1. Chapter 10 Stockholders’ Equity McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

2. Participation Questions – Chapter 10  How much did Facebook (the company itself, not the owners) receive in cash proceeds in their May 2012 IPO? $38 $180,000,000 $6,840,000,000 $19,000,000,000  Which of the company balance sheets reviewed at the beginning of Chapter 10 PowerPoints actually showed the treasury stock account on the balance sheet: Apple Computers; Walgreens; or Tutor Perini Construction  Which country is the “pre-emptive” right example from? United States; Mexico; France; Argentina  In the financial world, a tombstone means what? Details for issuance of new shares of stock The paperwork showing when a company files bankruptcy A marker showing when a bond issue has been paid off. A type of pizza.  As of April 2014, Apple Computers stock repurchase program had been authorized by the board of directors to repurchase (treasury stock) up to $90,000,000,000 in common stock. T/F

3. Announcements  Assignments – Due 4/10/16 Chapter 9 Homework (Connect) – unlimited attempts Participation questions for Chapter 9 (Webcourses) – 1 attempt Syllabus Quiz #2 (Webcourses) – 2 attempts  Assignments – Due 4/17/16 Chapter 10 Homework (Connect) – unlimited attempts Participation questions for Chapter 10 (Webcourses) – 1 attempt Definitions Quiz Block 3 (Webcourses) – 2 attempts  SEC Assignment now open – due 4/24/16 – Please wait until we have started chapter 11 to work on this assignment.  Accounting Research Survey – 3 points extra credit – available next week until Thursday April 21  Student Evaluations… Open in my.ucf.edu – please provide feedback!

4. Questions to be Answered Overall - How has society shaped today’s financial reporting? Chapter 10 – 1. How and what types of stocks do organizations issue to raise funds for asset purchase, expansion, etc.; 2. Can organizations repurchase their own stock, 3. How do organizations pay owners some of the retained profits (earnings) - dividends? What are the impacts to the income statement and balance sheet?

5. Chapter 10 Stockholders’ Equity SELLER BUYER Matchmaker.com + Investment Investor Banker Investor + Stock Exchange Investor Investor + Stock Exchange Matchmaker.com Impact to Financial Statements?

6. FACEBOOK IPO Why? In 2012, they crossed the threshold of 500 investors. Share breakdown 2.16 billion shares - Effective number of Class A shares outstanding as of 12/31/12 180 million shares in 2012 IPO IPO Share Price was $38 Initial Public Offering In May 2012, we completed our IPO in which we issued and sold 180,000,000 shares of Class A common stock at a public offering price of $38.00 per share and the selling stockholders sold 241,233,615 shares of Class A common stock. We did not receive any proceeds from the sale of shares by the selling stockholders. The total net proceeds received from the IPO were $6.8 billion after deducting underwriting discounts and commissions of $75 million and other offering expenses of approximately $7 million.

8. Stockholders’ Equity Paid-in capital Earned Capital - Retained Earnings Treasury Stock – Contra Equity TOTAL amount stockholders have invested in the corporation Amount of earnings the corporation has retained Corporation’s stock that is reacquired 10-8 Common Stock Preferred Stock

9. Tutor Perini – Balance Sheet (Partial)

10. Walgreens

11. APPLE COMPUTERS CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Millions, except Share data in Thousands, unless otherwise specifies

12. Part A Invested Capital 10-12

13. Advantages and Disadvantages of a Corporation  Additional taxes  More paperwork  Limited liability  Ability to raise capital  Lack of mutual agency Advantages Disadvantages 10-13

14. Advantages and Disadvantages of Equity Financing Over Loans – Informational Purposes Only Advantages to equity financing:  It's less risky than a loan because you don't have to pay it back,  You tap into the investor's network - add credibility.  Investors take a long-term view  No loan repayment.  More cash on hand for expanding the business.  No requirement to pay back the investment if the business fails. Disadvantages to equity financing:  It may require returns that could be more than the rate you would pay for a bank loan.  The investors will require some ownership of your company and a percentage of the profits.  You will have to consult with investors before making some decisions.  Investors may fire you.

