Reporting and Interpreting Owners’ Equity Chapter 11 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2 Understanding The Business Simple to become an owner Easy to transfer ownership Provides limited liability Advantages of a corporation Because a corporation is a separate legal entity, it can... Own assets. Sue and be sued. Incur liabilities. Enter into contracts.

McGraw-Hill/Irwin Slide 3 Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. Authorized shares are the maximum number of shares of capital stock that can be sold to the public. Authorized, Issued, and Outstanding Shares

McGraw-Hill/Irwin Slide 4 Unissued Shares Treasury Shares Outstanding Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders. Authorized, Issued, and Outstanding Shares

McGraw-Hill/Irwin Slide 5 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate

McGraw-Hill/Irwin Slide 6 Common Stock Dividend set by board of directors Basic voting stock Ranks after preferred stock

McGraw-Hill/Irwin Slide 7 Par Value and No-par Value Stock Legal capital is the amount of capital, required by the state, that must remain invested in the business. Par Value Nominal value Legal capital

Slide 8 Par Value Market Value  Par Value and No-par Value Stock Some states do not require that a par value be stated in the charter. Some states do not require a par value to be stated in the charter.

McGraw-Hill/Irwin Slide 9 Accounting for Capital Stock Two primary sources of stockholders’ equity Retained earnings Contributed capital Common stock, par value Capital in excess of par value

McGraw-Hill/Irwin Slide 10 Sale and Issuance of Capital Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public. Subsequent sales of new stock to the public. Kroger issues new stock. Kroger

McGraw-Hill/Irwin Slide 11 Secondary Markets Transactions between two investors that do not affect the corporation’s accounting records. I’d like to sell some of my Kroger stock. I’d like to buy some of your Kroger stock.

McGraw-Hill/Irwin Slide 12 On May 1, Kroger reacquired 15,000 shares of its common stock at $20 per share. The journal entry for May 1 is.... Treasury Stock When stock is reacquired, the corporation records the treasury stock at cost. Treasury stock has no voting or dividend rights. Treasury stock is not an asset. It is a contra equity account.

McGraw-Hill/Irwin Slide 13 10,000 shares × $30 = $300,000 10,000 shares × $20 cost = $200,000 On December 3, Kroger reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is... Treasury Stock

McGraw-Hill/Irwin Slide 14 Dividends on Common Stock Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. Declaration date Board of directors declares the dividend. Record a liability.

Slide 15 Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) Dividend Dates Date of Payment Record the dividend payment to stockholders.

McGraw-Hill/Irwin Slide 16 Dividend Yield Ratio Dividend Yield Dividends Per Share Market Price Per Share = This ratio is often used to compare the dividend-paying performance of different investment alternatives. Currently, Kroger pays a dividend of $0.60 per share and the market price of a share of Kroger stock is about $35. Dividend Yield $0.60 per share $35 per share = = 1.7%

McGraw-Hill/Irwin Slide 17 Stock Dividends Distribution of additional shares of stock to owners. No change in total stockholders’ equity. All stockholders retain same percentage ownership. No change in par values. Stock dividend < 25% Record at current market value of stock. Small Stock dividend >/= 25% Record at par value of stock. Large

McGraw-Hill/Irwin Slide 18 Stock splits change the par value per share, but the total par value is unchanged. Stock Splits Assume that a corporation had 3,000 shares of $2 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change

Slide Stock Splits in the Form of Stock Dividends  Accounting is the same as for a large stock dividend

McGraw-Hill/Irwin Slide 20 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate

Slide 21  Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.  Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.  Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.  Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. Dividends on Preferred Stock If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.

McGraw-Hill/Irwin Slide 22 Dividends on Preferred Stock

McGraw-Hill/Irwin Slide 23 Earnings Per Share (EPS) Assume Kroger’s income for 2011 is $78,705,000 and the average number of shares outstanding is 86,260,000. Earnings per share is probably the single most widely watched financial ratio. $78,705,000 86,260,000 Shares EPS = = $0.91 per share *If there are preferred dividends, the amount is subtracted from net income. Net Income* Average Number of Shares Outstanding for the Period EPS =

McGraw-Hill/Irwin Slide 24 Focus on Cash Flows

© 2008 The McGraw-Hill Companies, Inc. End of Chapter 11