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Homework assignment  Using Connect – 5 Questions for 60 Points For Chapter 10.  Last day for Homework for ALL Chapters is 5/4 at 11:59 PM. Corporate Reporting and Analysis  Prepare chapters 11 “ Corporate Reporting and Analysis.” Happiness is having all homework up to date Atef Abuelaish3

Chapter 11 Corporate reporting &

Chapter 11 Corporate reporting & analysis

Characteristics of Corporations Characteristics of Corporations 6

Privately Held Publicly Held Ownership can be Corporate Form of Organization 7 Existence is separate from owners An entity created by law Has rights and privileges C 1

Characteristics of Corporations 8 Advantages  Separate legal entity  Limited liability of stockholders  Transferable ownership rights  Continuous life  Lack of mutual agency for stockholders  Ease of capital accumulation Disadvantages  Governmental regulation  Corporate taxation C 1

Corporate Organization and Management 9 C 1 Corporate governance is the system by which companies are directed and controlled. Board of Directors Stockholders President, Vice President, and other Officers Employees of the Corporation

Ultimate control Selected by a vote of the stockholders Overall responsibility for managing the company Corporate Organization and Management 10 C 1 Stockholders usually meet once a year

Rights of Stockholders 11  Vote at stockholders’ meetings (or register proxy votes electronically)  Sell stock  Purchase additional shares of stock  Receive dividends, if any  Share equally in any assets remaining after creditors are paid in a liquidation C 1

Each unit of ownership is called a share of stock. A stock certificate serves as proof that a stockholder has purchased shares. Stock Certificates and Transfer 12 When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate. C 1

Basics of Capital Stock 13 Total amount of stock that a corporation’s charter authorizes it to sell. Total amount of stock that has been issued or sold to stockholders. C 1

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.  Basics of Capital Stock 14 Classes of Stock  Par Value  No-Par Value  Stated Value C 1

Common Stock Common Stock 15

Par Value Stock On June 5, Dillon Snowboard’s, Inc. issued 30,000 shares of $10 par value stock for $12 per share. Let’s record this transaction. Issuing Par Value Stock - Cash 16 P 1

Issuing Par Value Stock 17 P 1

Issuing Stock for Noncash Assets 18 Par Value Stock On June 10, 4,000 shares of $20 par value stock for land valued at $105,000. Let’s record this transaction. P 1

Prepare journal entries to record the following four separate issuances of stock. 1)A corporation issued 80 shares of $5 par value common stock for $700 cash. 2)A corporation issued 40 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $800. The stock has a $1 per share stated value. 3)A corporation issued 40 shares of no-par common stock in exchange for land, estimated to be worth $800. The stock has no stated value. 4)A corporation issued 20 shares of $30 par value preferred stock for $900 cash. DebitCredit 1) Cash700 Common Stock, $5 par value(80 shares x $5)400 Paid-in Capital in excess of par value, Common stock300 2) Organization expenses800 Common Stock, $1 stated value(40 shares x $1)40 Paid-in Capital in excess of stated value, Common stock760 3) Land800 Common Stock, No-par value800 4) Cash900 Preferred Stock, $30 par value(20 shares x $30)600 Paid-in Capital in excess of par value, Preferred stock300 General Journal NEED-TO-KNOW P 1 19

Dividends Dividends 20

Dividends Stockholders Cash Dividends 21 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 stock’s market value. P 2

Accounting for Cash Dividends 22 Three Important Dates Declaration Date of Declaration liability Record liability for dividend. Record Date of Record No No entry required. Payment Date of Payment payment Record payment of cash to stockholders. P 2

1) Date of Declaration Record liability for dividend. Accounting for Cash Dividends 23 On January 9, a $1 per share cash dividend is declared on Z-Tech, Inc.’s 5,000 common shares outstanding. The dividend will be paid on February 1 to stockholders of record on January 22. P 2

No entry required on January 22, the date of record. 3) Date of Payment Record payment of cash to stockholders. Accounting for Cash Dividends 24 On January 9, a $1 per share cash dividend is declared on Z-Tech, Inc.’s 5,000 common shares outstanding. The dividend will be paid on February 1 to stockholders of record on January 22. P 2

Deficits and Cash Dividends 25 A deficit is created when a company incurs cumulative losses or pays dividends greater than total profits earned in other years. P 2