15. What are we doing today??? Paid-in-Capital  Classes of stock that can be issued and features/rights of stock (Common & Preferred)  Stock issuance – JE and how many share issued, outstanding, authorized  Stock buyback (Treasury Stock) Earned Capital  Retained Earnings  Dividends Cash & Stock

16. Classes of Stock, Rights, and Features

17. Stockholder 4 Basic Rights  Whether public or private, stockholders are the owners of the corporation and have certain rights: oRight to vote oRight to receive dividends (if they are declared) oRight to share in distribution of assets oPreemptive right – allows a stockholder to maintain his or her percentage share of ownership. 10-17

18. Preemptive Right Example BUENOS AIRES, Argentina, /PRNewswire/ -- Pampa Energia S.A. (NYSE: PAM; Buenos Aires Stock Exchange: PAMP 'Pampa' or the 'Company') informs that, on October 3 past, Petrolera Pampa S.A., a subsidiary of PESA (hereinafter, "PEPASA"), reported to the Company that it would call a Shareholders' Meeting to increase its stock capital so as to raise up to $100,000,000 (One Hundred Million Pesos) in order to consolidate its financial position and thus access more easily to the financial markets and carry into effect PEPASA's proposed investments (hereinafter, "PEPASA's Capital Increase") according to its business plans for the exploration and exploitation of hydrocarbons. On the date hereof, the Company's Board of Directors has resolved to assign its preemptive subscription right in connection with PEPASA's Capital Increase to all those of PESA's shareholders who are registered by Caja de Valores S.A.

19. Classes of Stock COMMONPREFERRED  Basic form of stock  Has four basic rights  Shareholders benefit most if corporation succeeds Take more risk  Has four basic rights  Has advantages over common Receive dividends first Receive assets first in liquidation  Shareholders earn a fixed dividend  Very few corporations issue 19

20. Stock Classes  Common – if corporation has no other stock, it is usually classified as common. Stock with No ‘Par’ Value Stock with a ‘Par’ Value  Preferred Par or no par stock Other characteristics  Redeemable  Convertible  Cumulative 20

21. Par Value Par value stock has no relation to market value and, as a concept, is somewhat archaic. The par value of a share of stock is the value stated in the corporate charter below which shares of that class cannot be sold upon initial offering; the issuing company promises not to issue further shares below par value, so investors can be confident that no one else will receive a more favorable issue price. Thus, par value is the nominal value of a security which is determined by the issuing company to be its minimum price. This was far more important in unregulated equity markets than in the regulated markets that exist today  Par Arbitrary amount assigned to share of stock – no relation to market value of stock Usually set low to avoid legal issues  Most states do not allow companies to issue new stock below par 21

22. Features of Preferred Stock Flexibility allowed in its contractual provisions ConvertibleRedeemableCumulative Shares can be exchanged for common stock Shares can be returned to the corporation at a fixed price Shares receive priority for future dividends, if dividends are not paid in a given year 10-22

23. IHOP Tombstone 23 Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.

24. Stock – How many share in investors Hands??? Type of Stock Definition Authorized Shares available to sell (issued and unissued) Issued Shares actually sold (includes treasury stock) Outstanding Shares held by investors (excludes treasury stock) Issued = Authorized – Unissued Outstanding = Issued – Treasury Stock 10-24 Review - Articles of Incorporation Dividend Payment is based on shares Outstanding

25. APPLE COMPUTERS CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Millions, except Share data in Thousands, unless otherwise specifies

