Shareholders’ Equity: Capital

1. Shareholders’ Equity:Capital Chapter 11

2. Corporations An entity created by law. Existence is separate from owners. Privately, or Closely Held Ownership can be Has rights and privileges. Publicly Held

3. Advantages of Incorporation Limited personal liability for shareholders Transferability of ownership Professional management Continuity of existence

4. Disadvantages of Incorporation Heavy taxation Greater regulation Cost of formation Separation of ownership and management

5. Each corporation is formed according to the laws of the place or country where it is located. The application for corporate status is supported by the Memorandum and Articles of Incorporation. Formation of a Corporation The costs associated with incorporation are usually expensed immediately.

6. Voting (in person or by proxy). Proportionate distribution of dividends. Rights Proportionate distribution of assets in a liquidation. Rights of Shareholders Shareholders

7. Rights of Shareholders Shareholders usually meet once a year. Ultimate control

8. Functions of the Corporate Officers Contractual and legal representation Chief Accountant Custodian of funds

9. By law, publicly owned corporations must: Prepare financial statements in accordance with relevant accounting standards, e.g. IFRS. Have their financial statement audited by an independent CPA. Comply with relevant rules and regulations. Submit financial information for relevant authority for review. Publicly Owned Corporations Face Different Rules

10. Shareholder Records in a Corporation Shareholder ledgers are often maintained by a share transfer agent or share registrar. Shareholders usually meet once a year. Each unit of ownership is called a share. Share certificates serve as proof that a shareholder has purchased shares. When the share is sold, the shareholder signs a transfer endorsement on the back of the share certificate.

11. Shareholders’ Equity of a Corporation

12. Authorization and Issuanceof Share Capital Authorized Shares The maximum number of shares that can be sold to the public.

13. Issued shares are authorized shares that have been sold. Unissued shares are authorized shares that never have been sold. Authorization and Issuanceof Share Capital Authorized Shares Usually shares are sold through an underwriter.

14. Authorization and Issuanceof Share Capital Authorized Shares Outstanding shares are issued shares that are owned by shareholders. Outstanding Shares Unissued Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Treasury Shares

15. Shareholders’ Equity • Par value is an arbitrary amount assigned to each share when it is authorized. • Market price is the amount that each share will sell for in the market.

16. Shareholders’ Equity Ordinary share can be issued in three forms: Par Value Ordinary Share No-Par Ordinary Share Stated Value Ordinary Share Let’s examine this form of share. All proceeds credited to Ordinary Share Capital Treated like par value ordinary share

17. Issuance of Par Value Share Record: The cash received. The number of shares issued × the par value per share in the Ordinary Share account. The remainder is assigned to Share Premium (or Additional Paid-in Capital). Assume a corporation issues 10,000 shares of its $2 par value share for $25 per share.

18. 10,000× $2 = $20,000 Issuance of Par Value Share Assume a corporation issues 10,000 shares of its $2 par value share for $25 per share.

19. Issuance of Par Value Share

20. A separate class of share, typically having priority over ordinary shares in . . . Dividend distributions (rate is usually stated). Distribution of assets in case of liquidation. Specific characteristics (say redeemable) can affect its presentation in the balance sheet as liabilities (IAS 32). Preference Share Other Features Include: Cumulative dividend rights. Usually callable by the company. Normally has no voting rights.

21. Cumulative Vs. Noncumulative Cumulative Preference Share Dividends in arrears must be paid before dividends may be paid on ordinary share. Undeclared dividends from current and prior years do not have to be paid in future years.

22. Share Preferred as to Dividends Example: Consider the following partial Statement of Shareholders’ Equity. During 2008, the directors declare cash dividends of $5,000. In 2009, the directors declare cash dividends of $42,000.

23. Share Preferred as to Dividends

24. Gee, I can’t do that with MY preference share! Other Features of Preference Share I just converted 100 shares of preference share into 1,000 ordinary shares and ended up with a higher dividend yield! Some preference share is convertible into ordinary shares.

25. Preference Share

26. Market Value Ordinary share is carried at original issue price. Accounting by the issuer. Investments in marketable securities are carried at market value. Accounting by the investor.

27. Factors affecting market price of preference share: Dividend rate Risk Level of interest rates Market Price of Preference Share The return based on the market value is called the “dividend yield.”

28. Market Price of Ordinary Share • Factors affecting market price of ordinary share: • Investors’ expectations of future profitability. • Risk that this level of profitability will not be achieved. Changes in market value have no impact on the books of the issuer.

29. Preference share and preferencedividends in arrears are deductedfrom total shareholders’ equity. Total Shareholders’ Equity Number of Ordinary Shares Outstanding Book Value per Shareof Ordinary Share ≠ Book Value Market Value

30. Companies use share splits to reduce market price. Outstanding shares increase, but par value is decreased proportionately. Ice Cream Parlor Share SplitsNowAvailable Share Splits

31. Increase Decrease No Change Share Split Assume a corporation has 5,000 shares of $1 par value ordinary share outstanding before a 2–for–1 share split.

32. No voting or dividend rights Contra equity account Treasury Share Treasury shares are issued shares that have been reacquired by the corporation. When share is reacquired, the corporation records the treasury share at cost.

33. Recording Purchases of Treasury Share Riley Corporation reacquires 3,000 shares of its ordinary share at $55 per share. Prepare the journal entry to record the purchase of treasury share.

34. 1,000 shares × $75 = $75,000 1,000 shares × $55 cost = $55,000 Recording Purchases of Treasury Share Riley Corporation reissued 1,000 shares of the treasury share originally purchased for $55 per share. The shares were reissued at $75 per share.

35. Shareholders’ Equity Presentation

36. Share Buyback Programs Some corporations have buyback programs, in which they repurchase large amounts of their own ordinary share. As a result of these programs, treasury share has become a material item in the balance sheet of many corporations. Share option plans are an important part of employee compensation for many companies. Treasury share purchases are an effective means by which the company can have available the shares needed to satisfy the requirement of share option plans to issue the shares to employees.

37. Financial Analysis andDecision Making Return on Total Assets Profit Average Total Assets = Return on Ordinary Shareholders’ Equity Profit – Preference Dividends Average Ordinary Shareholders’ Equity =

38. End of Chapter 11