1. CORPORATIONS: DIVIDENDS & RETAINED EARNINGS 15 Dividends  a distribution of earnings to stockholders  proportional to ownership  cash, stock, or property

2. Cash 500 Common Stock 6,000 Retained Earnings 3,100 Accts Receiv 1,200 Equipment 7,400 9,100 Dividends & the Balance Sheet What does a company need to declare a dividend? Must be paid from R/E. A cash dividend requires cash!

3. 12-1-02Declared a 50¢ per share cash dividend to stockholders of record on 12-22-02. (100,000 shares of stock are outstanding.) Retained Earnings50,000 Dividends Payable50,000 AssetsLiab. Stckhlds Equity Net Income Entries for Cash Dividends

4. 1-20-03Paid the dividend. Dividends Payable50,000 Cash50,000 AssetsLiab. Stckhlds Equity Net Income

5. Buffet50015515 Turner2006206 Gates 300 9 309 Total1,000301,030 Shares Owned 3% Stock BeforeDividendAfter  stockholder expectations  reinvest R/E in the business 50% 30% 20% Stock Dividends Why?

6. 6-1-03Declared a 1% stock dividend on 50,000 shares of $5 par stock (market value = $30). Retained Earnings15,000 Com Stock Divid Distributable2,500 Pd in Capital in Excess of Par12,500 AssetsLiab. Stckhlds Equity Net Income Stock Dividend Entries

7. 7-1-03Paid the dividend. Com Stk Divid Distributable2,500 Common Stock2,500

8. Common Stock 250,000 Retained Earnings 120,000 Pd-in Cap Excess 750,000 2,500 252,500 12,500 762,500 15,000. 105,000 Total Equity (before stock dividend) $1,120,000 Total Equity (after) $1,120,000

9.  double or triple number of shares outstanding  reduce the par value of each share  no effect on paid-in capital or R/E Par Value: $30 Par Value: $15 Stock Splits Issuing new shares of stock to shareholders.

10. Retained Earnings 0 5,200 3,400 1,000 2,300 3,100 The start of business. Net income. Net loss. Dividend.

11. Cash 500 Retained Earnings 3,100 Retained Earnings Restrictions  restricted = unavailable for dividends  keeping assets in the company  reasons:  legal (e.g. treasury stock)  contractual  voluntary (e.g. expansion)  Note: restricting retained earnings is not the same as setting aside cash

12. Retained Earnings 0 5,200 3,400 1,000 2,300 3,100 Accrued revenue was understated by $250 in 2002. 250 3,350 Record correction. Prior Period Adjustments  General rule:  transactions are not recorded directly to R/E  everything goes through Income Summary  Exception  corrections of errors in previous years are recorded directly to R/E

13. Stockholders’ Equity Total Total Stockholders’ Equity Paid-in Capital Total Retained Earnings Less: Treasury stock Capital Stock Additional Pd-in Capital Common stock divid distributable Note any restrictions in the footnotes. included as part of common stock

14. Return on Common S/E = Net Income – Preferred Dividends Average Common S/E $2,300 - $1,000 ($7,800 + $9,100) / 2 = = 15.4% Average of the beginning and ending Common S/E Analysis of S/E

15. Earnings per share (EPS) = Net Income – Preferred Dividends Average Common Shares Outstanding $2,300 - $1,000 2,000 = = $0.65