26. Target ($ in millions, shares as stated)

27. Financing Comparison Factor Common Stock Preferred StockBonds Voting rightsYesUsually NoNo Risk to the investorHighestMiddleLowest Expected return to the investorHighestMiddleLowest Risk of contract violationsLowestMiddleHighest Preference for paymentsLowestMiddleHighest Tax deductibility of payments (by corporation) NoUsually NoYes Comparison of common stock, preferred stock, and bonds 10-27

28. Check-in’s If an organization has issued 1,000 shares and they are getting ready to issue an additional 1,000 shares, how many shares need to be offered to a current owner with a 10% stake based on the pre-emptive right? The par value of a stock is based on an algorithm designed by NASA True of False (Please circle correct answer) A company has 1,000,000 shares authorized, 100,000 in treasury stock, and 500,000 shares issued. How many shares are currently outstanding?

29. Issuance of Stock

30. Steps for recording Common Stock issues No Par Value Stock  Calculate cash received from sale of stock Formula = number of shares sold * sales price per share 1. Cash – debit for amount of cash received 2. Common Stock – credit for amount of cash received Par Value Stock  Calculate cash received from sale of stock Formula = number of shares sold * sales price per share  Calculate par value of stock issuance Formula = shares issued * par value 1. Cash – debit for amount of cash received 2. Common Stock – credit for amount of the par value calculated above 3. Additional Paid-in-Capital - credit based on the difference between cash received and par value of issuance

31. Accounting for Common Stock Issues When a corporation receives cash from issuing common stock, it debits cash. If it issues no-par value stock, the corporation credits the equity account entitled common stock. Cash (1,000 shares x $30)30,000 Common Stock30,000 (Issue no-par value common stock) 10-31

32. Accounting for Common Stock Issues – Par Value The entry changes slightly if the corporation issues par value stock rather than no-par value stock. In that case, we credit common stock and additional paid-in capital. Cash (1,000 shares x $30)30,000 Common Stock (1,000 shares x $0.01)10 Additional Paid-in Capital (difference)29,990 (Issue common stock above par) 10-32

33. Accounting for Preferred Stock Issues The entries to record the issuance of preferred stock are similar to those for the issue of common stock Cash (1,000 shares x $40)40,000 Preferred Stock (1,000 shares x $30 par)30,000 Additional Paid-in Capital10,000 (Issue preferred stock above par) 10-33

34. Target ($ in millions, shares as stated) – from financial notes

35. Based on Targets Financial Notes from the previous page – record transactions for 1.) issuance of 1,000 of Target Common Stock sold for $100 per share or 2.) 1,000 shares of Target Preferred Stock at $100 per share. Par values are.0833 and.01 for CS and PS, respectively.

36. LO4 Treasury Stock - Contra Equity Definition - A corporation’s own stock that it has previously issued and subsequently reacquired Contra equity - Normal Debit balance & companion is typically common stock 10-36

37. Treasury Stock (Cont.) Why corporations repurchase their stock  To boost under-priced stock.  To distribute surplus cash without paying dividends.  To boost earnings per share.  To offset issuance of shares under stock-based compensation plans.

38. LO4 Treasury Stock (Cont.) 10-38 Par value of stock is not considered in treasury stock transaction. 1.Steps for initial stock repurchase (Par is not considered for treasury stock transactions) Calculate cost of repurchase Number of shares repurchased * purchase price of stock Debit treasury stock Credit Cash 2.Steps for re-issuing treasury stock Calculate proceeds from reissue Number of shares reissued * sales price of stock Debit Cash Credit treasury stock account based on the original cost for the share of treasury stock. Difference between the debit to cash and credit to treasury stock record in additional paid- in-capital (either as a debit or credit).

