1. Corporate Stock and Earnings Issues Chapter 24

2. Corporate Capital Structure Stockholders’ Equity Contributed Capital Retained Earnings

3. Capital Stock and Legal Capital Capital stock - ownership unit Stockholders - owners of a corporation Stock certificate - legal document of ownership of shares of stock Legal capital - total par value of the issued capital stock

4. Stockholders’ Rights Attend stockholders’ meetings Vote in the election of the board of directors Share in net income by receiving dividends Purchase additional capital stock if it is issued (preemptive right) Share in the distribution of the assets of the corporation if it is liquidated

5. Stock Terminology Par value No-par capital stock Stated value Additional paid-in capital Common stock Preferred stock

6. Stockholders’ Equity on the Balance Sheet Stockholders’ Equity Contributed capital Preferred stock, $100 par, 2,000 shares authorized, 600 shares issued and outstanding$ 60,000 Additional paid-in capital on preferred stock 72,000 Common stock, $10 par, 30,000 shares authorized, 9,000 shares issued and outstanding 90,000 Additional paid-in capital on common stock 43,000 Total contributed capital$265,000 Retained earnings 173,000 Total Stockholders’ Equity$438,000

7. Articles of Incorporation The articles of incorporation lists the following: Classes of stock Par or stated value Number of authorized shares Preference provisions for preferred stock

8. Issuing Stock for Cash Common Stock Additional Paid-in Capital 3,000 1,800 4,800 Cash

9. Transfer of Stock Between Stockholders Trading of stock among stockholders does not affect the corporation’s financial statements The corporation must keep records of the names and addresses of the stockholders for mailing reports and dividends

10. Preferred Stock Preferences Convertible Callable Redeemable

11. Treasury Stock Treasury stock is a corporation’s own capital stock that: stockholders fully paid for and the corporation issued the corporation later reacquired, and the corporation currently holds

12. Reasons to Acquire Treasury Stock To have shares available for employee- purchase plans To have shares available for conversion of convertible stock To invest excess cash To have shares for the acquisition of other companies

13. Reasons to Acquire Treasury Stock To reduce the number of shares outstanding and increase earnings per share To have shares for use in the issuance of a stock dividend To concentrate ownership of the shares as a defense against hostile takeovers

14. Acquisition of Treasury Stock Treasury Stock 5,600 Cash Issued capital stock - Treasury stock = Outstanding capital stock

15. Reissuance of Treasury Stock Treasury Stock Additional Paid-in Capital 4,200 300 4,500 Cash Bal. 5,600 Bal. 1,400 Bal. 10,300 Bal. 10,000

16. Stock Options Compensatory stock options are intended to provide additional compensation to the corporation’s employees.

17. Corporate Income Statement Income from continuing operations Operating income Nonoperating income (other items) Income tax expense related to continuing operations Results of discontinued operations Income (loss) from operations of a discontinued segment (net of income taxes Gain (loss) on disposal of discontinued segment (net of income taxes) Extraordinary gains or losses (net of income taxes) Net income Earnings per share

18. Basic Earnings Per Share Net Income - Preferred Dividends Weighted Average Number of Common Shares Outstanding

19. Weighted Average Common Shares Number of Shares Outstanding X Fraction of Year Outstanding = Weighted Average Number of Shares

20. Reporting Earnings Per Share Earnings Per Share (EPS) are reported on the income statement directly below the net income. EPS are computed for: Income from continuing operations Results of discontinued operations Extraordinary gain or loss Net income

21. Diluted Earnings Per Share Complex capital structure - when stock options and convertible securities have been issued Potential common shares - securities that can be converted into common stock Diluted EPS - shows the effects of all potential common shares that would reduce earnings per share

22. Price/Earnings Ratio Market Price Per Share Earnings Per Share The price/earnings ratio indicates how much investors are willing to pay per dollar of current earnings.

23. Cash Dividends Date of Declaration Date of Record Date of Payment

24. Cash Dividends - Date of Declaration Retained Earnings 720,000 Dividends Payable

25. Cash Dividends - Date of Payment Dividends Payable 720,000 Cash

26. Cash Dividends on Preferred Stock Preferred stockholders have a preference to: –dividends –accumulation of dividends One or both of the preferences may be given to preferred stockholders

27. Stock Dividends Stock Dividend - a proportional distribution of additional shares of stock Small Stock Dividend - 20% or less of the previously outstanding common shares Large Stock Dividend - more than 20% of the previously outstanding common shares Stock Split - decrease in the par value per share and proportional increase in the number of shares

28. Statement of Changes in Stockholders’ Equity Changes in the different classes of capital stock Changes in each additional paid-in capital account Changes in treasury stock Changes in retained earnings

29. Conclusion To evaluate a corporation, both external and internal users must be familiar with how the corporation issues and reports on its capital stock. A corporation may distribute either cash dividends or stock dividends to the stockholders of record.