1. Financial Accounting, 3e Weygandt, Kieso, & Kimmel
Prepared by
Gregory K. Lowry
Mercer University
Marianne Bradford
The University of Tennessee
John Wiley & Sons, Inc. 1

2. CHAPTER 12 CORPORATIONS: ORGANIZATION, STOCK TRANSACTIONS, DIVIDENDS, AND RETAINED EARNINGS
After studying this chapter, you should be able to:
1 Identify and discuss the major characteristics of a corporation.
2 Record the issuance of common stock.
3 Explain the accounting for treasury stock.
4 Differentiate preferred stock from common stock.

3. CHAPTER 12 CORPORATIONS: ORGANIZATION, STOCK TRANSACTIONS, DIVIDENDS, AND RETAINED EARNINGS
After studying this chapter, you should be able to:
5 Prepare the entries for cash dividends and stock dividends.
6 Identify the items that are reported in a retained earnings statement.
7 Prepare a comprehensive stockholders’ equity section.

4. PREVIEW OF CHAPTER 12
CORPORATIONS: Organization, Stock Transactions, Dividends, and Retained Earnings
Corporate Organization and Stock Transactions
Cash dividends
Stock dividends
Stock splits
Dividends
Retained Earnings
Retained earnings restrictions
Prior period adjustments
Retained earnings statement
Stockholders’ Equity Presentation and Analysis
Characteristics
Forming a corporation
Corporate capital
Common stock issues
Treasury stock
Preferred stock
Presentation
Analysis

5. THE CORPORATE FORM OF ORGANIZATION
2 common bases that are used to classify corporations are by purpose and ownership.
A corporation may be organized for the purpose of making a profit, or it may be nonprofit.
Classification by ownership distinguishes between publicly held and privately held corporations.
1 A publicly held corporation may have thousands of stockholders and its stock is traded regularly on a national securities market.
2 A privately held corporation (or closely held corporation) usually has only a few stockholders and does not offer its stock for sale to the general public. 2

6. CHARACTERISTICS OF A CORPORATION
A number of characteristics distinguish a corporation from proprietorships and partnerships.
The most important of these characteristics are:
1 Separate legal existence – As an entity separate and distinct from its owners, the corporation acts under its own name rather than in the name of its stockholders.
2 Limited liability of stockholders – Since a corporation is a separate legal entity, creditors ordinarily have recourse only to corporate assets to satisfy their claims.
3 Transferable ownership rights – Ownership of a corporation is shown in share of capital stock, which are transferable units. 3

7. CHARACTERISTICS OF A CORPORATION
4 Ability to acquire capital – It is generally relatively easy for a corporation to obtain capital through the issuance of stock.
5 Continuous life – The life of a corporation is stated in its charter; it may be perpetual or it may be limited to a specific number of years.
6 Corporate management – Although stockholders legally own the corporation, they manage the corporation indirectly through a board of directors they elect.
7 Government regulations – A corporation is subject to numerous state and federal regulations.
8 Additional taxes – Corporations, unlike proprietorships and partnerships, must pay federal and state income taxes as a separate legal entity. 4

8. ILLUSTRATION 12-1 CORPORATION ORGANIZATION CHART
Stockholders
Board of Directors
President
Vice-President Finance
Vice-President Marketing
Corporate Secretary
Vice-President Production
Vice-President Personnel
Treasurer
Controller
The president is the chief The controller’s executive officer (CEO) responsibilities include with direct responsibility maintaining the for managing the business accounting records, The chief accounting maintaining an adequate officer is the controller system of internal The treasurer has custody control, and of the corporation’s funds preparing financial and is responsible for statements, tax returns, maintaining the and internal reports. company’s cash position. 5

9. ILLUSTRATION 12-2 ADVANTAGES AND DISADVANTAGES OF A CORPORATION
Separate legal existence Corporation management – separation of Limited ownership ownership and management Transferable ownership rights Government regulations Ability to acquire capital Additional taxes Continuous life Corporation management – professional managers 6

10. FORMING A CORPORATION
The corporation, once it receives its charter from the state of incorporation, must establish by-laws for conducting its affairs.
Regardless of the number of states in which a corporation has operating divisions, it is incorporated in only 1 state.
Costs incurred in the formation of a corporation are called organization costs.
Such costs are capitalized by debiting an intangible asset entitled Organization Costs.
Most corporations amortize these costs over an arbitrary period of time, up to a maximum of 40 years. 7

11. CORPORATE CAPITAL
Owners’ equity in a corporation is identified as stockholders’ equity, shareholders’ equity, or corporate capital.
The stockholders’ equity section of a corporation’s balance sheet consists of:
1 paid-in (contributed) capital and
2 retained earnings (earned capital).

