Download - Stockholders’ Equity
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Spiceland | Thomas | Herrmann
Financial Accounting
Stockholders’ Equity
Chapter 10
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
• Identify the advantages and disadvantages of the corporate form of ownership
• Record the issuance of common stock• Contrast preferred stock with common stock and
bonds payable• Account for treasury stock• Describe retained earnings and record cash
dividends
10-2
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
• Explain the effect of stock dividends and stock splits
• Prepare and analyze the stockholders’ equity section of a balance sheet and the statement of stockholders’ equity
• Evaluate company performance using information on stockholders’ equity
10-3
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part A
Invested Capital
10-4
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
Identify the advantages and disadvantages of the corporate form of ownership
10-5
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Corporations
• Articles of incorporation: corporate charter describing:• Nature of business activities• Shares of stock to be issued• Initial board of directors
• The board of directors establish corporate policies and appoints officers who manage the corporation
10-6
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Stages of Equity Financing
• Corporations first raise money from founders of the business, friends, and family
• To grow, companies seek investments from:• Angel investors• Venture capital firms• Initial public offering (IPO)
10-7
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Public or Private
• Allows public investment• Many shareholders• Stocks trade on stock
exchanges or by over-the-counter (OTC) trading
• Regulated by the (SEC) • Examples—Wal-Mart,
Microsoft, Intel
• Does not allow investment by the general public
• Fewer stockholders• Stocks not traded in the
open market• Not regulated by the
(SEC)• Examples—Cargill
(agricultural commodities) Koch Industries (oil and gas), Chrysler (cars)
Public Private
10-8
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 2
Record the issuance of common stock
10-9
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Common Stock
• Treasury stock: repurchased shares, included as part of shares issued, but excluded from shares outstanding
10-10
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Par Value
• Legal capital per share of stock that’s assigned when the corporation is first established
• Has no relationship to the market value today
10-11
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accounting for Common Stock Issues10-12
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 3
Contrast preferred stock with common stock and bonds payable
10-13
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Preferred Stock
• Issued in addition to common stock to attract wider investment
• Preferred stockholders have:• First rights to a specified amount of dividends• Preference over common stockholders in the
distribution of assets at the time of dissolution• Most preferred stock does not have voting rights
10-14
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Features of Preferred Stock
• Flexibility allowed in its contractual provisions• Types:
• Convertible: shares can be exchanged for common stock
• Redeemable: shares can be returned to the corporation at a fixed price
• Cumulative: shares receive priority for future dividends, if dividends are not paid in a given year
• Dividends in arrears - unpaid dividends
10-15
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 4
Account for treasury stock
10-16
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Treasury Stock
• Corporation’s own stock that it has reacquired• Companies buy back their own stock for various
reasons:• To boost underpriced stock• To distribute surplus cash without paying dividends• To boost earnings per share• To satisfy employee stock ownership plans
10-17
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Purchase of Treasury Stock10-18
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Illustration 10.11—Stockholders’ Equity before and after Purchase of Treasury Stock
10-19
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Reissuing Treasury Stock10-20
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Reissuing Treasury Stock10-21
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part B
Earned Capital
10-22
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 5
Describe retained earnings and record cash dividends
10-23
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Retained Earnings
• Earnings retained in the corporation and not paid out as dividends
• Equals all net income, less all dividends• Has a normal credit balance• Accumulated deficit: a debit balance in retained
earnings
10-24
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Dividends
• Distributions by a corporation to its stockholders• Declaration date: date on which board of
directors declare the cash dividend to be paid• Record date: specific date on which the company
will determine who will receive the dividend (registered owners of stock)
• Payment date: date of the actual cash distribution
10-25
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Recording Cash Dividends10-26
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 6
Explain the effect of stock dividends and stock splits
10-27
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Stock Dividends and Stock Splits• Stock dividends: additional shares of a company’s own
stock given to stockholders as dividends• Stock split: a large stock dividend that includes a
reduction in the par or stated value per shareYou own 100 shares
and assume aYou will get
10% stock dividend 10 additional shares 20% stock dividend 20 additional shares 100% stock dividend 100 additional shares
Small stock dividend
Large stock dividend or stock split (2-for-1)
10-28
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Stock Splits or Large Stock Dividends
• Stock split• Reduces par value per share and increases shares
outstanding• No need to record transaction
• Large stock dividends• Records an increase in common stock and
decrease in retained earnings• Recorded at par value
10-29
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Small Stock Dividends
• Recorded at market value• Believed to have little impact on market price
10-30
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part C
Reporting Stockholders’ Equity
10-31
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 7
Prepare and analyze the stockholders’ equity section of a balance sheet and the statement of
stockholders’ equity
10-32
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Statement of Stockholders’ Equity
• Summarizes the changes in the balance in each stockholders’ equity account over a period of time
10-33
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 8
Evaluate company performance using information on stockholders’ equity
10-34
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Return on Equity
• Measures the ability of company management to generate earnings from the resources that owners provide
10-35
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Return on the Market Value of Equity
• Analysts often relate earnings to the market value of equity
Net incomeMarket value of equity
Return on the market value of equity =
10-36
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Earnings per Share
• Measures net income earned per share of common stock
• Useful in comparing earnings performance for the same company over time
• Not useful for comparing earnings performance of one company with another
10-37
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Price-Earnings Ratio• Indicates how the stock is trading relative to current
earnings• Commonly are in the range of 15 to 20• Growth stocks: stocks whose future earnings
investors expect to be higher• Value stocks: stocks that are priced low in relation to
current earnings
10-38
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
End of Chapter 10
10-39
