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Chapter 11 Reporting and Interpreting Owners’ Equity.

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Presentation on theme: "Chapter 11 Reporting and Interpreting Owners’ Equity."— Presentation transcript:

1 Chapter 11 Reporting and Interpreting Owners’ Equity

2 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-2 Understanding The Business Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability

3 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-3 Because a corporation is a separate legal entity, it can... Own assets. Sue and be sued. Incur liabilities. Enter into contracts. Understanding The Business

4 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-4 Ownership of a Corporation Rights ¶Voting (in person or by proxy). ·Proportionate distributions of profits. ¸Proportionate distributions of assets in a liquidation. Stockholders

5 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-5 Ownership of a Corporation Elected by shareholders Appointed by directors

6 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-6 Authorized, Issued, and Outstanding Capital Stock The maximum number of shares of capital stock that can be sold to the public. Authorized Shares

7 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-7 Authorized, Issued, and Outstanding Capital Stock Authorized Shares Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold.

8 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-8 Authorized, Issued, and Outstanding Capital Stock Authorized Shares 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.

9 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-9 Earnings Per share (EPS) Income Average Number of Shares Outstanding EPS = Outback’s income for 2000 is $141,000,000 and the average number of shares outstanding is 77,500,000. Earnings per share is probably the single most widely watched financial ratio.

10 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-10 Income Average Number of Shares Outstanding EPS = Earnings per share is probably the single most widely watched financial ratio. $141,000,000 77,500,000 Shares EPS = = $1.82 per share Earnings Per share (EPS)

11 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-11 Earnings Per share (EPS) Earnings per share is probably the single most widely watched financial ratio.

12 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-12 Types of Capital Stock Common Stock Preferred Stock

13 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-13 Common Stock Basic voting stock Ranks after preferred stock Dividend set by board of directors

14 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-14 Par Value and No-par Value Stock Legal capital is the amount of capital, required by the state, that must remain invested in the business. Par Value Nominal value Legal capital

15 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-15 Par Value and No-par Value Stock Par Value Market Value  I get it!

16 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-16 No-par Value Stock Some states do not require that a par value be stated in the charter. Some states do not require a par value to be stated in the charter.

17 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-17 Accounting for Capital Stock Two primary sources of stockholders’ equity Retained earnings Contributed capital Par value Additional paid-in capital

18 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-18 Sale and Issuance of Capital Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public. Subsequent sales of new stock to the public. Outback issues new stock. Outback

19 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-19 Secondary Markets Transactions between two investors that do not affect the corporation’s accounting records. I’d like to sell some of my Outback stock. I’d like to buy some of your Outback stock.

20 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-20 Sale and Issuance of Capital Stock On July 6, Outback issued 100,000 shares of $0.01 par value common stock for $22 per share. Prepare the journal entry to record this transaction.

21 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-21 Sale and Issuance of Capital Stock 100,000 shares × $22 per share = $2,200,000 100,000 shares × $0.01 par value = $1,000 On July 6, Outback issued 100,000 shares of $0.01 par value common stock for $22 per share.

22 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-22 Capital Stock Sold for Noncash Assets and/or Services Record assets or services received at the market value of the stock at the date of the transaction. Accountant Provides accounting services Issues stock Outback

23 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-23 Capital Stock Sold for Noncash Assets and/or Services If the market value of the stock cannot be determined, then the market value of the assets or services received should be used. Accountant Provides accounting services Issues stock Outback

24 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-24 Capital Stock Sold for Noncash Assets and/or Services On March 14, Outback issued 10,000 shares of its $0.01 par value common stock to the Rose Law firms. The stock was selling for $15 per share. Prepare the journal entry to record this transaction.

25 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-25 Capital Stock Sold for Noncash Assets and/or Services 10,000 shares × $15 per share = $150,000 On March 14, Outback issued 10,000 shares of its $0.01 par value common stock to the Rose Law firms. The stock was selling for $15 per share. 10,000 shares × $0.01 par value = $100

26 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-26 Stock Options Management Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the stock’s value in the secondary market. If Outback does not have new stock to issue when the stock options are exercised, then.. Outback

27 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-27 Treasury Stock Outback buys its own stock in the secondary market. (Treasury stock) Stockholders Management Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the stock’s value in the secondary market. Outback

28 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-28 Treasury Stock No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost.

29 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-29 Treasury Stock On May 1, Outback reacquired 100,000 shares of its common stock at $20 per share. The journal entry for May 1 is....

30 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-30 Treasury Stock 10,000 shares × $30 = $300,000 10,000 shares × $20 cost = $200,000 On December 3, Outback reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is...

31 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-31 Accounting for Cash Dividends Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash.

32 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-32 Dividend Dates Declaration date Board of directors declares the dividend. Record a liability.

33 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-33 Dividend Dates X Date of Record Stockholders holding shares on this date will receive the dividend. (No entry)

34 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-34 Dividend Dates Date of Payment Record the dividend payment to stockholders.

35 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-35 Dividend Yield Ratio Dividend Yield Dividends Per Share Market Price Per Share = This ratio is often used to compare the dividend-paying performance of different investment alternatives. Outback does not pay a cash dividend. The 2000 market price is $27.

36 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-36 Dividend Yield Ratio Dividend Yield Dividends Per Share Market Price Per Share = Dividend Yield $0.00 $27.00 = = 0.0% This ratio is often used to compare the dividend-paying performance of different investment alternatives.

37 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-37 Dividend Yield Ratio This ratio is often used to compare the dividend-paying performance of different investment alternatives.

38 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-38 Accounting for Stock Dividends Distribution of additional shares of stock to stockholders. No change in total stockholders’ equity. All stockholders retain same percentage ownership. No change in par values.

39 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-39 Stock dividend < 25% Stock Dividends Stock dividend > 25% Record at current market value of stock. Record at par value of stock. SmallLarge

40 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-40 Stock Splits Distributions of 100% or more of stock to stockholders. Ice Cream Parlor Banana Splits On Sale Now

41 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-41 Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

42 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-42 Stock Splits Increase Decrease No Change Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

43 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-43 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate

44 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-44 Dividends on Preferred Stock ¶ 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. ¶ 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.

45 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-45 Dividends on Preferred Stock If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.

46 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-46 Dividends on Preferred Stock Kites, Inc. has the following stock outstanding: Common stock: $1 par, 100,000 shares Preferred stock: 3%, $100 par, cumulative, 5,000 shares Preferred stock: 6%, $50 par, noncumulative, 3,000 shares Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000. How much will each class of stock receive?

47 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-47 Dividends on Preferred Stock

48 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-48 Dividends on Preferred Stock

49 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-49 Dividends on Preferred Stock

50 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-50 Dividends on Preferred Stock

51 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-51 On June 1, 2003, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000. Dividends

52 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-52 On June 1, 2000 a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000. $100 × 8% = $8 dividend per share $8 × 2,500 = $20,000 total dividend Dividends

53 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-53 Focus on Cash Flows Outback

54 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-54 Restrictions on Retained Earnings If I loan you $150,000, I will want you to restrict your retained earnings. Why would you want to do that?

55 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-55 Restrictions on Retained Earnings Because I want to restrict the amount you can pay out in dividends.

56 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-56 Accounting and Reporting for Three Types of Businesses

57 © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 11-57 End of Chapter 11 C’mon Chester! With your smarts and my savvy, we could make a great partnership!!


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