1. Reporting and Interpreting Owners’ Equity – Preferred Stock Chapter 11 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

2. Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate

3.  Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.  Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.  Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.  Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. Dividends on Preferred Stock If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.

4. Components of Preferred Stock Par value Dividend - a % of par value – $100 par 5% dividends pay a $5 dividend per share.

5. Kites, Inc. has the following stock outstanding: Common stock: $1 par, 100,000 shares Preferred stock: 3%, $100 par, cumulative, 5,000 shares Preferred stock: 6%, $50 par, noncumulative, 3,000 shares Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000. How much will each class of stock receive? Dividends on Preferred Stock

7. On June 1, 2008, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000. Dividends on Preferred Stock $100 × 8% = $8 dividend per share $8 × 2,500 = $20,000 total dividend

8. Focus on Cash Flows