Stock Dividends 26 Why a stock dividend?  Can be used to keep the market price on the stock affordable.  Can provide evidence of management’s confidence that the company is doing well. A distribution of a corporation’s own shares to its stockholders without receiving any payment in return. Small Small Stock Dividend Distribution is  25% of the previously outstanding shares. Large Large Stock Dividend Distribution is > 25% of the previously outstanding shares. P 2

Recording a Small Stock Dividend 27 Quest has 10,000 shares of $1 par value stock outstanding. On December 31, Quest declared a 10% stock dividend, when the stock was selling for $15 per share. The stock will be distributed to stockholders on January 20. Let’s prepare the December 31 entry. 1,000 × $10 par market value Capitalize retained earnings for the market value of the shares to be distributed. (10,000 × 10% = 1,000 × $15 = $15,000) P 2

Before the stockdividend. After the stockdividend. P 2 28

Recording a Small Stock Dividend 29 Quest has 10,000 shares of $1 par value stock outstanding. On December 31, Quest declared a 10% stock dividend, when the stock was selling for $15 per share. The stock will be distributed to stockholders on January 20. Let’s prepare the January 20 entry. P 2

Recording a Large Stock Dividend 30 minimum amount required by state law Capitalize retained earnings for the minimum amount required by state law, usually par or stated value of the shares. (10,000 × 30% = 3,000 shares × $10 par value = $30,000) Quest, Inc. has 10,000 shares of $1 par value stock outstanding. On December 31, Quest declared a 30% stock dividend. The stock will be distributed to stockholders on January 20, Let’s prepare the December 31 entry. P 2

Common Stock $20 par value 100,000 shares Old Shares New Shares Common Stock $10 par value 200,000 shares Stock Splits 31 A distribution of additional shares of stock to stockholders according to their percent ownership. P 2

NEED-TO-KNOW A company began the current year with the following balances in its Stockholders’ Equity accounts. Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding$2,000 Paid-in capital in excess of par, Common Stock1,000 Retained earnings5,000 Total$8,000 Jan. 10The board declared a $0.10 cash dividend per share to shareholders of record on Jan. 28. Feb. 15Paid the cash dividend declared on January 10. Mar. 31Declared a 20% stock dividend. The market value of the stock is $18 per share. May 1Distributed the stock dividend declared on March 31. Dec. 1Declared a 40% stock dividend. The market value of the stock is $25 per share. Dec. 31Distributed the stock dividend declared on December 1. All outstanding common stock was issued for $15 per share when the company was created. Prepare journal entries to account for the following transactions during the current year. P 2 32

NEED-TO-KNOW Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding$2,000 Paid-in capital in excess of par, Common Stock1,000 Retained earnings5,000 Total$8,000 Jan. 10The board declared a $0.10 cash dividend per share to shareholders of record on Jan. 28. Feb. 15Paid the cash dividend declared on January 10. Mar. 31Declared a 20% stock dividend. The market value of the stock is $18 per share. May 1Distributed the stock dividend declared on March 31. Dec. 1Declared a 40% stock dividend. The market value of the stock is $25 per share. Dec. 31Distributed the stock dividend declared on December 1. DebitCredit Jan. 10Retained earnings(200 shares x $0.10)20 Common dividend payable20 Jan. 28No journal entry on the date of record Feb. 15Common dividend payable20 Cash20 Mar. 31Retained earnings(200 shares x 20% = 40 shares x $18 mkt.)720 Common Stock dividend distributable(40 shares x $10 par)400 Paid-in Capital in excess of par value, Common Stock320 May 1Common Stock dividend distributable(40 shares x $10 par)400 Common Stock, $10 par value(40 shares x $10 par)400 General Journal P 2 33

NEED-TO-KNOW Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding$2,000 Paid-in capital in excess of par, Common Stock1,000 Retained earnings5,000 Total$8,000 Jan. 10The board declared a $0.10 cash dividend per share to shareholders of record Jan. 28. Feb. 15Paid the cash dividend declared on January 10. Mar. 31Declared a 20% stock dividend. The market value of the stock is $18 per share. May 1Distributed the stock dividend declared on March 31. Dec. 1Declared a 40% stock dividend. The market value of the stock is $25 per share. Dec. 31Distributed the stock dividend declared on December 1. DebitCredit May 1Common Stock dividend distributable(40 shares x $10 par)400 Common Stock, $10 par value(40 shares x $10 par)400 Dec. 1Retained earnings(240 shares x 40% = 96 shares x $10 par)960 Common Stock dividend distributable(96 shares x $10 par)960 Dec. 31Common Stock dividend distributable(96 shares x $10 par)960 Common Stock, $10 par value(96 shares x $10 par)960 General Journal P 2 34

