Presentation is loading. Please wait.

Presentation is loading. Please wait.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-1.

Similar presentations


Presentation on theme: "© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-1."— Presentation transcript:

1 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-1

2 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-2 Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. Usually shares are sold through an underwriter. Authorized Shares Authorized Shares Authorization and Issuance of Capital Stock

3 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-3UnissuedShares Treasury Shares Outstanding Shares Treasury shares are issued shares that have been reacquired by the corporation. Issued Shares Issued Shares Outstanding shares are issued shares that are owned by stockholders. Authorized Shares Authorized Shares Authorization and Issuance of Capital Stock

4 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-4 Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market price is the amount that each share of stock will sell for in the market. Stockholders’ Equity

5 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-5 Common stock can be issued in three forms: No-Par Common Stock Par Value Common Stock Stated Value Common Stock All proceeds credited to Common Stock Treated like par value common stock Stockholders’ Equity Let’s examine this form of stock.

6 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-6 Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on September 1, Record: The cash received. The number of shares issued × the par value per share in the Common Stock account. The remainder is assigned to Contributed Capital in Excess of Par. Record: The cash received. The number of shares issued × the par value per share in the Common Stock account. The remainder is assigned to Contributed Capital in Excess of Par. Issuance of Par Value Stock

7 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-7 Issuance of Par Value Stock Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on September 1, ,000 × $2 = $20,000

8 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-8 Issuance of Par Value Stock

9 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-9 A separate class of stock, typically having priority over common shares in...  Dividend distributions (rate is usually stated).  Distribution of assets in case of liquidation. A separate class of stock, typically having priority over common shares in...  Dividend distributions (rate is usually stated).  Distribution of assets in case of liquidation. Cumulative dividend rights. Normally has no voting rights. Usually callable by the company. Other Features Include: Preferred vs. Common Stock Preferred Stock

10 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Vs.NoncumulativeCumulative Dividends in arrears must be paid before dividends may be paid on common stock. Undeclared dividends from current and prior years do not have to be paid in future years. Cumulative Preferred Stock

11 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Example: Consider the following partial Statement of Stockholders’ Equity. During 2007, the directors declare cash dividends of $5,000 (note $9,000 s/b paid to P.S.). In 2008, the directors declare cash dividends of $42,000. Stock Preferred as to Dividends

12 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Stock Preferred as to Dividends

13 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Accounting by the issuer. Accounting by the investor. Common stock is carried at original issue price. Investments in marketable securities are carried at market value. Market Value

14 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Factors affecting market price of preferred stock: Factors affecting market price of preferred stock: Dividend rateDividend rate RiskRisk Level of interest ratesLevel of interest rates Factors affecting market price of preferred stock: Factors affecting market price of preferred stock: Dividend rateDividend rate RiskRisk Level of interest ratesLevel of interest rates The return based on the market value is called the “dividend yield.” Market Price of Preferred Stock

15 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Factors affecting market price of common stock: Investors’ expectations of future profitability. Risk that this level of profitability will not be achieved. Factors affecting market price of common stock: Investors’ expectations of future profitability. Risk that this level of profitability will not be achieved. Changes in market value have no impact on the books of the issuer. Market Price of Common Stock

16 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Book Value per Share of Common Stock Total Stockholders’ Equity Number of Common Shares Outstanding Preferred stock at par value only and preferred dividends in arrears are deducted from total stockholders’ equity. Book Value Market Value =

17 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Stock Splits  Companies use stock splits to reduce market price.  Outstanding shares increase, but par value is decreased proportionately.  No journal entry  Companies use stock splits to reduce market price.  Outstanding shares increase, but par value is decreased proportionately.  No journal entry

18 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Assume a corporation has 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change Stock Split

19 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost. Treasury shares are issued shares that have been reacquired by the corporation. Treasury Stock

20 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On May 1, 2007, East, Inc. reacquires 3,000 shares of its common stock at $55 per share. Prepare the journal entry for May 1. Treasury Stock - Example

21 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On December 3, 2007, East Corp. reissued 1,000 shares of the stock at $75 per share. (What if reissued at $50 per share?) Prepare the journal entry for December 3. Treasury Stock - Example 1,000 shares × $55 cost = $55,000 1,000 shares × $75 = $75,000


Download ppt "© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 11-1."

Similar presentations


Ads by Google