10-1 Contributed Capital Three general forms of business Sole proprietorships Partnerships Corporations Stock—authorized, issued, & outstanding.
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10-1 Contributed Capital Three general forms of business Sole proprietorships Partnerships Corporations Stock—authorized, issued, & outstanding Stock—authorized, issued, & outstanding Common stock Common stock Preferred stock Preferred stock
10-2 Stock—Authorized Issued and Outstanding Authorized shares Maximum # of shares of stock a corp is authorized to offer to the public Specified in the corporate charter Issues shares Shares of stock that have been offered and sold to shareholders Outstanding shares Issued shares of stock owned by shareholders rather than the corp Treasury stock Stock that a corp buys back from shareholders Outstanding shares = shares issued less treasury stock
10-3 Common Stock Owners’ rights Vote for board of directors Share in pro rata portion of corp profits Dividends Share in assets in bankruptcy after creditors and preferred shareholders Right to acquire more shares when corp issues new shares Pre-emptive right Par value Arbitrary amount, usually small, and has no real meaning in today’s business environment Not required by most states Excess of stock issue proceeds above par value increases Additional Paid-in Capital account
10-4 Preferred Stock Owners receive dividends before common shareholders Priority claim on assets over common shareholders in bankruptcy Usually do not have voting rights
10-5 Cash Dividends Distributions of earnings to owners Board of directors decide amount and dates of dividend distributions Important dividend-related dates Important dividend-related dates Distribution of dividends between common and preferred shareholders Distribution of dividends between common and preferred shareholders Dividend payment example Dividend payment example
10-6 Important Dividend-related Dates Declaration date Date Board of directors decides it will pay a dividend Legal obligation to pay dividends is created, giving rise to Dividends Payable and increases Dividends (contra-equity) Date of record All shareholders on date of record entitled to receive dividends Purchaser of stock after this date will not receive the dividend declared Payment date Date dividend actually paid, Decreases cash and Dividends Payable
10-7 Distribution of Dividends Cumulative preferred stock Shareholders must receive any past, unpaid dividends (dividends in arrears) before a company can pay current dividends to common shareholders Noncumulative preferred stock Past, unpaid dividends do not accumulate to preferred shareholders
10-8 Caffinators Coffee (CC) has the following stock outstanding on 1/1/2008 100 shares of 8% 100 par, cumulative preferred stock 20,000 shares of $1/share common stock CC has not paid a dividend since 2005 On 10/31/08 CC declared $5,000 annual dividends to be paid 11/15/08 to shareholders of record on 10/15/08
10-9 Annual dividend for preferred shareholders 100 shares x 8% x $100 = $800 Total dividends payable to preferred shareholders 3 years (2006-2008) x $800 = $2,400 Dividends payable to common shareholders $5,000 - $2,400 = $2,600 Dividend per share $2,600/20,000 shares = $0.13/share
10-10 Why Firms Buy Their Own Stock Have stock to distribute to employees for compensation plans Use excess cash to increase shareholder wealth To return cash to the shareholders if they choose to sell shares to the firm More flexible for firm and shareholders than paying cash dividends Reduce equity Treasury stock is contra-equity account Increase the company’s earnings per share (EPS) EPS = Net income / # shares outstanding
10-11 Accounting for Treasury Stock Purchase Treasury stock accounted for at cost Separate treasury stock accounts for common and preferred stock No gain or loss reported on purchase or sale of treasury stock If a firm sells its treasury stock for more than the purchase price, in which account would it go? Why?
10-12 Selling Treasury Stock Treasury stock account reduced by the cost of the shares sold How do you reduce a contra-equity account? Sales price > acquisition cost Excess increases Paid-in-capital-TS Sales price < acquisition cost Decrease Paid-in-capital account
10-13 Reporting Treasury Stock Treasury stock, a contra-equity account, is reported as a reduction to stockholders equity Why aren’t gains and losses reported on the income statement?
10-14 Stock Dividends and Stock Splits Stock dividends Distribution of stock instead of cash to shareholders Capitalizing earnings Like using retained earnings to issue new shares Reduce Retained Earnings Increase Common Stock Increase Additional Paid in Capital Stock split Split original shares into two or more shares Why would a firm split its stock? No accounts are affected by stock split Par value decreases so total par value is the same ([par value per share] x [# of shares]) Total shares outstanding increases
10-15 Stock Dividends and Stock Splits CC did a 5 for 1 stock split on its 500 shares of $1 par stock How many shares will be outstanding after the stock split? What will the new par value be? If market value before the split was $10/share, what should be the market value/share after the split? Is this usually the case?
10-16 Retained Earnings What is the affect of the following on retained earnings? Net income Net loss Dividends Statement of retained earnings Shows activity in retained earnings for the period
10-17 Financial Statement Analysis Return on equity (ROE) Measures return to common shareholders Net income – preferred dividends _ Average common shareholders’ equity Why are preferred dividends subtracted from net income? How does ROA compare to ROE? Numerator? Denominator?
10-18 Financial Statement Analysis Earnings per share (EPS) Measures return to common shareholders Net income – preferred dividends _ Weighted avg # shares outstanding Basic earnings per share Assumes no securities that could be converted into common stock are converted Earnings per share (continued) Diluted earnings per share Assumes all securities that could be converted into common stock are converted
10-19 Business Risk Control and Ethics Risks faced by owners Stock may decrease in value or become worthless How can investors reduce the risk of stock ownership? Why do some companies choose to be publicly traded?