2 Explain the advantages and disadvantagesof a corporation.
3 What is the Best Way to Organize a Business? ProprietorshipPartnershipCorporation
4 Advantages and Disadvantages of a Corporation 1. Can raise more capital than aproprietorship or partnership can2. Continuous life is possible3. Ease of transferring ownership4. Limited liability of stockholdersAdvantages1. Separation of ownership2. Corporate taxation3. Government regulationDisadvantages
5 Stockholders’ Equity Owners’ equity in a corporation has two main components:Paid-in capital(contributed capital)Retained earnings
6 Capital Stock Corporate ownership is evidenced by a stock certificate which maybe for any number of shares.
7 Capital Stock Common Stock Preferred Stock A class of stock that has severalpreferences overcommon stock.The most basic formof capital stockissued by everycorporation.
8 Measure the effect of issuing stock on a company’sfinancial position.
9 Common Stock at Par Suppose IHOP’s common stock carries a par value of $10 per share.The company issues 6,200,000shares of common stock at par.What is the entry?
10 Common Stock at Par January 8 Cash (6,200,000 × $10) 62,000,000 To issue common stock
11 Common Stock Above Par IHOP’s common stock has a par value of $0.01 per share.The company issues 6,200,000 sharesof common stock at $10 per share.What is the entry?
12 Common Stock Above Par July 23 Cash (6,200,000 × $10) 62,000,000 (6,200,000 × $0.01) ,000Paid-in Capital in Excess of Par –Common (6,200,000 × $9.99) ,938,000To issue common stock
13 Common Stock Above Par Stockholders’ Equity Common Stock, $.01 par; 40 million shares authorized,6.2 million shares issued $ ,000Paid-in capital in excess of par ,938,000Total paid-in capital $ 62,000,000Retained earnings ,000,000Total stockholders’ equity $256,000,000
14 No-Par Common Stock When a company issues no-par stock, it debits the asset received and credits the stock account.August 14Cash (3,000 × $20) 60,000Common Stock ,000To issue no-par common stock
15 Preferred Stock Accounting for preferred stock follows the pattern illustrated for common stock.Stockholders’ equity on the balance sheetlists preferred stock, common stock,and retained earnings – in that order.
16 Describe how treasury stock transactions affect a company.
17 Treasury Stock Transactions Treasury stock are shares that a companyhas issued and later reacquired.Reasons for purchasing their own stock:Stock purchase plan distributionIncrease net assets (i.e. SE)Avoidance of a takeover
18 IHOP Corp. Purchase of Treasury Stock During 2000, IHOP paid $5,170 to purchase288 shares of its common stock as treasury stock.($000)November 12, 2000Treasury Stock ,170Cash ,170Purchased treasury stock
19 IHOP Corp. After Purchase of Treasury Stock Common Stock $Paid-in capital in excess of par ,655Retained earnings ,632Less: Treasury stock (288 shares at cost) – 5,170Total equity $258,320Stockholder’s Equity at December 31, 2000(with treasury stock purchased – $000)
20 Sale of Treasury Stock Assume that on July 22, 2002, the shares of treasury stock are sold for $5,300.Cash ,300Treasury Stock ,170PIC from T Stock TransactionsSold treasury stock
21 Account for dividends and measure their impacton a company.
22 Dividends A dividend is a corporation’s return to its stockholders of some of thebenefits of earnings.
23 Three relevant dates for dividends are: Dividend DatesThree relevant dates for dividends are:Declaration dateDate of recordPayment date
24 Preferred Stock Dividends When a company has issued bothpreferred and common stock,the preferred stockholdersreceive their dividends first.Pinecraft Industries, Inc., has bothcommon stock and 90,000 sharesof preferred stock outstanding.
25 Preferred Stock Dividends Preferred dividends are paid at the annualrate of $1.75 per share.Assume that in 2004, the company declaresan annual dividend of $1,500,000.Preferred dividend (90,000 × $1.75 per share) $157,500Common dividend ($1,500,000 – $157,500) 1,342,500Total dividend $1,500,000
26 Expressing the Dividend Rate on Preferred Stock Percentage rate (% of Par)Dollar amount per share
27 Preferred Stock Dividends The preferred stock of Pinecraft is CUMULATIVESuppose the company passed/ skipped/ did NOT pay the 2004preferred dividend of $157,500. They didn’t pay ANY divIn 2005, the company declares a $500,000 dividend.Retained Earnings ,000Divs Payable, Pfd ($157,500 × 2 years) ,000Divs Payable, CS ($500,000 – $315,000) ,000To declare a cash dividend
28 Why Issue a Stock Dividend? To continue dividends but conserve cashTo reduce the per-share market price of its stock
29 Stock Dividend IHOP declared a 10% stock dividend in 2001. Assume IHOP had 20,000,000 sharesof common stock outstanding.The stock is trading for $15 per share.How would this stock dividend be recorded?
31 Stock Splits A stock split is an increase in the number of authorized, issued, and outstanding sharesof stock, coupled with a proportionatereduction in the stock’s par value.A stock split decreases the market price of stock.
32 Stock Splits The market price of a share of Quaker Oats has been approximately $25.Assume that the company wantsto decrease it to $12.50.This 2-for-1 split means that the companywould have twice as many shares outstandingafter the split.
34 (amount pfd SH’s will get paid if company liquidates) Stock ValuesMarket valueRedemption valueLiquidation value(amount pfd SH’s will get paid if company liquidates)Book value
35 Book Value Book value of preferred stock = Redemption value + Dividends in arrearsBook value of common stock= Total stockholders’ equity – Preferred equity
36 Assume that a company’s balance sheet reports the following: Book ValueAssume that a company’s balance sheet reports the following:Preferred stock, 6%, $100 par, 5,000 sharesauthorized, 400 shares issued,redemption value $130 per share $ 40,000Additional paid-in capital in excess of par – preferred ,000Common stock, $10 par, 20,000 shares authorized,5,500 shares issued ,000Additional paid-in capital in excess of par – common ,000Retained earnings ,000Treasury stock – common, 500 shares at cost – 15,000Total stockholders’ equity $241,000Stockholders’ Equity
37 Book Value Suppose that four years’ (including the current year) cumulative preferred dividends are in arrears.The book-value-per-share computationsfor this company are as follows:
38 Book Value Preferred equity: Redemption value (400 shares × 130) $ 52,000Cumulative dividends ($40,000 × $0.06 × 4 years) ,600Preferred equity $ 61,600Common equity:Total stockholders’ equity $241,000Less preferred equity – 61,600Common equity $179,400Book value per share: $179,400 ÷ 5,000 shares* $*5,500 shares issued minus 500 treasury shares
39 Evaluate a company’s return on assets and return onstockholders’ equity.
40 Return on Assets Rate of return on total assets = (Net income + Interest expense)÷ Average total assetsIt is a measure of a company’s ability togenerate profits from the use of its assets.
41 Return on Equity Rate of return on common stockholders’ equity = (Net income – Preferred dividends)÷ Average common stockholders’ equityIt is a measure of the income earned from thecommon stockholders’ investment in the company.
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