1. Introduction to Using Financial Accounting Information, 7/e
Stockholders’
Equity
Statements and
the Annual Report 11
PowerPoint Author: Catherine Lumbattis
COPYRIGHT © 2011 South-Western/Cengage Learning

2. Advantages of Stock vs. Debt Financing
Flexibility
Exchanges facilitates trading
Return on investment
Disadvantages
Advantages
LO1

3. Disadvantages of Stock vs. Debt Financing
Control
Tax consequences
Impact on ratios
Disadvantages
Advantages

4. Expanded Accounting Equation
Assets = Liabilities + Owners’ Equity
Assets = Liabilities + Stockholders’ Equity
Contributed
Capital
Retained
Earnings

5. Retained Earnings Connects the Income Statement and Balance Sheet
Revenues $ xxx
Less: Expenses xxx
Net Income $ Net Inc
Statement of Retained Earnings
Retained Earnings, Beginning Balance $ xxx
Add: Net Income inc
Deduct: Dividends xxx
Retained Earnings, Ending Balance $ end
Balance Sheet
Total Assets $ xxx
Total Liabilities $ xxx
Stockholders’ Equity xxx
Retained Earnings end
Total Liabilities and Stockholders' Equity $ xxx

6. Contributed Capital Common Stock Basic stock of corporation
Normally carries voting rights
Preferred Stock
Optional
Tailored to meet specific needs

7. Par Value “Legal capital” Arbitrary amount stated on stock certificate
Also called “stated value”

8. Additional Paid-in Capital
Amount received in excess of par when stock was originally issued

9. Retained Earnings
Net income retained in the business (not paid out as dividends) since its inception
Reinvested in a variety of assets (not necessarily liquid or cash)

10. IFRS and Stockholders’ Equity
International standards differ from U.S. standards for those items that have attributes of both debt and equity
Convertible stock must be separated into a part that is presented in the Liability section and another part that is presented as Stockholders’ Equity section of the Balance Sheet

11. Preferred Stock Can tailor to specific needs of firm
Stated dividend rate
Percentage of the stock’s par value
Per-share amount
Often carries dividend preference over common stock
LO2

12. Stock Issued for Cash Example: Common Stock $ 10,000
1,000 shares of
$10 par value stock
sold for $15 per share
Common Stock $ 10,000
( $10 par value × 1,000 shares)
Additional Paid-In Capital $5,000
(($15 – $10) × 1,000 shares)
Example:
LO3

13. Recording Issuance of Stock

14. Stock Issued for Noncash Consideration
Record at fair market value of consideration given or received, whichever is more readily determinable
Building
Common or
Preferred
Stock

15. Treasury Stock Company buys back its own stock
Contra-equity account (debit balance)
Not outstanding (no voting rights)
LO4

16. Presentation of Treasury Stock
Common stock, $10 par value, 1,000
shares issued, 900 outstanding $10,000
Additional paid-in capital—Common 12,000
Retained earnings 15,000
Total contributed capital and
retained earnings 37,000
Less: Treasury stock, 100 shares
at cost ($25 per share) ,500
Total stockholders’ equity $34,500

17. Retirement of Stock
Repurchase of stock and is not intended to be resold
A proportional amount of the related Stock and Paid-In Capital accounts must be eliminated

18. Cash Dividends Paid to on Date of declaration Stockholders
on date of record
Payment
date
LO 5

19. Dividend Requirements
Sufficient cash
Positive retained earnings

20. Annual Dividend Amount
Dividend Payout Ratio
Annual Dividend Amount
Annual Net Income
The % of
earnings paid
as dividends

21. Dividends (1) dividends declared (2) dividends paid 12/31/10 1/15/11
Journal entry required to record:
(1) dividends declared
(2) dividends paid
12/31/10
1/15/11
Reduce
retained
earnings
Pay
dividends

22. Recording Cash Dividends
Declare a dividend:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues – Expenses = Net Equity Income
Dividends Retained Payable Earnings
Payment of Dividend:
Cash Dividend Payable

23. Allocation of Common and Preferred Cash Dividends
Distribute dividends in arrears, if any, to preferred
Distribute current year’s dividends to preferred
Distribute remainder to common (or to both if preferred is participating)

24. Stock Dividends
Issue of additional shares proportionately to existing stockholders
Reasons:
Insufficient cash
Market price reduction
Nontaxable to recipients
LO6

25. Small Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Additional paid-in capital—Common ,000
Retained earnings ,000
Total stockholders’ equity $150,000
Before Dividend
Assume Shah Company declares a 10% stock dividend;
500 $40 per share market value

26. Small Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000
Additional paid-in capital—Common , ,000
Retained earnings , ,000
Total stockholders’ equity $150,000 $150,000
Before After + + –
$40 market value deducted from retained earnings; allocated between Common Stock (initially Common Stock Dividend Distributable) and Additional
Paid-In Capital.

