1. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. Chapter 11 Reporting and Interpreting Stockholders’ Equity PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA

3. Corporate Ownership The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership. Simple to become an owner Easy to transfer ownership Provides limited liability Because a corporation is a separate legal entity, it can  Own assets.  Incur liabilities.  Sue and be sued.  Enter into contracts. 11-3

4.  Voting rights.  Dividends.  Residual claims. Stockholder Benefits Corporate Ownership  Preemptive rights. 11-4

5. Two primary sources of Stockholders’ Equity Common Stock Transactions Contributed Capital Common Stock Additional Paid-in Capital Retained Earnings 11-5

6. Authorization, Issuance, and Repurchase of Stock The maximum number of shares of capital stock that can be issued to the public. Issued shares are authorized shares of stock that have been distributed to stockholders. Unissued shares of stock are shares that have never been distributed to stockholders. Unissued Shares Treasury Shares Outstanding Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders. Authorized Shares 11-6

7. Stock Issuance Initial public offering (IPO) The first time a corporation issues stock to the public. Seasoned new issue Subsequent issues of new stock to the public. National Beverage issues stock. 11-7

8. Repurchase of Stock A corporation repurchases its stock to:  Send a signal that the company believes its stock is undervalued.  Obtain shares to reissue for the purchase of other companies.  Obtain shares to reissue to employees as part of stock purchase or stock option plans. Treasury Stock 11-8

9. Repurchase of Stock National Beverage repurchases its own stock (Treasury stock) Stockholders Stock options allow employees to purchase stock from the corporation at a fraction of the stock’s market price. Employee Employee compensation package includes salary plus stock options. 11-9

10. Dividends on Common Stock Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. 11-10

11. Dividends Dates 11-11

12. No change in total stockholders’ equity. No change in par values. All stockholders retain same percentage ownership. Stock Dividends Corporations issue stock dividends to:  Remind stockholders of the accumulating wealth in the company.  Reduce the market price per share of stock.  Signal that the company expects strong financial performance in the future. Distribution of additional shares of stock to stockholders. 11-12

13. Record at current market value of stock. Record at par value of stock. SmallLarge The journal entry moves an amount from Retained Earnings to other equity accounts. Stock Dividends Stock dividend > 20 – 25% Stock dividend < 20 – 25% 11-13

14. Preferred Stock Dividends 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. If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently. 11-14

15. Retained Earnings Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating. Baker Company incurred a loss of $120,000 in 2009 that resulted in an Accumulated Deficit in Retained Earnings. 11-15

16. Net Income Average Number of Common Shares Outstanding EPS = National Beverage’s income for 2008 was $22,500,000 and the average number of shares outstanding during the year was 45,900,000. Earnings per share is probably the single most widely watched financial ratio. Earnings Per Share (EPS) $22,500,000 45,900,000 Shares EPS = = $0.49 per share 11-16

17. Return on Equity (ROE) Net Income Average Stockholders’ Equity ROE = National Beverage’s income for 2008 was $22,500,000 and the average Stockholders’ Equity was $151,000,000. Return on equity is the amount earned for each dollar invested by stockholders. $22,500,000 $151,000,000 ROE = = 14.9 percent 11-17

18. Price/Earnings (P/E) Ratio Current Stock Price (per share) Earnings Per Share (annual) P/E = The P/E ratio is a measure of the value that investors place on a company’s common stock. National Beverage’s stock price was $7.74 when the company reported its 2008 EPS of $0.49. $ 7.74 $ 0.49 P/E = = 15.8 11-18

19. End of Chapter 11