Strategic Accounting

1. Strategic Accounting Shareholders’ Eqiuty

2. Assets – Liabilities = Shareholders’ Equity The Nature of Shareholders’ Equity Net Assets(Residual Interest)

3. Sources of Shareholders’ Equity Amounts earnedby corporation Amounts investedby shareholders Other gains and losses not included in net income Shareholders’ Equity Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income

4. Common Stock The basic voting stock of the corporation. Ranks after preferred stock for dividend and liquidation distribution. Dividends determined by the board of directors.

5. Preferred Stock Usually has apar or stated value. Generally does nothave voting rights. Preference over common stock in the event of liquidation. Dividend preference over common stock.

6. Preferred Stock Most preferred stock (preference shares) is reported under IFRS as debt with the dividends reported in the income statement as interest expense. IFRS / U.S. GAAP Difference Under U.S. GAAP that’s the case only for “manditorily redeemable” preferred stock.

7. Preferred Stock DividendsCumulative Unpaid dividends must be paid before any distributions to common stock. Dividends in arrearsare not liabilities, but must be disclosed.

8. SHARES SOLD FOR CASH Dow Industrial sells 100,000 of its common shares, $1 par per share, for $10 per share: ($ in 000s) Cash (100,000 shares at $10 price per share) 1,000 Common stock (100,000 shares at $1 par ) 100 Paid-in capital – excess of par (remainder) 900 The entire proceeds from the sale of nopar stock are recorded in the stock account: Cash (100,000 shares at $10 price per share) 1,000 Common stock 1,000

9. Issuing Stock for Noncash Assets Record the transaction at fair value(of stock issued or of asset or service received, whichever is more clearly evident). If market values cannot be determined, use appraised values.

10. Issuing Stock for Noncash Assets DuMont Chemicals issues 1 million of its common shares, $1 par per share, in exchange for a custom-built factory for which no cash price is available. Today’s issue of the Wall Street Journal lists DuMont’s stock at $10 per share: ($ in millions) Property, plant, & equipment (1 million sh at $10) 10 Common stock (1 million shares at $1 par) 1 Paid-in capital – excess of par (remainder) 9 We record both the asset and the stock at the $10 million fair value.

11. I can account forthe reacquired sharesbyretiring them or byholding them astreasury shares. Share Buybacks

12. Accounting for Retired Shares When shares are formally retired, we reduce the same capital accounts that were increased when the shares were issued – common or preferred stock, and additional paid-in capital.

13. Accounting for Treasury Stock Acquisition of Treasury Stock • Recorded at cost to acquire. Resale of Treasury Stock • Treasury Stock credited for cost. • Difference between cost andissuance price is (generally)recorded in paid-in capital –share repurchase.

14. COMPARISON OF SHARE RETIREMENT AND TREASURY STOCK ACCOUNTING American Semiconductor’s balance sheet included the following: Shareholders' Equity ($ in millions) Common stock, 100 million shares at $1 par $ 100 Paid-in capital – excess of par 900 Paid-in capital – share repurchase 2 Retained earnings 2,000

15. COMPARISON OF SHARE RETIREMENT AND TREASURY STOCK ACCOUNTING Reacquired 1 million of its common shares Retirement Treasury Stock Case 1: Shares repurchased at $7 per share Common stock ($1 par x 1 million sh) 1 Treasury stock (cost) 7 PIC – excess of par ($9 per sh) 9 PIC – share repurchase (difference) 3 Cash 7 Cash 7 OR Case 2: Shares repurchased at $13 per share Common stock ($1 par x 1 million sh) 1 Treasury stock (cost) 13 PIC – excess of par ($9 per sh) 9 PIC – share repurchase 2* Retained earnings (difference) 1 Cash 13 Cash 13 We credit PIC – share repurchase for the amount needed to make debits equal credits in the entry. We reduce common stock and PIC – excess of parthe same amounts they were increased when the shares were issued: Cash 10 Common stock 1 PIC – excess of par 9 *Because there is a $2 million credit balance.

16. SUBSEQUENT SALE OF SHARES Sold 1 million shares after reacquiring shares at $13 per share (Case 2 in previous situation) Retirement Treasury Stock Case A: Shares sold at $14 per share Cash 14 Cash 14 Common stock (par) 1 Treasury stock (cost) 13 PIC – excess of par 13 PIC – share repurchase 1 OR Case B: Shares sold at $10 per share Cash 10 Cash 10 Common stock (par) 1 RE (to balance) 1 PIC – excess of par 9 PIC – share repurchase 2* Treasury stock (cost) 13 *Because there is a $2 million credit balance.

17. REPORTING SHARE BUYBACKS IN THE BALANCE SHEET Formally retiring shares restores the balances in both the Common stock account and Paid-in capital – excess of par to what those balances would have been if the shares never had been issued at all. eAny net increase in assets resulting from the sale and subsequent repurchase is reflected as Paid-in capital – share repurchase. eAny net decrease in assets resulting from the sale and subsequent repurchase is reflected as a reduction in retained earnings.

18. REPORTING SHARE BUYBACKS IN THE BALANCE SHEET Shares Treasury Retired Stock Shareholders’ Equity($ in millions) Paid-in capital:Common stock, 100 million shares at $1 par $ 99 $ 100Paid-in capital – excess of par 891 900Paid-in capital – share repurchase 2 Retained earnings 1,999 2,000 Less: Treasury stock, 1 million shares (at cost) (13) Total shareholders’ equity$2,989$2,989 When a share repurchase is viewed as treasury stock, the cost of the treasury stock is simply reported as a reduction in total shareholders’ equity.

19. Retained Earnings Represents the undistributed earnings of the company since its inception.

20. CASH DIVIDENDS On June 1, the board of directors of Craft Industries declares a cash dividend of $2 per share on its 100 million shares, payable to shareholders of record June 15, to be paid July 1: ($ in millions) June 1 – declaration date Retained earnings 200 Cash dividends payable (100 million shares at $2/share) 200 June 13 – ex-dividend date no entry June 15 – date of record no entry July 1 – payment date Cash dividends payable 200 Cash 200

21. STOCK DIVIDENDS A stock dividend is the distribution of additional shares of stock to current shareholders of the corporation. Because each shareholder receives the same percentage increase in shares, shareholders' proportional interest in (percentage ownership of) the firm remains unchanged. Craft declares and distributes a 10% common stock dividend (10 million shares) when the market value of the $1 par common stock is $12 per share: ($ in millions) Retained earnings (10 million shares at $12 per share) 120 Common stock (10 million shares at $1 par per share) 10 Paid-in capital – excess of par (remainder) 110 For a "small" stock dividend (less than 25%), the fair market value of the additional shares distributed is transferred from retained earnings to paid-in capital.

22. STOCK SPLITS A stock distribution of 25% or higher is referred to as a stock split. A frequent reason for issuing a stock split is to reduce the market price per share (by half in a 2 for 1 split, for example). No journal entry, unless the stock distribution is referred to as a "stock split effected in the form of a stock dividend." Craft declares and distributes a 2 for 1 stock split effected in the form of a 100% stock dividend (100 million shares) when the market value of the $1 par common stock is $12 per share: ($ in millions) Paid-in capital – excess of par 100 Common stock (100 million shares at $1 par) 100 Some companies choose to debit retained earnings instead.