12. ILLUSTRATION 12-3 OWNERSHIP RIGHTS OF STOCKHOLDERS
1 To vote in election for board of directors at annual meeting. To vote on actions that require stockholder approval.
2 To share the corporate earnings through receipt of dividends.
3 To keep same percentage ownership when new shares of stock are issued (preemptive right).
4 To share in assets upon liquidation, in proportion to their holdings. Called a residual claim because owners are paid with assets remaining after all claims have been paid.
Dividends
10%
Before
After
New shares issued
TOR Corp.
Lenders
Stockholders
Going out of business
Creditors 9

13. CORPORATE CAPITAL
When a corporation has only one class of stock, it is identified as common stock.
A printed or engraved form known as a stock certificate serves as proof of stock ownership.
The amount of stock that a corporation is authorized to sell is indicated in its charter.
The total amount of authorized stock at the time of incorporation usually anticipates both initial and subsequent capital needs of a company. 17

14. CORPORATE CAPITAL
A corporation must choose whether to issue common stock directly to investors or indirectly through an investment banking firm (brokerage house) that specializes in informing prospective investors about securities.
The investment banking firm may agree to underwrite an entire indirect stock issue.
Under such an arrangement, the investment banker buys the stock from the corporation at a stipulated price and resells the shares to investors.
The prices set by the marketplace determine a stock’s market value and tend to follow the trend of a company’s earnings and dividends.

15. ILLUSTRATION 12-5 STOCK MARKET PRICE INFORMATION
Kellogg / / / / / /16
A recent listing for Kellogg is shown above.
These numbers indicate that:
1 the high and low market prices for the last 52 weeks have been 42 1/4 and 28 1/2;
2 the trading volume for one day was 433,000 shares;
3 the high, low, and closing prices for that date were /16, 34 7/16, and 34 5/8, respectively; and
4 the net change for the day was a decrease of -13/16 per share. 27

16. CORPORATE CAPITAL
Capital stock that has been assigned a value per share in the corporate charter is par value stock.
Par value is not indicative of the worth or market value of the stock, but does represent the legal capital per share that must be retained in the business for the protection of corporate creditors.
No-par value stock is capital stock that has not been assigned a value in the corporate charter.
In many states the board of directors is permitted to assign a stated value to the no-par shares, which becomes the legal capital per share.

17. ACCOUNTING FOR COMMON STOCK ISSUES
The primary objectives in accounting for the issuance of common stock are to
1 identify the specific sources of paid-in capital and
2 maintain the distinction between paid-in capital and retained earnings.
Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par for cash. The entry to record this transaction is:
1, ,000

18. ACCOUNTING FOR COMMON STOCK ISSUES
Hydro-Slide, Inc. issues an additional 1,000 shares of the $1 par value common stock for cash at $5 per share. The entry to record this transaction is:
5, , ,000 10

19. ILLUSTRATION 12-7 STOCKHOLDERS’ EQUITY – PAID-IN CAPITAL IN EXCESS OF PAR VALUE
The total paid-in capital from these two transactions is $6,000, and the legal capital is $2,000. If Hydro-Slide, Inc. has retained earnings of $27,000, the stockholders’ equity section is as follows:
Stockholders’ equity Paid-in capital Common stock $ 2, Paid-in capital in excess of par value , Total paid-in capital , Retained earnings , Total stockholders’ equity $ 33,000

20. ACCOUNTING FOR COMMON STOCK ISSUES
When no-par common stock has a stated value, the entries are similar to those for par value stock. The stated value represents legal capital and therefore is credited to Common Stock. When the selling price of no-par stock exceeds stated value, the excess is credited to Paid-in Capital in Excess of Stated Value. Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par stock at $8 per share for cash. The entry is:
40, , ,000

21. ACCOUNTING FOR COMMON STOCK ISSUES
Paid-in Capital in Excess of Stated Value is reported as part of paid-in capital in the stockholders’ equity section. When no-par stock does not have a stated value, the entire proceeds from the issue become legal capital and are credited to Common Stock. If Hydro-Slide does not assign a stated value to its no-par stock, the issuance of the 5,000 shares at $8 per share for cash is recorded as follows:
40, ,000 12

22. ACCOUNTING FOR COMMON STOCK ISSUES
Stock may be issued for services or for noncash assets.
A question arises in such cases as to the cost that should be recognized in the exchange transaction.
To comply with the cost principle in a noncash transaction, cost is the cash equivalent price.
Subsequently, cost is either the fair market value of the consideration given up or the fair market value of the consideration received, whichever is more clearly determinable.

