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PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston.

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Presentation on theme: "PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston."— Presentation transcript:

1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 13 A CCOUNTING FOR C ORPORATIONS

2 13 - 2 Privately Held Publicly Held Ownership can be C ORPORATE F ORM OF O RGANIZATION Existence is separate from owners An entity created by law Has rights and privileges C 1

3 13 - 3 C HARACTERISTICS OF C ORPORATIONS Advantages Separate legal entity Limited liability of shareholders Transferable ownership rights Continuous life Lack of mutual agency for shareholders Ease of capital accumulation Disadvantages Governmental regulation Corporate taxation C 1

4 13 - 4Shareholders Board of Directors President, Vice-President, and Other Officers Employees of the Corporation C ORPORATE O RGANIZATION AND M ANAGEMENT C 1

5 13 - 5 R IGHTS OF S HAREHOLDERS Vote at shareholders meetings Sell shares Purchase additional shares Receive dividends, if any Share equally in any assets remaining after creditors are paid in a liquidation C 1

6 13 - 6 B ASICS OF S HARE C APITAL Total number of shares that a corporation is authorized to sell or issue. Total number of shares that has been sold or issued to shareholders. C 1

7 13 - 7 Par value is an arbitrary amount assigned to each share when it is authorized. Market price is the amount that each share will sell for in the market. B ASICS OF S HARE C APITAL Classes of Shares Par Value No-Par Value Stated Value C 1

8 13 - 8 Par Value Share On September 1, Matrix, Inc. issued 100,000 shares of $2 par value for $25 per share. Lets record this transaction. I SSUING P AR V ALUE S HARE P 1

9 13 - 9 I SSUING P AR V ALUE S HARES P 1

10 13 - 10 I SSUING S HARES FOR N ONCASH A SSETS Par Value Shares On September 1, Matrix, Inc. issued 100,000 shares of $2 par value for land valued at $2,500,000. Lets record this transaction. P 1

11 13 - 11 Dividends Shareholders C ASH D IVIDENDS Corporation To pay a cash dividend, the corporation must have: 1.A sufficient balance in retained earnings; and 2.The cash necessary to pay the dividend. Regular cash dividends provide a return to investors and almost always affect the shares market value. P 2

12 13 - 12 A CCOUNTING FOR C ASH D IVIDENDS Three important dates Date of Declaration Record liability for dividend. Dividends Date of Record No entry required. Date of Payment Record payment of cash to shareholders. P 2

13 13 - 13 Date of Declaration Record liability for dividend. Dividends A CCOUNTING FOR C ASH D IVIDENDS On January 19, a $1 per share cash dividend is declared on Dana, Inc.s 10,000 ordinary shares outstanding. The dividend will be paid on March 19 to shareholders of record on February 19. P 2

14 13 - 14 No entry required on February 19, the date of record. Date of Payment Record payment of cash to shareholders. A CCOUNTING FOR C ASH D IVIDENDS On January 19, a $1 per share cash dividend is declared on Dana, Inc.s 10,000 ordinary shares outstanding. The dividend will be paid on March 19 to shareholders of record on February 19. P 2

15 13 - 15 S HARE D IVIDENDS OR B ONUS I SSUE Why a share dividend? Can be used to keep the market price on the shares affordable. Can provide evidence of managements confidence that the company is doing well. A distribution of a corporations own shares to its shareholders without receiving any cash payment in return. Capitalization: Transferring a portion of equity from retained earnings to contributed capital. P 2

16 13 - 16 Ordinary Shares $10 par value 100 shares Old Shares New Shares Ordinary Shares $5 par value 200 shares S HARE S PLITS A distribution of additional shares to shareholders according to their percent ownership. P 2

17 13 - 17 P REFERENCE S HARES A separate class of shares, typically having priority over ordinary shares in... Dividend distributions Distribution of assets in case of liquidation Usually has a stated dividend rate Normally has no voting rights C 2

18 13 - 18 vs.NoncumulativeCumulative Dividends in arrears must be paid before dividends may be paid on ordinary shares. (Normal case) Undeclared dividends from current and prior years do not have to be paid in future years. P REFERENCE S HARES Consider the following Shareholders Equity section of the Balance Sheet. The Board of Directors did not declare or pay dividends in 2010. In 2011, the Board declared and paid cash dividends of $42,000. C2

19 13 - 19 PREFERENCE SHARES C2

20 13 - 20 vs.NonparticipatingParticipating Dividends may exceed a stated amount once common shareholders receive a dividend equal to the preferred stated rate. Dividends are limited to a maximum amount each year. The maximum is usually the stated dividend rate. (Normal case) P REFERENCE S HARES Reasons for Issuing Preference Shares To raise capital without sacrificing control To boost the return earned by ordinary shareholders through financial leverage To appeal to investors who may believe the ordinary shares are too risky or that the expected return on common stock is too low C2

21 13 - 21 T REASURY S HARES Treasury shares are a companys own shares that have been acquired. Corporations might acquire its own shares to: 1. Use their shares to buy other companies. 2. Avoid a hostile takeover. 3. Reissue to employees as compensation. 4. Support the market price. P 3

22 13 - 22 P URCHASING T REASURY S HARES Treasury shares are shown as a reduction in total shareholders equity on the balance sheet. Treasury shares are shown as a reduction in total shareholders equity on the balance sheet. On May 8, Whitt, Inc. purchased 2,000 of its own shares in the open market for $4 per share. P 3

23 13 - 23 S ELLING T REASURY S HARES AT C OST On June 30, Whitt sold 100 shares of its treasury shares for $4 per share. P 3

24 13 - 24 S ELLING T REASURY S HARES A BOVE C OST On July 19, Whitt, Inc. sold an additional 500 treasury shares for $8 per share. P 3

25 13 - 25 S ELLING T REASURY S HARES B ELOW C OST On August 27, Whitt sold an additional 400 treasury shares for $1.50 per share. P 3

26 13 - 26 S TATEMENT OF C OMPREHENSIVE I NCOME Statement of Comprehensive Income (SCI) All non-owner changes in equity + other comprehensive income Can be 2 statements: Income statement + SCI C3

27 13 - 27 S TATEMENT OF C HANGES IN E QUITY Statement of Changes in Equity (SCE) All owner changes in equity, including changes in accounting policies Dividends C3

28 13 - 28 R ESERVES Most reserves result from accounting standards to reflect certain measurement changes in equity rather than the income statement, e.g. asset revaluation reserve, foreign currency translation reserve and other statutory reserves. Retained earnings also called revenue reserves. Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends A companys cumulative net income less any net losses and dividends declared since its inception. C3

29 13 - 29 E ARNINGS P ER S HARE Basic earnings per share = Net income - Preference dividends Weighted-average ordinary shares outstanding Earnings per share is one of the most widely cited accounting statistics. A 1

30 13 - 30 PRICE–EARNINGS RATIO Price– Earnings Ratio = Market value per share Earnings per share This ratio reveals information about the stock markets expectations for a companys future growth in earnings, dividends, and opportunities. A 2

31 13 - 31 D IVIDEND Y IELD Dividend Yield = Annual cash dividends per share Market value per share Tells us the annual amount of cash dividends distributed to ordinary shareholders relative to the shares market price. A 3

32 13 - 32 BOOK VALUE PER ORDINARY SHARE Book value per ordinary share = Shareholders equity applicable to ordinary shares Number of ordinary shares outstanding Reflects the amount of shareholders equity applicable to ordinary shares on a per share basis. A 4

33 13 - 33 E ND OF C HAPTER 13


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