chapter 9 powerpoints on stockholders' equity
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For November 1 & 3TRANSCRIPT
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Stockholders’ EquityChapter 9
9-1
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Learning Objective 1
Explain the Features of a Corporation
9-2
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Characteristics of a Corporation
9-3
Separate Legal Entity Corporation distinct from owners; artificial person
Continuous Life/Transfer of Ownership: Company continues
to exist & operate regardless of ownership changes
Separation of Ownership & Management: Stockholders
elect Board of Directors who, in turn, appoint officers
Limited LiabilityStockholders are not personally
liable for corporate debts
Corporate TaxationCorporations are taxed on their earnings; dividends distributed
to owners are also taxed
Government RegulationCorporate activities are
monitored by governmentregulations
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Organizing a Corporation
Incorporators Organize the corporation Pay fees Sign charter File documents with the state Agree to bylaws
9-4
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Authority Structure in a Corporation
9-5
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Stockholders’ Rights
Vote at stockholder meetings
Receive dividends
Receive share if corporation liquidates
Maintain proportionate ownership Preemptive right
9-6
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Parts of Stockholders’ Equity
Paid-in capital Represents amounts contributed by
stockholders Include stock accounts
Retained earnings Amounts earned and kept by the
corporation
9-7
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Classes of Stock
Common Basic form of
common stock Have rights of
ownership Benefit most of
company succeeds Risk most if
company does not succeed
Preferred Have preference in
receiving dividends and assets in case of liquidation
Hybrid between common stock and debt
Rare for corporations to issue 9-8
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Comparison of Issuing Stock and Debt
Common stock
Preferred stock
Long-term debt
Obligation to repay principal
No No Yes
Dividends/interest Dividends are not tax deductible
Dividends are not tax deductible
Interest expense is tax deductible
Obligation to pay dividends/interest
Only after declaration
Only after declaration
At fixed rates and date
9-9
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Classes of Stock - Terminology
Par value Arbitrary amount
assigned to share of stock
In most states, represents minimum price for shares Legal capital
No-par Does not have a
par value
May have a stated value
9-10
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Other Stock Terminology
Authorized
Issued
Outstanding
Issue price
Market price9-11
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Learning Objective 2
Account for the Issuance of Stock
9-12
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Issuing Common Stock at Par A company issues 100,000 shares of $5
par value common stock at par
The common stock account is always credited in the amount of the shares issued multiplied by par value
9-13
Date Accounts Debit Credit
Cash$500,0
00
Common stock $500,0
00
100,000 x $5
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Issuing Common Stock Above Par
A company issues 100,000 shares of $5 par value stock for $12 per share
The amount above par is credited to Paid-in Capital in Excess of Par
9-14
Date Accounts Debit Credit
Cash$1,200,00
0
Common stock $500,00
0
Paid-in capital in excess of par
$700,000
(100,000 x $5 par)
(100,000 x $12 price)
$1,200,000 - $500,000
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Issuing No Par Common Stock
A company issues 100,000 shares of no par value common stock at a price of $5 per share
Substitute market price for par value in journal entry
9-15
Date Accounts Debit Credit
Cash$500,0
00
Common stock $500,0
00
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100,000 x $5
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Issuing Common Stock for Noncash Assets
Assets recorded at their fair values Common stock and paid-in capital credited
accordingly Suppose a company purchased equipment
valued at $800,000 by issuing 50,000 shares of its $5 par common stock
9-16
Date Accounts Debit Credit
Equipment $800,00
0
Common stock$250,00
0
Paid-in capital in excess of par
$550,000
(50,000 x $5 par)
(Fair value of equipment)
50,000 x $5
$800,000 - $250,000
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S 9-7, p. 571
9-17
Journalize all transactions. Compare balances in all accounts in both cases. Same or different?