23. ACCOUNTING FOR COMMON STOCK ISSUES
The attorneys for The Jordan Company agrees to accept 4,000 shares of $1 par value common stock in payment of their bill of $5,000 for services performed in helping the company to incorporate. There is no established market price for the stock at the time of the exchange. Since the market value of the consideration received – $5,000 – is more clearly evident, the appropriate entry is:
5, , ,000

24. ACCOUNTING FOR COMMON STOCK ISSUES
Athletic Research Inc. is a publicly held corporation whose $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. On the basis of these facts the market price of the consideration given is the most clearly evident value. The par or stated value of the stock is never a factor in determining the cost of the assets received. The entry is:
80, , ,000 13

25. ACCOUNTING FOR TREASURY STOCK
Treasury stock is a corporation’s own stock that has been issued, fully paid for, and reacquired by the corporation but not retired.
A corporation may acquire treasury stock for the reasons listed below.
1 Reissue the shares to officers and employees under bonus and stock compensation plans.
2 Increase trading of the company’s stock in the securities market in the hopes of enhancing its market value.
3 Have additional shares available for use in the acquisition of other companies.
4 Reduce the number of shares outstanding and thereby increase earnings per share.
5 Rid the company of disgruntled investors, perhaps to avoid a takeover. 14

26. ILLUSTRATION 12-8 STOCKHOLDERS’ EQUITY WITH NO TREASURY STOCK
The cost method is normally used in accounting for treasury stock. Under the cost method, Treasury Stock is debited at the price paid to reacquire the shares, and the same amount is credited to Treasury Stock when the shares are sold. On January 1, 2001, the stockholders’ equity section of Mead, Inc. has 100,000 shares of $5 par value common stock outstanding (all issued at par value) and Retained Earnings of $200,000.
Stockholders’ equity Paid-in capital Common stock, $5 par value, 100, shares issued and outstanding $ 500, Retained earnings , Total stockholders’ equity $ 700,000

27. ACCOUNTING FOR TREASURY STOCK
On February 1, 2001, Mead acquires 4,000 shares of its stock at $8 per share. Treasury Stock is debited for the cost of the shares purchased. The entry is as follows:
32, ,000 15

28. ILLUSTRATION 12-9 STOCKHOLDERS’ EQUITY WITH TREASURY STOCK
Treasury Stock is deducted from total paid-in capital and retained earnings in the stockholders’ equity section. Both the number of shares issued (100,000) and the number of shares in the treasury (4,000) are disclosed. The difference is the number of shares of outstanding stock (96,000). The term outstanding stock means the number of shares of issued stock that are being held by stockholders. The stockholders’ equity section of Mead, Inc., after purchase of treasury stock, is as follows:
Stockholders’ equity Paid-in capital Common stock, $5 par value, 100,000 shares issued and 96,000 shares outstanding $ 500, Retained earnings , Total paid-in capital and retained earnings , Less: Treasury stock (4,000 shares) , Total stockholders’ equity $ 668,000 16

29. ACCOUNTING FOR TREASURY STOCK
Treasury stock is usually sold or retired and the accounting for its sale is different when it is sold above cost than when it is sold below cost. If the selling price of the treasury shares is equal to cost, the sale of the shares is recorded with a debit to Cash and a credit to Treasury Stock. When the selling price of the shares is greater than cost, the difference is credited to Paid-in Capital from Treasury Stock. Assume that $1,000 shares of treasury stock of Mead, Inc. previously acquired for $8 per share, are sold at $10 per share on July 1. The entry is:
10, , ,000

30. ACCOUNTING FOR TREASURY STOCK
The $2,000 credit in the July 1 entry is not made to Gain on Sale of Treasury Stock for 2 reasons:
1 Gains on sales occur when assets are sold and treasury stock is not an asset.
2 A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.
Paid-in capital arising from the sale of treasury stock should therefore not be included in the measurement of net income.
Paid-in Capital from Treasury Stock is listed separately on the balance sheet as part of paid-in capital.

