1. Chapter 11 Stockholders’ Equity
Certificate of Stock
Financial Accounting, Alternate 4e by Porter and Norton

2. Equity Financing: Issue Stock
Dividend flexibility
Ready markets
Often provides higher ROI than debt financing
Borrowing may not be feasible
Disadvantages
Advantages

3. Equity Financing: Issue Stock
Less control
Dividends not tax deductible
Hurts some financial ratios
Disadvantages
Advantages

4. Expanded Accounting Equation
Assets = Liabilities + Owners’ Equity
Assets = Liabilities + Stockholders’ Equity
Contributed
Capital
Retained
Earnings

5. Relationships among Financial Statements – Winnebago Industries, Inc.
Income Statement for 2002
Revenues $ xxx
Less: expenses xxx
Net income $ 54,671
Statement of Change in Stockholders’ Equity for 2002
Beginning balance, reinvested income $ 234,139
Add: Net income 54,671
Deduct: Cash dividends (3,954)
Ending balance, reinvested income $ 284,856
Balance Sheet as of August 25, 2002
Total Assets $ xxx
Total Liabilities xxx
Capital Stock xxx
Reinvested Earnings ,856
Total Liabilities & Stockholders' Equity $ xxx

6. Stockholders’ Equity Components
Preferred
Stock
Common
Addt’l.
Paid-In Cap.
Retained
Earnings
Donated
Capital
Other
Misc.
Deduct:
Treasury
Stock

7. Delta Air Lines Inc. Partial Balance Sheet
(in millions)
Shareholders' equity:
Common stock, $1.50 par value, 450 million shares
authorized; 2002 – 180,903,373 issued;
2001 – 180,890,356 issued
Additional paid-in capital 3,263 3,267
Retained earnings 1,639 2,930
Accumulated other comprehensive income (loss) (1,562)
Treasury shares at cost: 2002 – 57,544,168; 2001 –
57,644,690 (1,716) (1,865)
Total shareholders' equity ,769

8. Contributed Capital Common Stock Preferred Stock
basic stock of corporation
has voting rights
represents ownership interest
Certificate
of Stock
Preferred Stock
optional
tailored to meet specific needs
provides dividend returns with less risk

9. Number of Shares of Stock
Authorized
Maximum
Allowable
1,000
Issued - sold &
distributed
Outstanding - not
repurchased or retired

10. Par Value “Legal capital” Arbitrary amount stated on stock certificate
Also called “stated value”
Certificate of Stock
$1.00 Par Value

11. Additional Paid-in Capital
Amount received in excess of par or stated value of stock
Certificate of Stock
$1.00 Par Value 15

12. Retained Earnings
Net income retained in business (not paid out as dividends) since inception
Reinvested in a variety of assets (not necessarily liquid)

13. Preferred Stock Can tailor to specific needs of firm
Stated dividend rate
Often carries dividend preference over common stock
$100 par,
7% Preferred Stock

14. Preferred Stock Features1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
2002
2003
2004
Cumulative
Participating
Callable
Convertible
Preferred
Common

15. Stock Issued for Cash Example: Assets = Liab. + O/E + Rev. – Exp.
Common Stock $ 10,000
( $10 par value x 1,000 shares)
1,000 shares of
$10 par value stock
sold for $15 per share
Addt’l Paid-In Cap. $5,000
(($15 - $10) x 1,000 shares)
Assets = Liab O/E Rev. – Exp.
Cash , Common Stk ,000
Addtl. Paid in
Cap. - Common 5,000

16. Stock Issued for Noncash Consideration
Record at fair market value of consideration given or received, whichever is more readily determinable
Certificate of Stock
Title
to land,
building,
etc.

