stockholders’ equity
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Stockholders’ Equity. Chapter 10 . 10- 2. 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 - PowerPoint PPT PresentationTRANSCRIPT
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
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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
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Part A
Invested Capital
10-4
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Learning Objective 1
Identify the advantages and disadvantages of the corporate form of ownership
10-5
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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
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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
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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
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Learning Objective 2
Record the issuance of common stock
10-9
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Common Stock
• Treasury stock: repurchased shares, included as part of shares issued, but excluded from shares outstanding
10-10
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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
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Accounting for Common Stock Issues10-12
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Learning Objective 3
Contrast preferred stock with common stock and bonds payable
10-13
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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
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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
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Learning Objective 4
Account for treasury stock
10-16
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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
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Purchase of Treasury Stock10-18
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Illustration 10.11—Stockholders’ Equity before and after Purchase of Treasury Stock
10-19
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Reissuing Treasury Stock10-20
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Reissuing Treasury Stock10-21
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Part B
Earned Capital
10-22
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Learning Objective 5
Describe retained earnings and record cash dividends
10-23
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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
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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
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Recording Cash Dividends10-26
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Learning Objective 6
Explain the effect of stock dividends and stock splits
10-27
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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
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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
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Small Stock Dividends
• Recorded at market value• Believed to have little impact on market price
10-30
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Part C
Reporting Stockholders’ Equity
10-31
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Learning Objective 7
Prepare and analyze the stockholders’ equity section of a balance sheet and the statement of
stockholders’ equity
10-32
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Statement of Stockholders’ Equity
• Summarizes the changes in the balance in each stockholders’ equity account over a period of time
10-33
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Learning Objective 8
Evaluate company performance using information on stockholders’ equity
10-34
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Return on Equity
• Measures the ability of company management to generate earnings from the resources that owners provide
10-35
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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
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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
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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
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End of Chapter 10
10-39