39. Apple stock repurchase In 2012, the Company’s Board of Directors authorized a program to repurchase up to $10 billion of the Company’s common stock beginning in 2013. The Company’s Board of Directors increased the share repurchase program authorization to $60 billion in April 2013 and to final total of $90 billion in April 2014. As of September 27, 2014, $67.9 billion of the $90 billion had been utilized. The remaining $22.1 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of September 27, 2014. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

40. APPLE COMPUTERS

41. APPLE STATEMENT OF STOCKHOLDERS’ EQUITY

42. Apple – Notes to Financial Statements on Stock Repurchase

43. Accounting for Treasury Stock Treasury Stock (100 shares x $30)3,000 Cash3,000 (Repurchase treasury stock) Cash (100 shares x $35)3,500 Treasury Stock (100 shares x $30)3,000 Additional Paid-in Capital (difference)500 (Reissue treasury stock above cost) Cost Reissue price oTreasury stock is reported as a contra-equity (negative equity account). oWhen a corporation repurchases its own stock, it increases, or debits treasury stock and vice versa when it sells. 10-43

44. Accounting for Treasury Stock Cash (100 x $25)2,500 Additional Paid-in Capital (100 x $5)500 Treasury Stock (100 x $30)3,000 (Sell treasury stock below cost) Cost Reissue price What if the stock price goes down and we reissue the treasury stock for less than we paid to buy back the shares? 10-44

45. Exercise – Jan 17 Issued 2,200 shares of $2.50 par common stock at $10 per share. May 23 Purchased 300 shares of treasury stock at $12 per share. Jul 11 Sold 200 shares of treasury stock at $20 per share. 45

46. Exercise 46 JOURNAL DateAccounts and explanationDebitCredit 1-17 Cash22,000 Common stock5,500 Additional Paid-in capital16,500 5-23 Treasury stock (@ $12 per share)3,600 Cash3,600 6-11 Cash (@ $20 per share)4,000 Treasury stock (@ $12 per share)2,400 Additional Paid-in capital1,600

47. Exercise 47 Effect on Stockholders’ Equity 1-17Common stock issued$22,000 5-23Purchase of treasury stock(3,600) 6-11Sale of treasury stock4,000 Total change to SE$22,400

48. Part B Earned Capital 10-48

49. LO5 Retained Earnings and Dividends RETAINED EARNINGS o Represents the earnings retained in the corporation – earnings not paid out as dividends to stockholders. oEquals all net income, less all dividends, since the corporation began. oHas a normal credit balance consistent with other stockholders’ equity accounts. oIf losses exceed income since the corporation began, retained earnings will have a debit balance and is called an accumulated deficit. 10-49

50. Dividends  Distribution to the shareholders of a corporation usually based on earnings  Company not obligated to pay dividend even if preferred, unless it is declared by Board of Directors  Types of dividends Cash  Common stock and Preferred stock Stock Other Assets 50

51. Steps in Distributing Cash Dividends 1. Declaration Date - Board of Directors declares the distribution of a dividend and the type of dividend. 1. Important - Dividends are only paid on shares outstanding 1. Dividend – debit 2. Dividend Payable - credited 2. Date of Record – all stockholders as of a certain date (date of record) will receive dividend. No journal entry required. 3. Payment Date – the date the dividend is actually distributed, either in cash, stock, or other asset. 1. Dividends Payable – debit 2. Cash – credit 51

52. Debit and Credit Effects on Accounts in the Expanded Accounting Equation 2-52

53. Cash Dividends Lets consider the following dividend example A corporation declares a $0.25 per share dividend on its 2,000 outstanding shares March 15 (declaration date) Dividends (2,000 shares x $0.25)500 Dividends Payable500 (Declaration of cash dividends) April 15 (payment date) Dividends Payable (2,000 shares x $0.25)500 Cash500 (Payment of cash dividends) March 31 (No entry for Record date) 10-53

54. Check in’s UCF decides that the student union should be owned by students, so they complete an initial public offering of 100,000 shares @ $10 with a par value of $1. How much is the credit to additional paid-in-capital? An increase to the treasury stock account, will increase or decrease the overall amount of stockholders’ equity on the balance sheet? (please circle correct answer) After 4 years of student ownership of the Union, the BOD decides to repurchase 10,000 shares of stock from graduating students for $10 per share. This stock is then re-issued to new students at $15 per share. If 100 shares are re-issued, what is the credit to treasury stock? The BOD at the Union decides to issue a dividend of $100 per share. There are 1,000,000 shares authorized, 100,000 issued and 9,900 shares of treasury stock. What is the credit amount to dividends payable?