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S 9-7, p. 571
Case A — Issue stock and buy the assets in separate transactions:
9-18
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash 800,000
Common Stock (12,000 × $20)
240,000
Paid-in Capital in Excess of Par
560,000
Issued stock
Building 550,000
Equipment 250,000
Cash 800,000
Purchased plant assets
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S 9-7 (continued)
Case B — Issue stock to acquire the assets:
9-19
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Building 550,000
Equipment 250,000
Common Stock (12,000 × $20)
240,000
Paid-in Capital in Excess of Par
560,000
Issued stock to acquire building and equipment
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S 9-7 (continued)
The balances in all accounts are the same:
9-20
Building…………………………………… $550,000
Equipment……………………………….… 250,000
Common Stock (12,000 × $20)……… 240,000
Paid-in Capital in Excess of Par……… 560,000
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Preferred Stock
Follows the same pattern as common stock entries Preferred stock is credited for the shares
issued multiplied by the par value A separate paid-in capital account is
used if stock is issued above par
9-21
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Authorized, Issued, and Outstanding
Authorized – maximum number of shares company can issue as indicated in its charter
Issued – number of shares company has sold to shareholders
Outstanding – number of shares currently in shareholders’ possession Any difference between issued and outstanding
is due to treasury stock9-22
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S 9-8, p. 572
9-23
Required: Prepare stockholders’ equity section of balance sheet. Net income has already been closed to RE.
Note: All amounts have dollar amounts in thousands except for par value.
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S 9-8, p. 572
Thousands
Stockholders’ equity:
Common stock, $.01 par, 400 thousand shares issued
$ 4
Paid-in capital in excess of par………………………..
196
Retained earnings………………………………………..
647
Other stockholders’ equity……………………………..
(22
)
Total stockholders’ equity………………………………
$825
9-24
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E9-20A, p. 575 – transaction data
9-25
Authorized to issue 120,000 shares of common stock and 7,000 shares of preferred stock. Had following stock issuance transactions during the year:
Jan 19 – Issued 12,000 shares of $2.00 par common stock for cash of $6.00 per share
Apr 3 – Issued 400 shares of $1.00 no-par preferred stock for $54,000 cash
Apr 11 – Received inventory valued at $16,000 and equipment with market value of $9,500 for 3,700 shares of the $2.00 par common stock.
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E9-20A (req. 1) – Journal - Jan 19
9-26
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E9-20A (req. 1) – Journal – Apr 3
9-27
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E9-20A (req. 1) – Journal – Apr 11
9-28
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E9-20A (req. 2), p. 575
9-29
Given: Ending RE balance is deficit of $43,000.
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Learning Objective 3
Describe How Treasury Stock Affects a Company
9-30
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Treasury Stock
Company’s own stock that it has issued and later reacquired
Reasons: All authorized shares have been issued
and shares are needed for employee stock purchase plans
Company wants to purchase its shares at a low price and the re-issue them at a higher price
Management want to avoid a takeover 9-31
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Accounting for Treasury Stock
Recorded at cost (not par value)
Contra-equity account (debit balance)
Reduces stockholders’ equity and assets
If sold above cost, paid-in capital from treasury stock transactions is credited
9-32
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Accounting for Treasury Stock
Suppose a company purchased 10,000 shares of its own $1 par common stock for $200,000
9-33
Date Accounts Debit Credit
Treasury stock$200,00
0
Cash $200,00
0
10,000 x $2
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Accounting for Treasury Stock
Later, the company resells the treasury shares for $250,000 (above cost)
9-34
Date Accounts Debit Credit
Cash $250,00
0
Treasury stock $200,00
0
Paid-in capital from treasury stock
transactions $50,000
(original cost)
(given above)
($250,000 - $200,000)
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Retained Earnings
Balance = Net incomes – net losses – dividends declared
Accumulated earnings the company keeps
Not a reservoir of cash
Normal credit balance
Debit balance = Deficit Losses and dividends exceed earnings
9-35
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Retained Earnings Balance
Credit balance
Lifetime earnings
Lifetime losses &
dividends>
Debit balance
Lifetime earnings
Lifetime losses &
dividends<
9-36
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Retained Earnings
9-37
Retained Earnings
Beginning Balance
Dividends Declared
Ending Balance
Net Income
If retained earnings increases, net income > dividendsIf retained earnings decreases, net income < dividends
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S 9-10, p. 572
9-38
A corporation reported the following SE section at Dec 31 (in millions):
During the next year, the corporation purchased treasury stock at a cost of $29 million and resold treasury stock for $8 million (this stock had cost the corporation $2 million).
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S 9-10, p. 572
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Millions
Treasury Stock………………………………
29
Cash………………………………………..
29
Cash………………………………………......
8
Treasury Stock…………………………..
2
Paid-in Capital from Treasury Stock
Transactions………………………..6
9-39
Overall, stockholders’ equity decreased by $21 million ($29 M paid out minus $8 M received).
