1. Chapter 11 Stockholders’ equity
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2. Corporations A corporation is a legal entity.
The founders of a corporation prepare and file the articles of incorporation which define its structure, purpose, and authorized stock.
If approved by the government, the founders next elect a Board of Directors and adopt the corporation’s bylaws.
In order to obtain the funds needed to begin operations, the corporation issues (sells) capital stock to stockholders (owners of the corporation).
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3. Corporate Stakeholders
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4. The Corporate Form—Advantages
Separate legal entity
Limited liability
Transferability of ownership
Continuity of existence
Capital raising capability
Capital raising capability is primarily the result of two of the other advantages, specifically limited liability and transferability of ownership.
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5. The Corporate Form—Disadvantages
Organization costs
Taxation
Regulation and supervision
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6. Select the correct answer.
Each of the following is an advantage of the corporate form except:
Limited liability
Transferability of ownership
.Taxation
Capital raising ability
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7. Par Value Stock (also called face value or stated value)
Of little significance today
May have some legal implications concerning minimum issuance prices
Legal capital—the minimum amount of contributed capital that must be maintained
Usually set at a very low amount such as $0.01 (1 cents)
Not related to market value or issuance price
No-par value stock is permitted in many states meaning that companies can issue stock with no-par value.
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8. Capital Stock Authorized shares
The maximum number of shares that may be issued
Issued shares
Shares that have been sold to stockholders
Outstanding shares
Issued shares that have been issued and remain in the hands of stockholders rather than having been purchased back by the corporation
Treasury Stock are those shares acquired or reacquired by a corporation
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9. Common Stock The most basic type of capital stock
If only one type present it will be common stock
Has voting rights on corporate matters
Shares in the corporation’s net income through dividends
Has a preemptive right to purchase new shares to maintain proportionate ownership in the corporation
Has a residual claim on corporate assets in the event of a liquidation
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10. Preferred Stock Dividend preference Asset distribution preference
Entitled to a dividend before common stockholders
If cumulative, then any dividends in arrears must be paid to preferred stockholders prior to common shareholders receiving any dividends
(Dividends in arrears are dividends omitted in past years to preferred stockholders)
Asset distribution preference
Preference over common stockholders in corporate liquidations
Other potential features
Convertible into common stock
Participating in special dividends
Callable by the corporation
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11. Select the correct answer.
Which of the following applies to common stock relative to preferred stock?
.Voting rights
Shares in the corporation’s net income
Dividend preference
Both A. (voting rights), and
B. (shares in the corporation’s net income)
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12. the accounting for issuances of capital stock.
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13. Stock Issuance
Assume Lester Corporation issues 100 shares of $100 par value preferred stock for $13,000 and 100 shares of no-par (and no stated value) common stock for $3,000.
Cash
13,000
Preferred stock
10,000
Paid-in capital in excess of par value—preferred stock
3,000
To record issuance of preferred stock.
Cash
3,000
Common stock
To record issuance of no-par common stock.
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14. Learning Objective 5
Stock splits.
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15. Stock Splits
A forward stock split increases the number of outstanding shares and proportionately reduces the price of the stock.
No stockholder equity accounts are changed.
For example, Savanna Corporation issues a 2 for 1 stock split on its 2,000 outstanding $1 par common stock. [Common Stock account = $2,000]
Following the split Savanna will have 4,000 outstanding shares at $0.50 par-value common shares. [Common Stock account = $2,000]
A reverse stock split increases the companies par value and reduces the outstanding shares.
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16. Learning Objective 6
Treasury stock.
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17. Treasury Stock
Treasury stock are shares of stock that the corporation owns; stock that is acquired for purposes other than retiring them. (for purposes such as reissuing them to officers or employee stock sharing plans)
Kitzer Corporation acquires 200 shares of its common stock for $15/share.
Kitzer later resells 100 shares of its treasury stock for $20/share.
Reported as a reduction of equity on the balance sheet.
Treasury stock
3,000
Cash
To record the purchase of 200 shares of treasury stock.
Cash
2,000
Treasury stock
1,500
Paid-in capital—treasury stock
500
To record the sale of 100 shares of treasury stock.
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18. Cash Dividends
Dividends represent a distribution of assets or shares of stock from a corporation to its shareholders.
Cash is the most common form of dividend asset distribution.
Dividends are not required to be paid by a corporation, however they become a liability once they are declared.
Note that dividends are not considered an expense and do not appear on the income statement, instead they are a direct reduction of retained earnings.
Cash dividends
1,000
Cash
To record payment of cash dividends.
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19. Stock Dividends
Dividends may also take the form of a stock distribution.
While the recipient of a stock dividend does receive additional shares of stock, their proportionate ownership in the corporation, and therefore their wealth, does not change.
Stock dividends are accounted for as a transfer of a portion of retained earnings to the paid-in capital account, therefore total stockholders’ equity remains unchanged.
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20. the statement of retained earnings and the statement of stockholders’ equity.
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21. Statement of Retained Earnings
The statement of retained earnings provides an analysis of the changes in the retained earnings account for a given accounting period.
Typical changes to the retained earnings account are the addition of net income or the reduction of a net loss, and a reduction for dividends.
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22. Statement of Stockholders’ Equity
Most corporations integrate the information regarding retained earnings into a more comprehensive statement of stockholders’ equity.
The statement of stockholders’ equity shows an analysis of all stockholders’ equity accounts for the accounting period.
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23. the return on common stockholders’ equity, dividend yield, and dividend payout ratio
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24. Analyzing Stockholders’ Equity
A financial ratio of particular interest to common stockholders is the return on common stockholders’ equity.
This ratio measures the profitability of the common stockholders’ investment in the company.
The higher the ratio, the higher the profitability of the common stockholders’ investment in the corporation.
Return on common stockholders’ equity =
(Net income – Preferred stock dividends)
Average common stockholders’ equity
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25. Analyzing Dividends Policy
Some investors prefer receiving current income in the form of cash dividends and some investors rather the corporation not pay dividends so that the stock will appreciate more.
One measure of the dividend policy of a corporation is the dividend yield.
The dividend yield measures the rate of return in cash dividends from an investment in the company’s common stock.
Dividend yield =
Annual dividend per share
Market price per share
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26. Analyzing Dividends Policy
The dividend payout ratio measures the percentage of the net income available to common shareholders that is paid out as dividends.
Growth companies typically have low dividend payout ratios since they would rather use their cash to fund additional growth, while more mature companies, lacking growth opportunities, tend to have higher dividend payout ratios.
Dividend payout ratio =
Annual dividend per share
Earnings per share
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27. Select the correct answer
Norma Co. reports the following for the current year: Net income $100,000; Average stockholders’ equity $400,000; Preferred dividends paid $20,000; Common dividends paid $10,000. Compute Norma’s ROE.
25%
.20%
17.5%
30%
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28. Corporate Social Responsibility
CSR is sometimes seen as a competition between stockholders and other corporate stakeholders.
Many companies now see CSR in a strategic sense where doing good can lead to doing well.
In other words, CSR can lead to additional profits creating a win-win situation
Doing Well
Doing Good
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