Issuance of Preferred Stock 35

Preferred Stock 36 A separate class of stock, typically having priority over common shares in... o Dividend distributions o Distribution of assets in case of liquidation Usually has a stated dividend rate Normally has no voting rights C2

vs.NoncumulativeCumulative Dividends in arrears must be paid before dividends may be paid on common stock. (Normal case) Undeclared dividends from current and prior years do not have to be paid in future years. Preferred Stock 37 Consider the following Stockholders’ Equity section of the Balance Sheet. The Board of Directors declares $5,000 of dividends in In 2015, the Board declared and paid cash dividends of $42,000. C2

Preferred Stock 38 C2

vs.NonparticipatingParticipating Dividends may exceed a stated amount once common stockholders 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) Preferred Stock 39 Reasons for Issuing Preferred Stock  To raise capital without sacrificing control  To boost the return earned by common stockholders through financial leverage  To appeal to investors who may believe the common stock is too risky or that the expected return on common stock is too low C2

NEED-TO-KNOW Total 20X1$15 20X25 20X3200 Total$220 Par value per preferred share$5 Dividend %5% Dividend per preferred share$0.25 Number of preferred shares80 Annual preferred dividend$20 TotalPreferredCommon 20X1$15 $0 20X X Total$220$40$180 Part 1. Determine the amount of dividends paid each year to each of the two classes of stockholders: preferred and common. Also compute the total dividends paid to each class for the three years. A company’s outstanding stock consists of 80 shares of noncumulative 5% preferred stock with a $5 par value and also 200 shares of common stock with a $1 par value. During its first three years of operation, the corporation declared and paid the following total cash dividends: Annual preferred dividend C2 40

NEED-TO-KNOW TotalPreferredArrearsCommon 20X1$15 $5$0 20X X Total$220$60$160 A company’s outstanding stock consists of 80 shares of noncumulative 5% preferred stock with a $5 par value and also 200 shares of common stock with a $1 par value. During its first three years of operation, the corporation declared and paid the following total cash dividends: Part 2. Determine the amount of dividends paid each year to each of the two classes of stockholders assuming that the preferred stock is cumulative. Also determine the total dividends paid to each class for the three years combined. Par value per preferred share$5 Dividend %5% Dividend per preferred share$0.25 Number of preferred shares80 Annual preferred dividend$20 Annual preferred dividend C2 41

Treasury Stock Treasury Stock 42

Treasury Stock 43 Treasury stock represents shares of a company’s own stock that has been acquired. A corporation might acquire its own stock to: 1. Use its shares to buy other companies. 2. Avoid a hostile takeover. 3. Reissue to employees as compensation. 4. Support the market price. P 3

Purchasing Treasury Stock 44 Treasury stock is shown as a reduction in total stockholders’ equity on the balance sheet. Treasury stock is shown as a reduction in total stockholders’ equity on the balance sheet. On May 1, Cyber, Inc. purchased 1,000 of its own shares of stock in the open market for $11.50 per share. P 3

Selling Treasury Stock at Cost 45 On May 21, Cyber sold 100 shares of its treasury stock for $11.50 per share. P 3

Selling Treasury Stock Above Cost 46 On June 3, Cyber, Inc. sold an additional 400 shares of its treasury stock for $12 per share. P 3

Selling Treasury Stock Below Cost 47 On July 10, Cyber sold an additional 500 shares of its treasury stock for $10 per share. P 3

NEED-TO-KNOW A company began the current year with the following balances in its stockholders’ equity accounts. Common Stock - $10 par, 500 shares authorized, 200 shares issued and outstanding$2,000 Paid-in capital in excess of par, Common Stock1,000 Retained earnings5,000 Total$8,000 Jul. 1Purchased 30 shares of treasury stock at $20 per share. Sep. 1Sold 20 treasury shares at $26 cash per share. Dec. 1Sold the remaining 10 shares of treasury stock at $7 cash per share. All outstanding common stock was issued for $15 per share when the company was created. Prepare journal entries to account for the following transactions during the current year. P 3 48