31. ACCOUNTING FOR TREASURY STOCK
When treasury stock is sold below its cost, the excess of cost over selling price is usually debited to Paid-in Capital from Treasury Stock. If Mead, Inc. sells an additional 800 shares of treasury stock on October 1 at $7 per share, the entry is:
5, ,400

32. ILLUSTRATION 12-10 TREASURY STOCK ACCOUNTS
Observe from the 2 sales entries that
1 Treasury Stock is credited at cost for each entry,
2 Paid-in Capital from Treasury Stock is used for the difference between the cost and the resale price of the shares, and
3 The original paid-in capital account, Common Stock, again is not affected.
The sale of treasury stock increases both total assets and total stockholders’ equity.
After posting the July 1 and October 1 entries, the treasury stock accounts will show the following balances on October 1:

33. ACCOUNTING FOR TREASURY STOCK
When the credit balance in Paid-in Capital from Treasury Stock is eliminated, any additional excess of cost over selling price is debited to Retained Earnings. Mead, Inc. sells its remaining 2,200 shares at $7 per share on December 1. The excess of cost over selling price is $2,200 [2,200 X ($8 – $7)]. In this case, $1,200 of the excess is debited to Paid-in Capital from Treasury Stock and the remaining $1,000 is debited to Retained Earnings. The entry is:
15, , , ,600

34. PREFERRED STOCK
Preferred stock has contractual provisions that give it a preference over common stock in certain areas. Preferred stockholders have a priority as to 1 dividends and 2 assets in the event of liquidation.
They usually do not have voting rights. When a corporation has more than one class of stock, each capital account title should identify the stock to which it relates. Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. The entry to record the issuance is:
120, , ,000

35. ILLUSTRATION 12-11 COMPUTATION OF TOTAL DIVIDENDS TO PREFERRED STOCK
Preferred stockholders have the right to share in the distribution of corporate income before common stockholders.
Preferred stock contracts often contain a cumulative dividend feature – which means that preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends.
Cumulative preferred dividends not declared in a given period are called dividends in arrears.
Scientific Leasing has 5,000 shares of 7%, $100 par value cumulative preferred stock outstanding, and the annual dividend is $35,000 (5,000 X $7 per share).
If dividends are 2 years in arrears, preferred stockholders are entitled to receive the following dividends in the current year:

36. DIVIDENDS
A dividend is distribution by a corporation to its stockholders on a pro rata (equal) basis.
A cash dividend is a pro rata distribution of cash to stockholders.
For a cash dividend to occur, a corporation must have:
1 retained earnings,
2 adequate cash, and
3 declared dividends.

37. ENTRIES FOR CASH DIVIDENDS
3 dates are important in connection with dividends: 1 the declaration date, 2 the record date, and 3 the payment date. Accounting entries are required on 2 of the dates – the declaration date and the payment date. On the declaration date, the board of directors formally declares the cash dividend and announces it to the stockholders. An entry is required to recognize the decrease in retained earnings and the increase in the liability – Dividends Payable. On December 31, 2001, the directors of Media General declare a $.50 per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is $50,000 (100,000 X $.50), and the entry to record the declaration is:
Date
Account Titles and Explanation
Debit
Credit
Dec. 31
Retained Earnings
50, ,000
Dividends Payable
(To record declaration of cash dividend)

38. ENTRIES FOR CASH DIVIDENDS
Preferred stock has priority over common stock in regard to dividends. Cash dividends must be paid to preferred stockholders before common stockholders are paid any dividends. IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock and 50,000 shares of $10 par value common stock outstanding at December 31, The dividend per share for preferred stock is $8 ($100 par value X 8%), and the required annual dividend for preferred stock is $8,000 (1,000 X $8). The directors declare a $6,000 cash dividend on December 31, The total dividend amount goes to the preferred stockholders in this case due to their dividend preference. The entry to record the dividend declaration is:
Date
Account Titles and Explanation
Debit
Credit
Dec. 31
Retained Earnings (or Dividends)
6, ,000
Dividends Payable
(To record $6 per share cash dividend to
preferred stockholders)