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E9-24A, p. 576
9-40
Transactions:
Jan 17 – Issued 2,200 shares of $2.50 par common stock at $10 per share
May 23 – Purchased 300 shares of treasury stock at $12 per share
Jul 11 – Sold 200 shares of treasury stock at $20 per share
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E9-24A, p. 576 – J/E on Jan 17
9-41
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E9-24A, p. 576 – J/E on May 23
9-42
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E9-24A, p. 576 – J/E on July 11
9-43
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E9-24A, p. 576 – Effect on Equity
9-44
1/17 5,500
1/17 16,500
5/23 (3,600)
7/11 2,400
7/11 1,600
Net increase 22,400
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Learning Objective 4
Account for Dividends
9-45
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Dividends
Distribution to stockholders
Three forms Cash Stock Noncash assets
9-46
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Cash Dividends
Company must have both: Enough Retained Earnings to declare the
dividend Enough Cash to pay the dividend
Board of Directors has authority to declare the dividend
9-47
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Dividend Dates
Date of Declaration Board of Directors announces dividend Corporation is now obligated to pay
Date of record Stockholders who own shares on this date
will receive dividend
Date of payment Payment sent to shareholders on record
9-48
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Accounting for Dividends
Date of Declaration
Equity Decreases; Liabilities Increase9-49
Accounts Debit Credit
Retained Earnings $$$$$
Dividends Payable $$$$$
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Accounting for Dividends
Date of Record – no entryDate of Payment
Liabilities Decrease; Assets Decrease9-50
Accounts Debit Credit
Dividends Payable $$$$$
Cash $$$$$
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Retained Earnings
9-51
Retained Earnings
Beginning Balance
Dividends Declared
Ending Balance
Net Income
If retained earnings increases, net income > dividendsIf retained earnings decreases, net income < dividends
We saw this slide earlier…
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Preferred Dividends
Preferred shareholders receive dividends before common shareholders
Dividend rate expressed as: Percent of par value Dollar amount per share
Cumulative – any unpaid dividends are carried forward until paid Dividends in arrears
9-52
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Preferred Dividends
Preferred cumulative – any unpaid dividends are carried forward until paid Dividends in arrears
Preferred noncumulative
Preferred participating
Preferred nonparticipating
9-53
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Preferred Dividend Example A corporation has 10,000 shares of $100,
8% cumulative preferred stock outstanding
It also has 80,000 shares of $1 par common stock outstanding
The Board of Directors declares dividends as follows: Year 1 = $ 20,000 Year 2 = $150,000
9-54
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Preferred Dividend Example
Preferred Dividend : 10,000 shares x $100 par x 8% = $80,000
9-55
Preferred Common
Year 1 $20,000 $ -
Year 2
Dividends in arrears $60,000
Current year $80,000
$140,000 $10,000
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S9-13, p. 573
9-56
Access Garde, Inc., has 200,000 shares of 1.80 preferred stock outstanding in addition to its common stock. The 1.80 designation means that the preferred stockholders receive an annual dividend of $1.80 per share. In 2010, the corporation declares an annual dividend of $500,000. The allocation to preferred and common shareholders is:
Preferred (200,000 shares x $1.80 per share) = $360,000Common (Remainder $500,000 - $360,000) = 140,000 Total dividend $500,000
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S9-13, p. 573
9-57
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Req 1: How much in dividends must Access Garde declare each year before the common shareholders receive any cash dividends for the year?
Answer: $360,000 (200,000 shares × $1.80 per share)
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S9-13, p. 573
9-58
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Req 2: Suppose the company declares cash dividends of $400,000 for 2010. How much of the dividends goes to preferred? How much goes to common?
Answer: Preferred: $360,000 (200,000 shares × $1.80 per share)Common: $40,000 ($400,000 - $360,000)
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S9-13, p. 573
9-59
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Req 3: Is the company’s preferred stock cumulative or noncumulative? How can you tell?
Answer: The company’s preferred stock are cumulative because they are not specifically designated as noncumulative.
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S9-13, p. 573
9-60
Req 4: The company passed the preferred dividend in 2009 and 2010. In 2011, the company declares cash dividends of $1,500,000. How much of the dividends goes to preferred? How much goes to common?