NEED-TO-KNOW Common Stock - $10 par, 500 shares authorized, 200 shares issued and outstanding$2,000 Paid-in capital in excess of par, Common Stock1,000 Retained earnings5,000 Total$8,000 Jul. 1Purchased 30 shares of treasury stock at $20 per share. Sep. 1Sold 20 treasury shares at $26 cash per share. Dec. 1Sold the remaining 10 shares of treasury stock at $7 cash per share. DebitCredit Jul. 1Treasury Stock(30 shares x $20 cost)600 Cash600 Sep. 1Cash(20 shares x $26)520 Treasury Stock(20 shares x $20 cost)400 Paid-in Capital, Treasury Stock120 Dec. 1Cash(10 shares x $7)70 Paid-in Capital, Treasury Stock(Available balance)120 Retained Earnings10 Treasury Stock(10 shares x $20 cost)200 General Journal P 3 49

Statement of Retained Earnings 50

Statement of Retained Earnings 51 Retained earnings is the total cumulative amount of reported net income less any net losses and dividends declared since the company started operating. Legal Restriction Most states restrict the amount of treasury stock purchases to the amount of retained earnings. Contractual Restriction Loan agreements can include restrictions on paying dividends below a certain amount of retained earnings. Restricted Retained Earnings C 3

Prior Period Adjustments 52 Prior period adjustments are corrections of material errors in past years’ financial statements that result in a change in the beginning balance of retained earnings. C 3

Statement of Stockholders’ Equity 53 This is a more inclusive statement than the statement of retained earnings. C 3

Option purchase price $30 per share. Stock Options 54 Market price of stock $75 per share. The right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above the fixed option price, the value of the option increases. Options are given to key employees to motivate them to: focus on company performance, take a long-run perspective, and remain with the company. C 3

Global View 55 U.S. GAAP and IFRS have similar procedures for issuing common stock at par, at a premium, at a discount, and for noncash assets. Accounting for and reporting cash dividends, stock dividends, and stock splits, are consistent under both U.S. GAAP and IFRS. Accounting for treasury stock is consistent under both U.S. GAAP and IFRS. Companies do not report gains or losses on transactions involving their own stock. Preferred stock that is redeemable at the option of the preferred stockholder is reported between liabilities and equity under U.S. GAAP, but it is reported as a liability under IFRS. Also, the issue price of convertible preferred stock (and bonds) is recorded entirely under preferred stock (or bonds) and none is assigned to the conversion feature under U.S. GAAP. However, IFRS requires that a portion of the issue price be allocated to the conversion feature when it exists.

Earnings Per Share Earnings Per Share 56

14) Earnings Per Share 57 Basic earnings per share = Net income - Preferred dividends Weighted-average common shares outstanding Earnings per share is one of the most widely cited accounting statistics. A 1

Price-Earnings Ratio Price-Earnings Ratio 58

15) Price-Earnings Ratio 59 Price– earnings ratio = Market value (price) per share Earnings per share This ratio reveals information about the stock market’s expectations for a company’s future growth in earnings, dividends, and opportunities. A 2

Dividend Yield Dividend Yield 60

16) Dividend Yield 61 Dividend yield = Annual cash dividends per share Market value per share Tells us the annual amount of cash dividends distributed to common stockholders relative to the stock’s market price. A 3

Book Value Per Share Book Value Per Share 62

17) Book Value per Common Share 63 Book value per common share = Stockholders’ equity applicable to common shares Number of common shares outstanding Reflects the amount of stockholders’ equity applicable to common shares on a per share basis. A 4

18) Book Value per Preferred Share 64 Book value per preferred share = Stockholders’ equity applicable to preferred shares Number of preferred shares outstanding Reflects the amount of stockholders’ equity applicable to preferred shares on a per share basis. A 4

Homework assignment 11  Using Connect – 9 Questions for 60 Points For Chapter 11. ALL1 - 9  Last day for Homework for ALL Chapters is 5/4 at 11:59 PM. 12 Reporting Cash Flows  Prepare chapter 12 “ Reporting Cash Flows.” Happiness is having all homework up to date Atef Abuelaish65

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