Reporting and Interpreting Owners’ Equity

1. Reporting andInterpretingOwners’Equity Chapter 11

2. Learning Objectives Explain the role of stock in the capitalstructure of a corporation. LO1

3. Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability Understanding The Business

4. Incur liabilities. Own assets. Sue and be sued. Enter into contracts. Understanding The Business Because a corporation is a separatelegal entity, it can . . .

5. Voting (in person or by proxy).  Proportionate distributions of profits. Stockholders’ Rights  Proportionate distributions of assets in a liquidation. Ownership of a Corporation

6. Elected byshareholders Appointedby directors Ownership of a Corporation

7. Authorized Shares Authorized, Issued, and Outstanding Capital Stock The maximum number of shares of capital stock that can be sold to the public.

8. Authorized, Issued, and Outstanding Capital Stock Authorized Shares Issued sharesare authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold.

9. Outstanding sharesare issued shares that are owned by stockholders. Issued Shares Treasury sharesare issued shares that have been reacquired by the corporation. Authorized, Issued, and Outstanding Capital Stock Authorized Shares Outstanding Shares Unissued Shares Treasury Shares

10. Learning Objectives Analyze the earnings per share ratio. LO2

11. Net Income Average Number of Shares Outstanding EPS = Earnings per share (EPS) Outback’s income for 2003 is $170,000,000 and the average number of shares outstanding is 75,260,000. Earnings per share is probably the single most widely watched financial ratio.

12. Net Income Average Number of Shares Outstanding EPS = $170,000,000 75,260,000 Shares = $2.26 per share EPS = Earnings per share (EPS) Earnings per share is probably the single most widely watched financial ratio.

13. Earnings per share (EPS) Earnings per share is probably the single most widely watched financial ratio.

14. Learning Objectives Describe the characteristics of common stock and analyze transactions affecting common stock. LO3

15. Common Stock Preferred Stock Types of Capital Stock

16. Basic voting stock Ranks after preferred stock Dividend set by board of directors Common Stock

17. Nominal value Legal capital Par Value and No-par Value Stock Par Value Legal capitalis the amount of capital, required by the state, that must remain invested in the business.

18. I get it! Par Value and No-par Value Stock  Par Value Market Value

19. Some states do not require that a par value be stated in the charter. Some states do notrequire a par value to be stated in the charter. No-par Value Stock

20. Contributed capital Retained earnings Common stock, par value Capital in excess of par value Accounting for Capital Stock Two primary sources of stockholders’ equity

21. Outback Outback issues new stock. 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.

22. Transactions between two investorsthat do not affectthe corporation’s accounting records. Secondary Markets I’d like to sell some of myOutback stock. I’d like to buy some of yourOutback stock.

23. Sale and Issuance of Capital Stock On July 6, Outback issued 100,000shares of $0.01 par value commonstock for $22 per share. Prepare the journal entry to record this transaction.

24. Sale and Issuance of Capital Stock On July 6, Outback issued 100,000shares of $0.01 par value commonstock for $22 per share. 100,000 shares × $0.01 par value = $1,000 100,000 shares × $22 per share = $2,200,000

25. If Outback does not have new stock to issue when the stock options are exercised, then . . Outback Stock Options Employee compensation package includes salary and stock options. Stock optionsallow employees to purchase stock from the corporation at a fraction of the stock’s value in the secondary market. Employee

26. Stockholders Outback Treasury Stock Outback buysits own stock in the secondary market.(Treasury stock) Management compensation package includes salary and stock options. Stock optionsallow management to purchase stock from the corporation at a fraction of the stock’s value in the secondary market. Management

27. No voting or dividend rights Contra equity account Treasury Stock When stock is reacquired, the corporation records the treasury stock at cost.

28. Treasury Stock On May 1, Outback reacquired 100,000shares of its common stock at $20 per share. The journal entry for May 1 is . . . .

29. Treasury Stock On December 3, Outback reissued 10,000shares of the treasury stock at $30 per share. The journal entry for December 3 is . . . 10,000 shares × $20 cost = $200,000 10,000 shares × $30 = $300,000

30. Learning Objectives Discuss dividends and analyze transactions. LO4

31. Declared by board of directors. Not legally required. Requires sufficient Retained Earnings and Cash. Creates liability at declaration. Accounting for Cash Dividends

32. Dividend Dates Declaration date • Board of directors declares the dividend. • Record a liability.

33. Dividend Dates • Date of Record • Stockholders holding shares on this date willreceive the dividend. (No entry) X

34. Dividend Dates • Date of Payment • Record the dividend payment to stockholders.

35. Learning Objectives Analyze the dividend yield ratio. LO5

36. Dividend Yield Dividends Per Share Market Price Per Share = Dividend Yield Ratio Outback paid a dividend of $0.12 per share in 2003 and the market price was $40 per share. This ratio is often used to compare the dividend-paying performance of different investment alternatives.

37. Dividend Yield Dividends Per Share Market Price Per Share = Dividend Yield $0.12$40.00 = = 0.3% Dividend Yield Ratio This ratio is often used to compare the dividend-paying performance of different investment alternatives.

38. Dividend Yield Ratio This ratio is often used to compare the dividend-paying performance of different investment alternatives.

39. Learning Objectives Discuss the purpose of stock dividends, stock splits, and report transactions. LO6

40. No change in total stockholders’ equity. No change in par values. All stockholders retain same percentage ownership. Accounting for Stock Dividends Distribution of additional sharesof stock to stockholders.

41. Record at currentmarket valueof stock. Record atpar valueof stock. Accounting for Stock Dividends Small Large Stock dividend < 25% Stock dividend > 25%

42. Stock Splits Stock splits change the par value per share, but the total par value is unchanged. Ice Cream Parlor Banana Splits On Sale Now

43. Stock Splits Assume that a corporation had 3,000shares of $2 par value common stockoutstanding before a 2–for–1 stock split.

44. Stock Splits Assume that a corporation had 3,000shares of $2 par value common stockoutstanding before a 2–for–1 stock split. Increase Decrease No Change

45. Learning Objectives Describe the purpose of preferred stock and analyze transactions affecting preferred stock. LO7

46. Preference over common stock Usually hasno voting rights Usually has a fixed dividend rate Preferred Stock

47. Dividends on Preferred Stock 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.

48. Dividends on Preferred Stock If the preferred stock isnoncumulative, any dividends not declared in previous years are lostpermanently.

49. Dividends on Preferred Stock Kites, Inc. has the following stock outstanding: Common stock: $1 par, 100,000 shares Preferred stock: 3%, $100 par, cumulative, 5,000 shares Preferred stock: 6%, $50 par, noncumulative, 3,000 shares Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000. How much will each class of stock receive?

50. Dividends on Preferred Stock