1. 10-1 Contributed Capital  Three general forms of business  Sole proprietorships  Partnerships  Corporations  Stock—authorized, issued, & outstanding Stock—authorized, issued, & outstanding  Common stock Common stock  Preferred stock Preferred stock

2. 10-2 Stock—Authorized Issued and Outstanding  Authorized shares  Maximum # of shares of stock a corp is authorized to offer to the public  Specified in the corporate charter  Issues shares  Shares of stock that have been offered and sold to shareholders  Outstanding shares  Issued shares of stock owned by shareholders rather than the corp  Treasury stock  Stock that a corp buys back from shareholders  Outstanding shares = shares issued less treasury stock

3. 10-3 Common Stock  Owners’ rights  Vote for board of directors  Share in pro rata portion of corp profits  Dividends  Share in assets in bankruptcy after creditors and preferred shareholders  Right to acquire more shares when corp issues new shares  Pre-emptive right  Par value  Arbitrary amount, usually small, and has no real meaning in today’s business environment  Not required by most states  Excess of stock issue proceeds above par value increases Additional Paid-in Capital account

4. 10-4 Preferred Stock  Owners receive dividends before common shareholders  Priority claim on assets over common shareholders in bankruptcy  Usually do not have voting rights

5. 10-5 Cash Dividends  Distributions of earnings to owners  Board of directors decide amount and dates of dividend distributions  Important dividend-related dates Important dividend-related dates  Distribution of dividends between common and preferred shareholders Distribution of dividends between common and preferred shareholders  Dividend payment example Dividend payment example

6. 10-6 Important Dividend-related Dates  Declaration date  Date Board of directors decides it will pay a dividend  Legal obligation to pay dividends is created, giving rise to Dividends Payable and increases Dividends (contra-equity)  Date of record  All shareholders on date of record entitled to receive dividends  Purchaser of stock after this date will not receive the dividend declared  Payment date  Date dividend actually paid,  Decreases cash and Dividends Payable

7. 10-7 Distribution of Dividends  Cumulative preferred stock  Shareholders must receive any past, unpaid dividends (dividends in arrears) before a company can pay current dividends to common shareholders  Noncumulative preferred stock  Past, unpaid dividends do not accumulate to preferred shareholders

8. 10-8  Caffinators Coffee (CC) has the following stock outstanding on 1/1/2008  100 shares of 8% 100 par, cumulative preferred stock  20,000 shares of $1/share common stock  CC has not paid a dividend since 2005  On 10/31/08 CC declared $5,000 annual dividends to be paid 11/15/08 to shareholders of record on 10/15/08

9. 10-9  Annual dividend for preferred shareholders  100 shares x 8% x $100 = $800  Total dividends payable to preferred shareholders  3 years (2006-2008) x $800 = $2,400  Dividends payable to common shareholders  $5,000 - $2,400 = $2,600  Dividend per share  $2,600/20,000 shares = $0.13/share

10. 10-10 Why Firms Buy Their Own Stock  Have stock to distribute to employees for compensation plans  Use excess cash to increase shareholder wealth  To return cash to the shareholders if they choose to sell shares to the firm  More flexible for firm and shareholders than paying cash dividends  Reduce equity  Treasury stock is contra-equity account  Increase the company’s earnings per share (EPS)  EPS = Net income / # shares outstanding

11. 10-11 Accounting for Treasury Stock Purchase  Treasury stock accounted for at cost  Separate treasury stock accounts for common and preferred stock  No gain or loss reported on purchase or sale of treasury stock  If a firm sells its treasury stock for more than the purchase price, in which account would it go? Why?

12. 10-12 Selling Treasury Stock  Treasury stock account reduced by the cost of the shares sold  How do you reduce a contra-equity account?  Sales price > acquisition cost  Excess increases Paid-in-capital-TS  Sales price < acquisition cost  Decrease Paid-in-capital account

13. 10-13 Reporting Treasury Stock  Treasury stock, a contra-equity account, is reported as a reduction to stockholders equity  Why aren’t gains and losses reported on the income statement?

14. 10-14 Stock Dividends and Stock Splits  Stock dividends  Distribution of stock instead of cash to shareholders  Capitalizing earnings  Like using retained earnings to issue new shares  Reduce Retained Earnings  Increase Common Stock  Increase Additional Paid in Capital  Stock split  Split original shares into two or more shares  Why would a firm split its stock?  No accounts are affected by stock split  Par value decreases so total par value is the same ([par value per share] x [# of shares])  Total shares outstanding increases

15. 10-15 Stock Dividends and Stock Splits  CC did a 5 for 1 stock split on its 500 shares of $1 par stock  How many shares will be outstanding after the stock split?  What will the new par value be?  If market value before the split was $10/share, what should be the market value/share after the split?  Is this usually the case?

16. 10-16 Retained Earnings  What is the affect of the following on retained earnings?  Net income  Net loss  Dividends  Statement of retained earnings  Shows activity in retained earnings for the period

17. 10-17 Financial Statement Analysis  Return on equity (ROE)  Measures return to common shareholders Net income – preferred dividends _ Average common shareholders’ equity  Why are preferred dividends subtracted from net income?  How does ROA compare to ROE?  Numerator? Denominator?

18. 10-18 Financial Statement Analysis  Earnings per share (EPS)  Measures return to common shareholders Net income – preferred dividends _ Weighted avg # shares outstanding  Basic earnings per share  Assumes no securities that could be converted into common stock are converted  Earnings per share (continued)  Diluted earnings per share  Assumes all securities that could be converted into common stock are converted

19. 10-19 Business Risk Control and Ethics  Risks faced by owners  Stock may decrease in value or become worthless  How can investors reduce the risk of stock ownership?  Why do some companies choose to be publicly traded?

20. 10-20  Assign #5 – pg. 542-544, E10-2A, E10- 6A, E10-11A;  Assign #6 – pg. 550-551, P10-4A, P10- 8A;  Assign #2, 3, 4.