1. Accounting & Financial Reporting BUSG 503 Michael Dimond

2. Michael Dimond School of Business Administration Stockholders’ Equity Total stockholders’ equity is divided into two components: 1.Contributed capital - proceeds received by the issuing company from original stock issuances, net of the amounts paid to repurchase shares of the issuer’s stock from its investors. 2.Earned capital - Retained earnings and accumulated other comprehensive income (AOCI). In addition, many companies report an equity account called noncontrolling interest, which reflects the equity of minority shareholders.

3. Michael Dimond School of Business Administration Components of Paid-in-Capital

4. Michael Dimond School of Business Administration P&G’s Stockholders’ Equity

5. Michael Dimond School of Business Administration Types of Stock There are two classes of stock: 1.Preferred Stock 2.Common Stock Preferred stock preferences: 1.Dividend preference – preferred shareholders receive dividends on their shares before common shareholders do. 2.Liquidation preference –preferred shareholders receive payment in full before common shareholders in liquidation.

6. Michael Dimond School of Business Administration Preferred Stock Privileges 1.Conversion privileges – a conversion privilege allows preferred stockholders to convert their shares into common shares at a predetermined conversion ratio. 2.Participation feature – allows preferred shareholders to share ratably with common stockholders in dividends.

7. Michael Dimond School of Business Administration Fortune Brands’ Convertible Preferred Stock

8. Michael Dimond School of Business Administration Fortune Brands’ Convertible Preferred Stock Holders of convertible preferred are entitled to $2.67 dividends per share. Each share of convertible preferred stock is entitled to 3/10 of a vote per share. Holders of convertible preferred have a preference in liquidation over common shareholders amounting to $30.50. Each share of convertible preferred is convertible into 6.601 shares of common stock. Fortune Brands has an option to redeem each share at a price of $30.50; upon redemption, the preferred shareholder will receive that cash amount and will surrender that share to the company.

9. Michael Dimond School of Business Administration Aon’s Common Stock Par value of $1 per share.Par value of $1 per share. Aon has authorized the issuance of 750 million shares.Aon has authorized the issuance of 750 million shares. To date, Aon’s management has issued (sold) 385.9 million shares of stock.To date, Aon’s management has issued (sold) 385.9 million shares of stock. Aon has repurchased 53.6 million shares from its shareholders.Aon has repurchased 53.6 million shares from its shareholders. The number of outstanding shares is equal to the issued shares less treasury shares. There were 332.3 million (385.9 million – 53.6 million) shares outstanding at the end of 2010.The number of outstanding shares is equal to the issued shares less treasury shares. There were 332.3 million (385.9 million – 53.6 million) shares outstanding at the end of 2010.

10. Michael Dimond School of Business Administration P&G’s Common Stock

11. Michael Dimond School of Business Administration Sale of Stock To illustrate, assume that AON issues 100,000 shares of its $1 par value common stock at a market price of $43 cash per share: 1.Cash increases by $4,300,000 (100,000 shares 3 $43 per share) 2.Common stock increases by the par value of shares sold (100,000 shares 3 $1 par value = $100,000) 3.Additional paid-in capital increases by the $4,200,000 difference between the issue proceeds and par value ($4,300,000 2 $100,000)

12. Michael Dimond School of Business Administration Repurchase of Stock To illustrate, assume that 3,000 common shares of AON previously issued for $43 are repurchased for $40:

13. Michael Dimond School of Business Administration Repurchase of Stock cont’d Now assume that these 3,000 shares are subsequently resold for $42 cash per share:

14. Michael Dimond School of Business Administration Accounting for Stock Options

15. Michael Dimond School of Business Administration Cisco’s Stock Option Expense

16. Michael Dimond School of Business Administration Accounting for Restricted Stock

17. Michael Dimond School of Business Administration Accounting for Dividends: Cash Dividends Aon declares and pays a cash dividend of $10 million:

18. Michael Dimond School of Business Administration Preferred and Common Dividends Assume that a company has 15,000 shares of $50 par value, 8% preferred stock outstanding and 50,000 shares of $5 par value common stock outstanding. During its first three years in business, the company declares $20,000 dividends in the first year, $260,000 of dividends in the second year, and $60,000 of dividends in the third year. If the preferred stock is cumulative, the total amount of dividends paid to each class of stock in each of the three years follows:

19. Michael Dimond School of Business Administration Preferred and Common Dividends (cont’d)

20. Michael Dimond School of Business Administration Accounting for Dividends: Stock Dividends

21. Michael Dimond School of Business Administration Small Stock Dividends Assume that a company has 1 million shares of $5 par common stock outstanding. It then declares a small stock dividend of 15% of the outstanding shares when the market price of the stock is $30 per share. This small stock dividend has the following financial statement effects:

22. Michael Dimond School of Business Administration Large Stock Dividends To illustrate the effect of a large stock dividend, assume that the company now declares a large stock dividend of 70% of the outstanding shares when the market price of the stock is $30 per share ($5 par value). The large stock dividend will have the following effects on the balance sheet:

23. Michael Dimond School of Business Administration Accumulated Other Comprehensive Income

24. Michael Dimond School of Business Administration Foreign Currency Translation on the Balance Sheet

25. Michael Dimond School of Business Administration Noncontrolling Interest Noncontrolling interest represents the equity of noncontrolling (minority) shareholders who only have a claim on the net assets of one or more of the subsidiaries in the consolidated entity. If the company acquires less than 100% of the subsidiary, it must include 100% of the subsidiary’s assets, liabilities, revenues and expenses in its consolidated balance sheet and income statement, but now there are two groups of shareholders that have a claim on the net assets and earnings of the subsidiary company: The parent company, and The noncontrolling shareholders (those shareholders who continue to own shares of the subsidiary company).

26. Michael Dimond School of Business Administration Noncontrolling Interest: Income Statement

27. Michael Dimond School of Business Administration Noncontrolling Interest: Balance Sheet

28. Michael Dimond School of Business Administration