17. Treasury Stock Company buys back its own stock
Contra-equity account (debit balance)
Not outstanding (no voting rights)
Certificate of Stock

18. Reasons for Repurchasing Stock
Provide for bonus or benefit plans
Maintain favorable market value
Improve financial ratios
Maintain control of ownership
Cash in on future price increases

19. Presentation of Treasury Stock
Common stock, $10 par, 1,000
shares issued, 900 outstanding $ 10,000
Additional paid-in capital 12,000
Retained earnings 15,000
37,000
Less: Treasury stock, 100 shares
at cost ($25 per share) ( 2,500)
Total stockholders’ equity $34,500

20. Cash Dividends Date of declaration Paid to Payment date on
dividend check for
Date
Dept.. of Treasurer
Jane Doe
Date of
declaration 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
Paid to
Payment
date on 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
Stockholders
on date of record

21. Dividends
Record dividends when declared; not when paid
12/31/03
1/15/04
Reduce
retained
earnings
Pay
dividends

22. Dividend Requirements
Sufficient cash
Positive retained earnings

23. Dividend Payout Ratio Annual dividend Net income
The % of
earnings paid
as dividends
Dividend check for
Date
Dept. of Treasurer
Jane Doe
I.M. Treasurer

24. Allocation of Cash Dividends1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
2001
2002
2003
1) Distribute dividends in arrears, if any, to preferred
2) Distribute current dividends to preferred
3) Distribute remainder to common (or to both if preferred is participating) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
2004

25. Cash Dividends Example
Stricker Company declares a $70,000 dividend for 2004 (no dividends were paid in 2002 or 2003).
There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.

26. Cash Dividends Example
Noncumulative Preferred Stock
Preferred Common
Step 1: Distribute current-year dividend to
preferred (10,000 shares x $10 par x 8% x 1 yr.) $8,000
Step 2: Distribute remaining dividend to common
($70,000 - $8,000) $62,000
Total allocated $8, $62,000
$0.80
per share
$1.55
per share

27. Cash Dividends Example
Cumulative Preferred Stock
Preferred Common
Step 1: Distribute dividends in arrears to
preferred (10,000 shares x $10 par x 8% x 2 yrs.) $16,000
Step 2: Distribute current-year dividend to
preferred (10,000 shares x $10 par x 8% x 1 yr.) 8,000
Step 3: Distribute remaining dividend to common
($70,000 - $24,000) $46,000
Total allocated $24, $46,000
$2.40
per share
$1.15
per share

28. Stock Dividends
Issue of additional shares proportionately to existing stockholders
Certificate of Stock
Certificate of Stock
Certificate of Stock
Certificate of Stock
Certificate of Stock
Certificate of Stock
Reasons:
insufficient cash
market price reduction
nontaxable to recipients

29. Small Stock Dividend Example
Before
Dividend
Stockholders’ Equity:
Common stock, $10 par,
5,000 shares $ 50,000
Additional paid-in cap ,000
Retained earnings ,000
Total $150,000
Assume Shah Company declares 10% stock dividend;
500 $40 per share market value

30. Small Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par,
5,500 shares $ 50,000 $ 55,000
Additional paid-in cap , ,000
Retained earnings , ,000
Total $ 150,000 $150,000 + + -
$40 market value deducted from retained earnings; allocated between Common Stock (initially Common Stock Div. Distributable) and Addtl. Paid-In Capital.

31. Small Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par,
5,500 shares $ 50,000 $ 55,000
Additional paid-in cap , ,000
Retained earnings , ,000
Total $ 150,000 $150,000 + + -
Total S/E is unchanged

32. Large Stock Dividend Example
Before
Dividend
Stockholders’ Equity:
Common stock, $10 par,
5,000 shares $ 50,000
Additional paid-in cap ,000
Retained earnings ,000
Total $150,000
Assume Shah Company declares 100% stock dividend

33. Large Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par,
10,000 shares $ 50,000 $100,000
Additional paid-in cap , ,000
Retained earnings , ,000
Total $ 150,000 $150,000 + -
Dividend deducted from retained earnings and recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected.

