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 Ownership of a Corporation Voting (in person or by proxy). Proportionate distributions of profits. Proportionate distributions of assets in a liquidation. Rights Stockholders’
McGraw-Hill/Irwin Slide 4 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 5 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 6 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate
McGraw-Hill/Irwin Slide 7 Common Stock Dividend set by board of directors Basic voting stock Ranks after preferred stock
McGraw-Hill/Irwin Slide 8 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 9 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 10 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 11 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 12 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 13 Sale and Issuance of Capital Stock Prepare the journal entry to record this transaction. On July 6, Kroger issued 100,000 shares of $0.01 par value common stock for $20 per share. 100,000 shares × $20 per share = $2,000,000 100,000 shares × $0.01 par value = $1,000
McGraw-Hill/Irwin Slide 14 Stock Issued for Employee Compensation Employee Employee compensation package includes salary and stock options. Stock options allow employees to purchase stock from the corporation at a predetermined, fixed price. If Kroger does not have new stock to issue when the stock options are exercised, then.. Kroger
McGraw-Hill/Irwin Slide 15 Repurchase of Stock Kroger buys its own stock in the secondary market. (Treasury stock) Stockholders Management compensation package includes salary and stock options. Kroger Management Stock options allow employees to purchase stock from the corporation at a predetermined, fixed price.
McGraw-Hill/Irwin Slide 16 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 17 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 18 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 19 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 20 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. In 2009, Kroger paid a dividend of $0.36 per share and the market price of a share of Kroger stock was $22. Dividend Yield $0.36 per share $22 per share = = 1.6%
McGraw-Hill/Irwin Slide 21 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 22 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 23 23 Stock Splits in the Form of Stock Dividends Accounting is the same as for a large stock dividend
McGraw-Hill/Irwin Slide 24 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate
Slide 25 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 26 Dividends on Preferred Stock
McGraw-Hill/Irwin Slide 27 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 =