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., CA Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved Chapter 13 A CCOUNTING FOR C ORPORATIONS

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

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

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

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

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

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

On June 5, Dillion Snowboards issued 30,000 shares of $10 par value for $300,000. Let’s record this transaction. I SSUING P AR V ALUE S HARES AT P AR P 1

I SSUING P AR V ALUE S HARES AT P AR P 1 The shareholders’ equity section of Dillon Snowboards’ statement of financial position at year-end 2015 (its first year of operations) after profit of $65,000 and no dividend payments.

On June 5, Dillion Snowboards issued 30,000 shares of $10 par value at $12 per share. Let’s record this transaction. I SSUING P AR V ALUE S HARES AT A P REMIUM P 1

I SSUING P AR V ALUE S HARES AT A P REMIUM P 1 The shareholders’ equity section of Dillon Snowboards’ statement of financial position at year-end 2015 (its first year of operations) after profit of $65,000 and no dividend payments.

On October 20, a corporation issued 1,000 shares of no-par value for $40 per share. Let’s record this transaction. I SSUING N O -P AR V ALUE S HARES P 1

On October 20, a corporation issued 1,000 no-par value shares having a stated value of $40 per share for $50 per share. Let’s record this transaction. I SSUING S TATED V ALUE S HARES P 1

I SSUING S HARES FOR N ONCASH A SSETS On June 10, a corporation issued 4,000 shares of $20 par value for land valued at $105,000. Let’s record this transaction. P 1

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 share’s market value. P 2

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

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

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

B ONUS I SSUES OR S HARE D IVIDENDS Why a share dividend?  Can be used to keep the market price on the shares affordable.  Can provide evidence of management’s confidence that the company is doing well. A distribution of a corporation’s own shares to its shareholders without receiving any cash payment in return. Capitalization: Transferring a portion of equity from Retained Earnings to Share Capital. P 2

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

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

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 Statement of Financial Position. The Board of Directors did not declare or pay dividends in In 2015, the Board declared and paid cash dividends of $42,000. C2

P REFERENCE S HARES C2

vs.NonparticipatingParticipating Dividends may exceed a stated amount once ordinary shareholders receive a dividend equal to the preference 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 ordinary shares is too low C2

T REASURY S HARES Treasury shares are a company’s 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

P URCHASING T REASURY S HARES Treasury shares are shown as a reduction in total shareholders’ equity on the statement of financial position. Treasury shares are shown as a reduction in total shareholders’ equity on the statement of financial position. On May 8, Whitt, Inc. purchased 2,000 of its own shares in the open market for $4 per share. P 3

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

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

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

S TATEMENT OF P ROFIT OR L OSS AND O THER C OMPREHENSIVE I NCOME Statement of Profit or Loss and Other Comprehensive Income All non-owner changes in equity + other comprehensive income Can be 2 statements: Statement of Profit or Loss + Statement of Comprehensive Income C3

S TATEMENT OF P ROFIT OR L OSS AND O THER C OMPREHENSIVE I NCOME C3

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

S TATEMENT OF C HANGES IN E QUITY C3

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 are also called revenue reserves. Ending Retained Earnings = Beginning Retained Earnings + Net Profit – Dividends A company’s cumulative net profit less any net losses and dividends declared since its inception. C3

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

PRICE–EARNINGS RATIO 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

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 share’s market price. A 3

BOOK VALUE PER SHARE–ORDINARY 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

E ND OF C HAPTER 13