws.
Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey).
Corporations engaged in interstate commerce must obtain a license from each state in which they do business.
LO 1 Identify and discuss the major characteristics of a corporation.

7. Different Ways to Finance a Company
Borrowing from a Bank (Ch 10): Notes Payable – More expensive and restrictive than bonds.
Selling Stock (Ch 11): Gives up ownership shares, but does NOT require interest or principal repayments.
Issuing Bonds (Ch 10): Easier to deal with than bank loans, require interest & principal repayment.

8. Stock Issue Considerations
Authorized Stock
Charter indicates the amount of stock that a corporation is authorized to sell.
Number of authorized shares is often reported in the stockholders’ equity section.
LO 2 Record the issuance of common stock.

9. Stock Issue Considerations
Issuance of Stock
Corporation can issue common stock
directly to investors or
indirectly through an investment banking firm.
Top five exchanges by value of shares traded:
New York Stock Exchange
Nasdaq stock market
London Stock Exchange
Tokyo Stock Exchange
Euronext
LO 2 Record the issuance of common stock.

10. Stockholders’ Rights
1. Vote in election of board of directors and on actions that require stockholder approval.
2. Share the corporate earnings through receipt of dividends.
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.
LO 1 Identify and discuss the major characteristics of a corporation.

11. Stock Issue Considerations
Par and No-Par Value Stocks
Capital stock that has been assigned a value per share.
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 fairly common today.
In many states the board of directors assigns a stated value to no-par shares.
LO 2 Record the issuance of common stock.

12. Basics of Capital Stock
Total amount of stock that a corporation’s charter authorizes it to sell.
Total amount of stock that has been issued or sold to stockholders.
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13. Stock Issue Considerations
Common Stock
Account
Paid-in Capital
Paid-in Capital in Excess of Par
Account
Preferred Stock
Account
Two Primary Sources of Equity
Retained Earnings
Account
Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for shares of ownership.
LO 2 Record the issuance of common stock.

14. Accounting for Common Stock Issuances
Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.
Cash 1,000
Common stock (1,000 x $1) 1,000
Cash 5,000
Paid-in capital in excess of par value 4,000 a) b)
LO 2 Record the issuance of common stock.

15. Stock Issue Considerations
Stockholders’ equity section assuming Hydro-Slide, Inc. has retained earnings of $27,000.
Illustration 11-5
LO 2 Record the issuance of common stock.

16. Preferred Stock
Typically, preferred stockholders have a priority in relation to
dividends and
assets in the event of liquidation.
However, they sometimes do not have voting rights.
Each paid-in capital account title should identify the stock to which it relates:
Paid-in Capital in Excess of Par Value—Preferred Stock
Paid-in Capital in Excess of Par Value—Common Stock
LO 4 Differentiate preferred stock from common stock.

17. Preferred Stock
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.
Cash 120,000
Preferred stock (10,000 x $10) ,000
Paid-in capital in excess of par –
Preferred stock 20,000
Preferred stock may have a par value or no-par value.
LO 4 Differentiate preferred stock from common stock.

18. Preferred Stock Dividend Preferences
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.

19. Preferred Stock – Cumulative vs Non-Cumulative Dividends
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20. RISK Risk Analysis of Corporate Investments Common Stock Voting Rights
Dividends, back of line
Preferred Stock
No voting rights
Dividends, front of line
Non-cumulative
Cumulative
RISK
Bonds Payable – Lender/Borrower

21. Accounting for Treasury Stock
Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired.
Corporations purchase their outstanding stock:
To reissue shares to officers and employees under bonus and stock compensation plans.
To increase trading of the company’s stock in the securities market.
To have additional shares available for use in acquiring other companies.
To increase earnings per share.
Another infrequent reason is to eliminate hostile shareholders.
LO 3 Explain the accounting for the purchase of treasury stock.

22. Accounting for Treasury Stock
Purchase of Treasury Stock
Debit Treasury Stock for the price paid.
Treasury stock is a contra stockholders’ equity account, not an asset. Normal side is a DEBIT.
Treasury Stock decreases by the same amount when the company later sells the shares.
LO 3 Explain the accounting for the purchase of treasury stock.