34. Large Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par,
10,000 shares $ 50,000 $100,000
Additional paid-in cap , ,000
Retained earnings , ,000
Total $ 150,000 $150,000 + -
Total S/E is unchanged

35. Stock Splits Results in additional issuance of shares
Reduces par value per share
No change in Stockholders’ Equity accounts
Certificate of Stock
$1 par value
Certificate of Stock
$3 par value

36. Stock Splits Not recorded in accounts
Disclose
in notes
Not recorded in accounts
Splits reduce market value per share and make stock more affordable to a wider range of investors

37. 2-for-1 Stock Split Example
Before
Split
Stockholders’ Equity:
Common stock, $10 par,
5,000 shares $ 50,000
Additional paid-in cap ,000
Retained earnings ,000
Total $ 150,000
Assume Shah Company declares 2-for-1 stock split.

38. 2-for-1 Stock Split Example
Before After
Stockholders’ Equity:
Common stock, $5.00 par,
10,000 shares $ 50,000 $ 50,000
Additional paid-in cap , ,000
Retained earnings , ,000
Total $ 150,000 $150,000
Only disclosures are affected
All accounts are unchanged

39. Statement of Stockholders’ Equity
Shows changes in all equity accounts including
Sales and Purchases of capital stock
Includes:
Statement of Retained Earnings
Beginning retained earnings
Add: Net income
Subtract: Dividends
= Ending retained earnings

40. Statement of Comprehensive Income
Income Statement
For Year Ended Dec. 31, 20xx
Revenues xxx
Expenses xxx
Other gains and losses xxx
Income before tax xxx
Income tax expense xxx
Net income xxx
Statement of Comprehensive Income
For Year Ended Dec. 31, 20xx
Net income xxx
Foreign currency translation adjustment xxx
Unrealized holding gains/losses xxx
Minimum pension liability adjustment xxx
Other comprehensive income xxx
Comprehensive income xxx
Excluded from Inc. Stmt.
Comprehensive income – the total change in net assets from all sources except investments by or distributions to the owners

41. Analyzing Owners’ Equity
Book value per share
rights of each share to net assets of corporation
Market value per share
price at which stock is currently selling

42. Total Common Stockholders’ Equity # of Common Shares Outstanding
Book Value per Share
Total Common Stockholders’ Equity
# of Common Shares Outstanding
Rights of common stockholders in event of liquidation
Generally represents “floor” price of stock

43. Book Value vs. Market Value
Southwest Airlines’ 2002:
Book value per share: $ 5.69
Market value per share: $16.42 (avg.)
Which value would you expect to pay for a share of Southwest Airlines’ stock?
What factors account for the difference between the two values?

44. Stockholders’ Equity Items on the Statement of Cash Flows
Operating Activities
Net income xxx
Investing Activities
Financing Activities
Issuance of stock +
Retirement or repurchase
of stock – Payment of dividends – 44

45. Unincorporated Businesses
Appendix
Accounting Tools:
Unincorporated Businesses

46. Sole Proprietorships
Not a separate legal entity so owner has unlimited liability
Must keep personal and business records separate
Business income is declared on the owner’s personal tax return and taxed at personal tax rate

47. Sole Proprietorships Owner’s withdrawal of assets from business:
Assets = Liab O/E Rev. – Exp.
Equip. (6,000) Peter Tom,
Drawing (6,000)
Owners’ drawing or withdrawal accounts are contra-equity accounts

48. Sole Proprietorships
Drawing or withdrawal and income summary accounts are closed to the owner’s capital account
Owner’s Equity section of the balance sheet consists of the capital account:
Beginning balance $
Plus: Investments 10,000
Net Income ,000
Less: Withdrawals (6,000)
Ending balance $ 8,000

49. Partnerships Unlimited liability
Limited life – partnership agreements can and do end
Not taxed as a separate entity

50. Partnerships Distribution of income: Equal distribution Stated ratio
Other allocation
For example, based on salaries, interest on invested capital, and a stated ratio

51. End of Chapter 11
Certificate of Stock