chapter 10 financial 3 ed
TRANSCRIPT
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Spiceland | Thomas | Herrmann
Financial Accounting
Stockholders’ Equity
Chapter 10
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Learning Objectives
• Identify the advantages and disadvantages of the corporate form of ownership
• Record the issuance of common stock• Contrast preferred stock with common stock and
bonds payable• Account for treasury stock• Describe retained earnings and record cash
dividends
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Learning Objectives
• Explain the effect of stock dividends and stock splits
• Prepare and analyze the stockholders’ equity section of a balance sheet and the statement of stockholders’ equity
• Evaluate company performance using information on stockholders’ equity
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Stockholders’ Equity
Primary Sections of Stockholders’ Equity
Paid-in capital Retained Earnings Treasury Stock
Amount stockholders have
invested in the corporation
Amount of earnings the
corporation has retained
Corporation’s own stock that it has
reacquired
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Part A
Invested Capital
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Learning Objective 1
Identify the advantages and disadvantages of the corporate form of ownership
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Corporations
• Articles of incorporation: corporate charter describing:• Nature of business activities• Shares of stock to be issued• Initial board of directors
• The board of directors establish corporate policies and appoints officers who manage the corporation
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Illustration 10.2—Organization Chart
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Stages of Equity Financing
• Corporations first raise money from founders of the business, friends, and family
• To grow, companies seek investments from:• Angel investors• Venture capital firms• Initial public offering (IPO)
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Illustration 10.3—Stages of EquityFinancing
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Public or Private
• Allows public investment• Many shareholders• Stocks trade on stock
exchanges or by over-the-counter (OTC) trading
• Regulated by the (SEC) • Examples—Wal-Mart,
Microsoft, Intel
• Does not allow investment by the general public
• Fewer stockholders• Stocks not traded in the
open market• Not regulated by the
(SEC)• Examples—Cargill
(agricultural commodities) Koch Industries (oil and gas), Chrysler (cars)
Public Private
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Illustration 10.4—Stockholder Rights
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Illustration 10.5—Advantages andDisadvantages of a Corporation
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Learning Objective 2
Record the issuance of common stock
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Common Stock
• Treasury stock: repurchased shares, included as part of shares issued, but excluded from shares outstanding
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Illustration 10.6—Authorized, Issued, and Outstanding Stock
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Par Value
• Legal capital per share of stock that’s assigned when the corporation is first established
• Has no relationship to the market value today
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Accounting for Common Stock Issues
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Learning Objective 3
Contrast preferred stock with common stock and bonds payable
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Preferred Stock
• Issued in addition to common stock to attract wider investment
• Preferred stockholders have:• First rights to a specified amount of dividends• Preference over common stockholders in the
distribution of assets at the time of dissolution
• Most preferred stock does not have voting rights
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Illustration 10.7—Comparison ofFinancing Alternatives
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Features of Preferred Stock
• Flexibility allowed in its contractual provisions• Types:
• Convertible: shares can be exchanged for common stock
• Redeemable: shares can be returned to the corporation at a fixed price
• Cumulative: shares receive priority for future dividends, if dividends are not paid in a given year
• Dividends in arrears - unpaid dividends
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Illustration 10.8—Allocate Dividendsbetween Preferred and Common Stock
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Illustration 10.9—Stockholders’ Equity Section
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Learning Objective 4
Account for treasury stock
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Treasury Stock
• Corporation’s own stock that it has reacquired• Companies buy back their own stock for various
reasons:• To boost underpriced stock• To distribute surplus cash without paying dividends• To boost earnings per share• To satisfy employee stock ownership plans
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Purchase of Treasury Stock10-27
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Illustration 10.11—Stockholders’ Equity before and after Purchase of Treasury Stock
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Reissuing Treasury Stock10-29
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Illustration 10.12—Stockholders’ Equity before and after Sale of Treasury Stock
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Reissuing Treasury Stock10-31
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Part B
Earned Capital
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Learning Objective 5
Describe retained earnings and record cash dividends
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Retained Earnings
• Earnings retained in the corporation and not paid out as dividends
• Equals all net income, less all dividends• Has a normal credit balance• Accumulated deficit: a debit balance in retained
earnings
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Dividends
• Distributions by a corporation to its stockholders• Declaration date: date on which board of
directors declare the cash dividend to be paid• Record date: specific date on which the company
will determine who will receive the dividend (registered owners of stock)
• Payment date: date of the actual cash distribution
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Recording Cash Dividends10-36
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Learning Objective 6
Explain the effect of stock dividends and stock splits
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Stock Dividends and Stock Splits
• Stock dividends: additional shares of a company’s own stock given to stockholders as dividends
• Stock split: a large stock dividend that includes a reduction in the par or stated value per share
You own 100 shares and assume a
You will get
10% stock dividend 10 additional shares
20% stock dividend 20 additional shares
100% stock dividend 100 additional shares
Small stock dividend
Large stock dividend or stock split (2-for-1)
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Stock Splits or Large Stock Dividends
• Stock split• Reduces par value per share and increases shares
outstanding• No need to record transaction
• Large stock dividends• Records an increase in common stock and
decrease in retained earnings• Recorded at par value
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Small Stock Dividends
• Recorded at market value• Believed to have little impact on market price
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Part C
Reporting Stockholders’ Equity
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Learning Objective 7
Prepare and analyze the stockholders’ equity section of a balance sheet and the statement of
stockholders’ equity
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Illustration 10.17—Stockholders’ Equity Section
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Statement of Stockholders’ Equity
• Summarizes the changes in the balance in each stockholders’ equity account over a period of time
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Illustration 10.19—Statement ofStockholders’ Equity
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Learning Objective 8
Evaluate company performance using information on stockholders’ equity
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Return on Equity
• Measures the ability of company management to generate earnings from the resources that owners provide
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Return on the Market Value of Equity
• Analysts often relate earnings to the market value of equity
Net income
Market value of equityReturn on the
market value of equity=
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Earnings per Share
• Measures net income earned per share of common stock
• Useful in comparing earnings performance for the same company over time
• Not useful for comparing earnings performance of one company with another
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Price-Earnings Ratio
• Indicates how the stock is trading relative to current earnings
• Commonly are in the range of 15 to 20• Growth stocks: stocks whose future earnings
investors expect to be higher• Value stocks: stocks that are priced low in relation to
current earnings
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End of Chapter 10
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