39. ILLUSTRATION 12-13 ALLOCATING DIVIDENDS TO PREFERRED AND COMMON STOCK
Since the preferred stock is cumulative, dividends of $2 per share are in arrears on preferred stock for 2001 and must be paid before any future dividends can be paid on common stock. On December 31, 2002, IBR declares a $50,000 cash dividend. The allocation of the dividend to the two classes of stock shown above. The entry to record the declaration of the dividend is:
Date
Account Titles and Explanation
Debit
Credit
Dec. 31
Retained Earnings (or Dividends)
50, ,000
Dividends Payable
(To record declaration of cash dividends of
$10,000 to preferred stock and $40,000 to
Common stock)

40. STOCK DIVIDENDS
A stock dividend is a pro rata distribution of the corporation’s own stock to stockholders.
A stock dividend results in a decrease in retained earnings and an increase in paid-in capital.
Corporations usually issue stock dividends for one or more of the following reasons:
1 To satisfy stockholders’ dividend expectations without spending cash.
2 To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share.
3 To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business and therefore is unavailable for cash dividends.

41. STOCK DIVIDENDS
The size of the stock dividend and the value to be assigned to each dividend share are determined by the board of directors when the dividend is declared.
The per share amount must be at least equal to the par or stated value in order to meet legal requirements.
The accounting profession distinguishes between
1 a small stock dividend (less than 20-25% of the corporation’s issued stock) and
2 a large stock dividend (greater than 20-25%).
It is recommended that the directors assign the fair market value per share for small stock dividends.
Though the amount to be assigned for a large stock dividend is not specified by the accounting profession, par or stated value per share is normally assigned.

42. ENTRIES FOR STOCK DIVIDENDS
Medland Corporation has a balance of $300,000 in retained earnings and declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. The current fair market value of its stock is $15 per share. The number of shares to be issued is 5,000 (10% X 50,000) and the total amount to be debited to Retained Earnings is $75,000 (5,000 X $15). The entry to record this transaction at the declaration date is:
75, , ,000

43. ILLUSTRATION 12-15 STATEMENT PRESENTATION OF COMMON STOCK DIVIDENDS DISTRIBUTABLE
Common Stock Dividends Distributable is a stockholders’ equity account; if a balance sheet is prepared before the dividend shares are issued, the distributable account is reported in paid-in capital as additional common stock issued, as shown above. When the dividends are issued, Common Stock Dividends Distributable is debited and Common Stock is credited as follows:
50, ,000

44. ILLUSTRATION 12-16 STOCK DIVIDEND EFFECTS
Stock dividends change the composition of stockholders’ equity because a portion of retained earnings is transferred to paid-in capital.
However, total stockholders’ equity remains the same.
Stock dividends also have no effect on the par or stated value per share, but the number of shares outstanding increases.
These effects are shown below for Medland Corporation.

45. STOCK SPLITS
A stock split, like a stock dividend, involves the issuance of additional shares of stock to stockholders according to their percentage of ownership.
However, a stock split results in a reduction of par or stated value per share.
The purpose of a stock split is to increase the marketability of the stock by lowering its market value per share.
In a stock split, the number of shares is increased in the same proportion that par or stated value per share is decreased.
A stock split does not have any effect on total paid-in capital, retained earnings, and total stockholders’ equity.
However, the number of shares outstanding increases.

46. ILLUSTRATION 12-17 STOCK SPLIT EFFECTS
Assume that Medland Corporation splits its 50,000 shares of common stock on a 2-for-1 basis. Because a stock split does not affect the balances in any stockholders’ equity accounts, it is not necessary to journalize a stock split.

47. ILLUSTRATION 12-18 EFFECTS OF STOCK SPLITS AND STOCK DIVIDENDS DIFFERENTIATED
Significant differences between stock splits and stock dividends are shown below.

48. ILLUSTRATION 12-19 RETAINED EARNINGS AND CASH BALANCES
Retained earnings is net income that is retained in the business.
The balance in retained earnings is part of the stockholders’ claim on the total assets of the corporation.
The relationship of cash to retained earnings is shown below.

49. ILLUSTRATION 12-20 STOCKHOLDERS’ EQUITY WITH DEFICIT
Net losses are debited to Retained Earnings, not to paid-in capital accounts. To do so would destroy the distinction between paid-in capital and earned capital. A debit balance in retained earnings is identified as a deficit and is reported as a deduction in the stockholders’ equity section, as shown below.