27. Large Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Additional paid-in capital—Common ,000
Retained earnings ,000
Total stockholders’ equity $150,000
Before Dividend
Assume Shah Company declares 100% stock dividend

28. Large Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par, 10,000 shares $ 50,000 $100,000
Additional paid-in capital—Common 30,000 30,000
Retained earnings , ,000
Total stockholders’ equity $150,000 $150,000
Before After + –
Dividend deducted from retained earnings and recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected.

29. Stock Splits Results in additional issuance of shares
Reduces par value per share
No change in Stockholders’ Equity accounts
LO 7

30. Stock Splits Not recorded in accounts
Reduce market price per share and make the stock more accessible to a wider range of investors
Disclosed in notes

31. 2-for-1 Stock Split Example
Stockholders’ Equity:
Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Additional paid-in capital—Common ,000
Retained earnings ,000
Total stockholders’ equity $150,000
Before Split
Assume Shah Company declares 2-for-1 stock split

32. 2-for-1 Stock Split Example
Before After
Stockholders’ Equity:
Common stock, $5 par, 10,000 shares $ 50,000 $ 50,000
Additional paid-in capital—Common , ,000
Retained earnings , ,000
Total stockholders’ equity $150,000 $150,000
All accounts are unchanged
Only disclosures are affected

33. Statement of Stockholders’ Equity
Explains all the reasons for the difference between the beginning and the ending balance of each of the accounts in the Stockholders’ Equity category of the balance sheet
Statement of Retained Earnings
Beginning retained earnings
Add: Net earnings
Subtract: Dividend(s) declared
= Ending retained earnings
LO8

34. Statement of Comprehensive Income
For Year Ended December 31, 20XX
Net income xxx
Foreign currency translation adjustment xxx
Unrealized holding gains/losses xxx
Minimum pension liability adjustment xxx
Other comprehensive income xxx
Comprehensive income xxx
Income Statement
For Year Ended December 31, 20XX
Revenues xxx
Expenses xxx
Other gains and losses xxx
Income before tax xxx
Income tax expense xxx
Net income xxx
Comprehensive income – the total change in net assets from all sources except investments by or distributions to the owners

35. Analyzing Owners’ Equity
Book value per share
Rights that each share of common stock has to the net assets of corporation
Market value per share
Price at which stock is currently selling
LO9

36. Total Stockholders’ Equity Number of Shares of Stock Outstanding
Book Value per Share
Total Stockholders’ Equity
Number of Shares of Stock Outstanding
Amount per share of net assets to which the company’s common stockholders have the rights
Does not indicate the price that should be paid by those who want to buy or sell the stock on the stock exchange

37. Market Value per Share
The selling price of the stock as indicated by the most recent transactions
Usually stated in a 52-week high and low
More meaningful measure of the value of the stock than book value
52-week Daily
High Low Sym High Low Last Change
GM (1.13%)

38. Stockholders’ Equity Items on the Statement of Cash Flows
Operating Activities
Net income xxx
Investing Activities
Financing Activities
Issuance of stock
Retirement or repurchase of stock –
Payment of dividends –
LO10

39. Unincorporated Businesses
Appendix
Accounting Tools:
Unincorporated Businesses

40. Sole Proprietorships
Not a separate legal entity so owner has unlimited liability
Must keep personal and business records separate
Business income is declared on the owner’s personal tax return and taxed at personal tax rate
LO11

41. Owners’ drawing or withdrawal accounts are contra-equity accounts
Sole Proprietorship
Owner withdraws an auto from business:
Owners’ drawing or withdrawal accounts are contra-equity accounts

42. Sole Proprietorships
Drawing or withdrawal and income summary accounts are closed to the owner’s capital account
Owner’s Equity section of the balance sheet consists of the capital account:
Beginning balance $
Plus: Investments 10,000
Net Income ,000
Less: Withdrawals (6,000)
Ending balance $ 8,000

43. Partnerships Unlimited liability
Limited life – partnership agreements can and do end
Not taxed as a separate entity

44. Partnerships Distribution of income: Equal distribution Stated ratio
Other allocation
For example, based on salaries, interest on invested capital, and a stated ratio

45. End of Chapter 11