Answer: Preferred: $1,080,000 ($360,000 × 3)Common: $ 420,000 ($1,500,000 − $1,080,000)
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Stock Dividends
Proportional distribution of shares to stockholders
Reasons corporations distribute stock dividends: Provide dividend, yet conserve cash Reduce market price of shares
Decrease retained earnings and increase common stock Total equity is unchanged
9-61
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Stock Dividends
Small Less than 25% of outstanding shares Recorded at market value
Large Greater than 25% of outstanding shares Recorded at par value
9-62
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E9-29A, p. 578
9-63
On May 11, 2011, market price of the common stock was $19 per share. HD distributed a 15% stock dividend on this date.
Prepare journal entry & Stockholders’ Equity section of balance sheet.
As of Dec 31, 2010
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E9-29A, p. 578 – Journal entry
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Accounts Debit Credit
Retained Earnings $855,000
Common stock $36,000
Paid-in capital in excess of par $819,000
(300,000 × 0.15 × $19)(300,000 × 0.15 × $0.80)
$855,000 - $36,000
Market price# of shares stock dividend %
Par value
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E9-29A, p. 578 – Balance sheet
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E9-29A, p. 578 – Question 3
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Question 3: Why is total stockholders’ equity unchanged by the stock dividend?
Answer: Company gave its shareholders no assets. Just transferred $855,000 from RE to Common Stock and Paid-in Capital in Excess of Par
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E9-29A, p. 578 – Question 4
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Question 4: Suppose HD had a cash balance of $560,000 on May 12, 2011. What is the maximum amount of cash dividends HD can declare?
Answer: HD’s maximum cash dividends cannot exceed the balance in Cash account, $560,000.
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Stock Splits
Increase in shares coupled with a proportionate reduction in par value 2-for-1 split doubles the shares
outstanding and halves the par value
No entry made Description of stock changed on balance
sheet
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Summary of Transaction Effects
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Assets
= Liabilitie
s + Equity
Issue stock IncreaseNo
effect Increase
Purchase treasury stock
Decrease
No effect
Decrease
Sell treasury stock IncreaseNo
effect Increase
Declare cash dividend
No effect Increase
Decrease
Pay cash dividendDecreas
eDecreas
eNo
effect
Stock dividendNo
effectNo
effectNo
effect
Stock splitNo
effectNo
effectNo
effect
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Learning Objective 5
Use Stock Values in Decision Making
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Stock Value Terms
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Price one can buy or sell one share of stock for; varies with company
performance and economy
Redemption value
Set price company is required to pay toretire preferred stock
Liquidation value
Required payment to preferred shareholders if the company liquidates
Book value Common equity# of common shares outstanding
Market value
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Learning Objective 6
Compute Return on Assets and Return on Equity
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Return on Assets (ROA)
Measures company’s use of asset to earn income for financers of the business Creditors Stockholders
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Net income + Interest expense
Average total assets
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Return on Equity (ROE)
Shows relationship between net income and equity Computed only on common stock
Should be higher than return on assets Stockholders risk more than bondholders
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Net income – Preferred dividends
Average common stockholders’ equity
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S 9-17, p. 574 (compute ROA & ROE)
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S 9-17, p. 574
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ROA
Net Interest
=income + expense
=¥120 + ¥31
Average total assets
(¥10,624 + ¥9,515) / 2
=¥151
= 1.5%¥10,07
0Note: 10% is considered good in most industries. Therefore, Godhi’s 1.5% return on assets is very weak.
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S 9-17 (continued)
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ROE
Net Preferred
=
income − dividends
=
¥120 − ¥0
Average common stockholders’
equity
(¥3,212 + ¥2,878) / 2
=¥120
= 3.9%¥3,04
5Note: 15% is considered good in most industries, so Godhi’s return on equity is very weak.
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Learning Objective 7
Report Equity Transactions on the Statement of Cash Flows
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Equity Transactions on the Cash Flow Statement
All equity transactions are financing activities
Financing inflow Issuing stock
Financing outflow Purchase of treasury stock Payment of dividends
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S 9-19, p. 574
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During 2010, Dwyer Corporation earned net income of $5.8 billion and paid off $2.4 billion of long-term notes payable. Dwyer raised $1.1 billion by issuing common stock, paid $3.5 billion to purchase treasury stock, and paid cash dividends of $1.6 billion.
Report Dwyer’s cash flow from financing activities on the statement of cash flows for 2010.
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S 9-19, p. 574
Billions
Cash flows from financing activities:
Paid off long-term notes payable………………… $(2.4)
Issued common stock……………………………… 1.1
Purchased treasury stock…………………………. (3.5)
Paid cash dividends………………………………… (1.6)Cash flows from financing activities: $(6.4)
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End of Chapter 9
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