50. RETAINED EARNINGS RESTRICTIONS
In some cases, there may be retained earnings restrictions that make a portion of the balance currently unavailable for dividends.
Restrictions result from one or more of the following causes:
1 Legal restrictions. Many states require a corporation to restrict retained earnings for the cost of treasury stock purchased which serves to keep intact the corporation’s legal capital that is temporarily being held as treasury stock.
2 Contractual restrictions. Long-term debt contracts may impose a restriction on retained earnings as a condition for the loan.
3 Voluntary restrictions. The board of directors of a corporation may voluntarily create retained earnings restrictions for specific purposes.

51. ILLUSTRATION 12-22 DISCLOSURE OF RESTRICTION
Retained earnings restrictions are generally disclosed in the notes to the financial statements. Pratt & Lambert, a leading producer of architectural finishes (paint), has the following note in a recent financial statement:

52. PRIOR PERIOD ADJUSTMENTS
The correction of an error in previously issued financial statements is known as a prior period adjustment. The correction is made directly to Retained Earnings because the effect is now in this account; the net income for the prior period has been recorded in retained earnings through the journalizing and posting of closing entries. General Microwave discovers in 2001 that it understated depreciation expense in 2000 by $300,000 as a result of computational errors. These errors overstated net income for 2000, and the current balance in retained earnings is also overstated. The entry for the prior period adjustment, assuming all tax effects are ignored, is as follows:
300, ,000

53. ILLUSTRATION 12-23 STATEMENT PRESENTATION OF PRIOR PERIOD ADJUSTMENTS
Prior period adjustments are reported in the retained earnings statement. They are added to (or deducted from) the beginning retained earnings balance to show the adjusted beginning balance. General Microwave has a beginning balance of $800,000 in retained earnings and the prior period adjustment is reported as follows:

54. ILLUSTRATION 12-24 DEBITS AND CREDITS TO RETAINED EARNINGS
The retained earnings statement shows the changes in retained earnings during the year. The statement is prepared from the Retained Earnings account. Transactions and events that affect retained earnings are tabulated in account form as shown below.

55. ILLUSTRATION 12-25 RETAINED EARNINGS STATEMENT
Net income increases retained earnings and a net loss decreases retained earnings. Prior period adjustment may either increase or decrease retained earnings. Both cash and stock dividends decrease retained earnings. Treasury stock transactions may decrease retained earnings. The retained earnings statement for Graber Inc. is as follows:

56. STOCKHOLDERS’ EQUITY PRESENTATION AND ANALYSIS
Two classifications of paid-in capital are recognized:
1 Capital stock – which consists of preferred and common stock.
2 Additional paid-in capital – which includes the excess of amounts paid in over par or stated value and paid-in capital from treasury stock.

57. ILLUSTRATION 12-26 COMPREHENSIVE STOCKHOLDERS’ EQUITY SECTION

58. ILLUSTRATION 12-27 PUBLISHED STOCKHOLDERS’ EQUITY SECTION
In published annual reports, subclassifications within the stockholders’ equity section are seldom presented.
The individual sources of additional paid-in capital are often combined and reported as a single amount as shown below:

59. ILLUSTRATION 12-28 RETURN ON COMMON STOCKHOLDERS’ EQUITY RATIO AND COMPUTATION
A popular ratio that measures profitability from the common stockholder’s point of view is return on common stockholders’ equity.
This ratio shows the amount of net income dollars earned for each dollar invested by the owners.
It is calculated by dividing net income by average stockholders’ equity.
If Kellogg’s beginning of the year and end of year common stockholders’ equity were $997.5 and $889.8, net income was $502.6 million, and no preferred stock was outstanding, the return on common stockholders’ equity ratio is:
Net Income
Preferred Dividends
Average Common Stockholders’ Equity
Return on Common Stockholders’ Equity
($ $889.8) ($ $0) ÷ ——————————— - $0 =53.3%

60. COPYRIGHT
Copyright © 2000 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions
Department, John Wiley & Sons, Inc. The purchaser may make back-up copies
for his/her own use only and not for distribution or resale. The Publisher assumes
no responsibility for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein. 33

61. CHAPTER 12 CORPORATIONS: ORGANIZATION, STOCK TRANSACTIONS, DIVIDENDS, AND RETAINED EARNINGS34