59. LO6 Stock Dividends and Stock Splits Sometimes, corporations distribute to shareholders additional shares of the companies’ own stock rather than cash. These are known as stock dividends or stock splits depending on the size of the stock distribution. You own 100 shares and assume a You will get 10% stock dividend10 additional shares 20% stock dividend20 additional shares 100% stock dividend100 additional shares Small stock dividend Large stock dividend or stock split (2-for-1) 10-59

60. Since the corporation’s shares double following a 100% stock dividend, we make an entry to reflect the increase in the par value of the common shares. Example: 1,000 shares outstanding, Par = $0.01 Stock Dividends Retained Earnings (1,000 shares x $0.01)10 Common Stock10 (100% stock dividend, large stock dividend) Small stock dividends are recorded by debiting retained earnings for the market value, rather than the par value, per share. Example: 1,000 Shares outstanding, 10% dividend, $30 market value Retained Earnings (1,000 x 10% x $30)3,000 Common Stock (1,000 x 10% x $0.01)1 Additional Paid-In Capital (difference)2,999 (10% stock dividend, small stock dividend) 10-60

61. Stock Splits oA stock distribution of 25% or higher, although it’s technically a “large” stock dividend, is more often referred to as a stock split. oA 100% stock dividend is effectively the same as a 2-for-1 stock split, although the accounting for a 100% stock dividend and a 2-for-1 stock split differs. oMake no journal entry to record a stock split. oAfter a 2-for-1 stock split, the common stock account balance (total par) represents twice as many shares and the par value per share is reduced by one-half. 10-61

62. Stock Split 62

63. Practice Questions from Connect for Chapter 10. Gothic Architecture is a new chain of clothing stores specializing in the color black. Gothic issues 1,200 shares of its $3 par value common stock at $22 per share. 1.) Record the issuance of the stock. 2.) How would the entry differ if Gothic issued no- par value stock? Review of Stock Issuance and Treasury Stock

64. Practice Questions from Connect for Chapter 10 (Cont.) Equinox Outdoor Wear issues 1,700 shares of its $.02 par value preferred stock for cash at $29 per share. Record the issuance of the preferred shares.

65. Chapter 10 (Cont.) California Surf Clothing Company issues 1,400 shares of $4 par value common stock at $21 per share. Later in the year, the company decides to repurchase 150 shares at a cost of $50 per share. Record the transaction if California Surf reissues the 75 shares of treasury stock at $56 per share

66. Practice Questions from Connect for Chapter 10 (Cont.) California Surf Clothing Company issues 1,400 shares of $4 par value common stock at $21 per share. Later in the year, the company decides to repurchase 150 shares at a cost of $50 per share. How would the entry be different if the shares reissue at $28 per share rather than at $56 per share

67. Practice Questions from Connect for Chapter 10 (Cont.) Divine Apparel has 4,400 shares of common stock outstanding. On October 1, the company declares a $1.40 per share dividend to stockholders of record on October 15. The dividend is paid on October 31. Record all transactions on the appropriate dates for cash dividends

68. Chapter 10 (Cont.) On June 30, the board of directors of Sandals, Inc., declares a 100% stock dividend on its 33,000, $3 par, common shares. The market price of Sandals common stock is $150 on June 30. Record the stock dividend On June 30, the board of directors of Sandals, Inc., declares a 3-for-1 stock split on its 33,000, $8 par, common shares. The market price of Sandals common stock is $200 on June 30. What are the number of shares, par value per share, and market price per share immediately after the 3-for-1 stock split?

69. End of chapter 10 10-69