23. Accounting for Treasury Stock
Illustration 11-6
Illustration: On February 1, 2014, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry.
Treasury stock (4,000 x $8) 32,000
Cash 32,000
LO 3 Explain the accounting for the purchase of treasury stock.

24. Accounting for Treasury Stock
Stockholders’ Equity with Treasury stock
Illustration 11-7
Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed.
LO 3 Explain the accounting for the purchase of treasury stock.

25. Dividends
A distribution to stockholders on a pro rata (proportional to ownership) basis.
Types of Dividends:
Cash dividends.
Property dividends.
Stock dividends.
Scrip (promissory note)
LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

26. Dividends Cash Dividends
For a corporation to pay a cash dividend, it must have:
Retained earnings - Payment of dividends from retained earnings is legal in all states.
Adequate cash.
Declaration by the Board of Directors.
LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

27. Dividends Dividends require information concerning three dates:
LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

28. Dividends
Illustration: On Dec. 1, the directors of Media General declare a $0.50 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 (Record Date)
No entry
January 20 (Payment Date)
Dividends payable 50,000
Cash 50,000
LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

29. Dividends Stock Dividends
Pro rata distribution of the corporation’s own stock.
Illustration 11-10
Results in decrease in retained earnings and increase in paid-in capital.
LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

30. Dividends Effects of Stock Dividends
Changes the composition of stockholders’ equity.
Total stockholders’ equity remains the same.
No effect on the par or stated value per share.
Increases the number of shares outstanding.
LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

31. Stock Splits Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of shares.
LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

32. Dividends
Illustration: Assuming Medland splits its 50,000 shares of common stock on a 2-for-1 basis.
Illustration 11-11
LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

33. Retained Earnings Statement
Statement shows amounts and causes of changes in retained earnings during the period.
Time period is the same as that covered by the income statement.
Users can evaluate dividend payment practices.
Retained earnings is part of the stockholders’ claim on the total assets of the corporation.
A debit balance in Retained Earnings is identified as a deficit.
Retained Earnings Statement
Illustration 1-5
Helpful Hint The heading of this statement identifies the company, the type of statement, and the time period covered by the statement.
LO 4 Describe the content and purpose of each of the financial statements.

34. Retained Earnings
Illustration 11-14
LO 6 Identify the items that affect retained earnings.

35. Retained Earnings Retained Earnings Restrictions
Restrictions can result from:
Legal restrictions.
Contractual restrictions.
Voluntary restrictions.
Illustration 11-15
Disclosure of unrestricted
retained earnings
LO 6 Identify the items that affect retained earnings.

36. Presentation of Stockholders’ Equity
Balance Sheet Presentation
Illustration 11-16
Two classifications of paid-in capital:
* Capital stock
* Additional paid-in capital
LO 7 Prepare a comprehensive stockholders’ equity section.

37. Measuring Corporate Performance
Dividend Record
Illustration: The following is the calculation of the payout ratio for Nike in 2011 and 2010.
Illustration 11-18
The payout ratio measures the percentage of earnings a company distributes in the form of cash dividends.
LO 8 Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.

38. Measuring Corporate Performance
Earnings Performance
Illustration: The following is the calculation of Nike’s return on common stockholders’ equity ratios for 2011 and 2010.
Illustration 11-20
This ratio shows how many dollars of net income a company earned for each dollar of common stockholders’ equity.
LO 8 Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.

39. Measuring Corporate Performance
Debt Versus Equity Decision
Illustration 11-21
LO 8 Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.

40. Measuring Corporate Performance
Debt Versus Equity Decision
Illustration 11-22
LO 8 Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.

41. Measuring Corporate Performance
Illustration: Microsystems Inc. currently has 100,000 shares of
common stock outstanding issued at $25 per share and no debt. It is considering two alternatives for raising an additional $5 million: Plan A involves issuing 200,000 shares of common stock at the current market price of $25 per share. Plan B involves issuing $5 million of 12% bonds at face value. Income before interest and taxes will be $1.5 million; income taxes are expected to be 30%.
Illustration 11-23
LO 8