Learning Objectives Understand the Business – LO1 Explain the role of shares (also called stocks) in financing a corporation. Study the accounting methods.

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Presentation transcript:

Learning Objectives Understand the Business – LO1 Explain the role of shares (also called stocks) in financing a corporation. Study the accounting methods – LO2 Explain and analyze common share transactions. – LO3 Explain and analyze cash dividends, stock dividends, and stock split transactions. – LO4 Describe the characteristics of preferred shares and analyze transactions affecting preferred shares. Evaluate the results – LO5 Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

Dividends on Common Shares Investors in common shares expect a return on their investment: © McGraw-Hill Ryerson. All rights reserved.2 Dividends And/or Increase in Share Price A growth investmentAn income investment A corporation does not have to pay dividends. Dividend payments must be approved by the board of directors. A corporation must have sufficient retained earnings and sufficient cash to pay dividends. LO3

Declaration Date The Declaration Date is the date the board of directors officially approves a dividend, thereby creating a liability. LO3 © McGraw-Hill Ryerson. All rights reserved.3 Dividends are not expenses; they are distributions of accumulated earnings. Sun-Rype declares a $0.05 dividend per share on its 10.8 million outstanding common shares. 1 Analyze 2 Record

Date of Record On the Date of Record, the corporation prepares a list of current shareholders. The dividend is payable only to those listed on the record date. LO3 © McGraw-Hill Ryerson. All rights reserved.4 Date of Payment On the Payment date, a cash dividend is paid to the shareholders of record. 1 Analyze 2 Record

Dividend Dates © McGraw-Hill Ryerson. All rights reserved.5 Increase current liabilities and Decrease retained earnings No effect Decrease current assets and Decrease current liabilities Balance Sheet Effects LO3

Stock Dividends Stock dividends are the distribution of additional shares in the form of a dividend. Stock dividends usually reduce the market price per share. LO3 © McGraw-Hill Ryerson. All rights reserved.6 Stock Dividends do not change total shareholders’ equity. Sun-Rype issues a 2% stock dividend when the share price is $4 per share, with 10.8 million common shares outstanding. 1 Analyze 2 Record

Stock Splits Stock splits increase the total number of authorized shares by a specified ratio. LO3 © McGraw-Hill Ryerson. All rights reserved.7 A stock split does not affect retained earnings. In a 2-for-1 stock split, each issued share is called in and two new shares are issued in its place. A stock split does not require any journal entries.

LO3 © McGraw-Hill Ryerson. All rights reserved.8 Comparison of Stock Splits, Stock Dividends and Cash Dividends A 2-for-1 Stock Split doubles the number of outstanding shares, and halves the book value per share. There is no change in total shareholders’ equity A 100% Stock Dividend doubles the number of outstanding shares, but does not change the book value per share. The value of Common Shares increases and Retained Earnings decreases. There is no change in total shareholders’ equity. A Cash Dividend does not change the number of outstanding shares or the book value. Retained Earnings decreases. Total shareholders’ equity decreases.