2Explain the advantages and disadvantagesof a corporation.
3What is the Best Way to Organize a Business? ProprietorshipPartnershipCorporation
4Advantages 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
5Stockholders’ Equity Owners’ equity in a corporation has two main components:Paid-in capital(contributed capital)Retained earnings
6Capital Stock Corporate ownership is evidenced by a stock certificate which maybe for any number of shares.
7Capital Stock Common Stock Preferred Stock A class of stock that has severalpreferences overcommon stock.The most basic formof capital stockissued by everycorporation.
8Measure the effect of issuing stock on a company’sfinancial position.
9Common 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?
10Common Stock at Par January 8 Cash (6,200,000 × $10) 62,000,000 To issue common stock
11Common 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?
12Common 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
13Common 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
14No-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
15Preferred 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.
16Describe how treasury stock transactions affect a company.
17Treasury 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
18IHOP 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
19IHOP 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)
20Sale 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
21Account for dividends and measure their impacton a company.
22Dividends A dividend is a corporation’s return to its stockholders of some of thebenefits of earnings.
23Three relevant dates for dividends are: Dividend DatesThree relevant dates for dividends are:Declaration dateDate of recordPayment date
24Preferred 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.
25Preferred 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
26Expressing the Dividend Rate on Preferred Stock Percentage rate (% of Par)Dollar amount per share
27Preferred 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
28Why Issue a Stock Dividend? To continue dividends but conserve cashTo reduce the per-share market price of its stock
29Stock 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?
31Stock 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.
32Stock 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
35Book Value Book value of preferred stock = Redemption value + Dividends in arrearsBook value of common stock= Total stockholders’ equity – Preferred equity
36Assume 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
37Book 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:
38Book 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
39Evaluate a company’s return on assets and return onstockholders’ equity.
40Return 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.
41Return 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.