Stockholders’ Equity: Paid-In Capital

1. Stockholders’ Equity:Paid-In 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 stockholders 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 state where it is located. The application for corporate status is called the Articles of Incorporation. Formation of a Corporation The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes.

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

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

8. Functions of the Board of Directors Primary functions are to set corporate policies ad protect stockholders.

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

10. By law, publicly owned corporations must: Prepare financial statements in accordance with GAAP. Have their financial statement audited by an independent CPA. Comply with federal securities laws. Submit financial information for SEC review. Publicly Owned Corporations Face Different Rules

11. Stockholder Records in a Corporation Stockholder ledgers are often maintained by a stock transfer agent or stock registrar. Stockholders usually meet once a year. Each unit of ownership is called a share of stock. Stock certificates serve as proof that a stockholder has purchased shares. When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.

12. Stockholders’ Equity of a Corporation

13. Authorization and Issuanceof Capital Stock Authorized Shares The maximum number of shares of capital stock that can be sold to the public.

14. Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. Authorization and Issuanceof Capital Stock Authorized Shares Usually shares are sold through an underwriter.

15. Authorization and Issuanceof Capital Stock Authorized Shares Outstanding shares are issued shares that are owned by stockholders. Outstanding Shares Unissued Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Treasury Shares

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

17. Stockholders’ Equity Common stock can be issued in three forms: Par Value Common Stock No-Par Common Stock Stated Value Common Stock Let’s examine this form of stock. All proceeds credited to Common Stock Treated like par value common stock

18. Issuance of Par Value Stock Record: The cash received. The number of shares issued × the par value per share in the Common Stock account. The remainder is assigned to Additional Paid-in Capital. Assume a corporation issues 10,000 shares of its $2 par value stock for $25 per share.

19. 10,000× $2 = $20,000 Issuance of Par Value Stock Assume a corporation issues 10,000 shares of its $2 par value stock for $25 per share.

20. Issuance of Par Value Stock

21. Common Stock and Preferred Stock Show below is the stockholders’ equity section of Martin, Inc. The company has both common and preferred stock outstanding.

22. A separate class of stock, typically having priority over common shares in . . . Dividend distributions (rate is usually stated). Distribution of assets in case of liquidation. Preferred Stock Other Features Include: Cumulative dividend rights. Usually callable by the company. Normally has no voting rights.

23. Cumulative Vs. Noncumulative Cumulative Preferred Stock Dividends in arrears must be paid before dividends may be paid on common stock. Undeclared dividends from current and prior years do not have to be paid in future years.

24. Stock Preferred as to Dividends Example: Consider the following partial Statement of Stockholders’ Equity. During 2010, the directors declare cash dividends of $5,000. In 2011, the directors declare cash dividends of $42,000.

25. Stock Preferred as to Dividends

26. Gee, I can’t do that with MY preferred stock! Other Features of Preferred Stock I just converted 100 shares of preferred stock into 1,000 shares of common stock and ended up with a higher dividend yield! Some preferred stock is convertible into shares of common stock.

27. Preferred Stock

28. Preferred stock and preferreddividends in arrears are deductedfrom total stockholders’ equity. Total Stockholders’ Equity Number of Common Shares Outstanding Book Value per Shareof Common Stock ≠ Book Value Market Value

29. Book Value With Both Preferred and Common Stock Davis company has paid no dividends in the current year. As of December 31st, dividends in arrears on cumulated preferred stock total $50,000. All equity belongs to common stockholders except the $500,000 applicable to preferred stock and the $50,000 dividends in arrears. Here is the calculation of book value for common stock:

30. Market Value Common stock is carried at original issue price. Accounting by the issuer. Investments in marketable securities are carried at market value. Accounting by the investor.

31. Factors affecting market price of preferred stock: Dividend rate Risk Level of interest rates Market Price of Preferred Stock The return based on the market value is called the “dividend yield.”

32. Market Price of Common Stock • Factors affecting market price of common stock: • 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.

33. Companies use stock splits to reduce market price. Outstanding shares increase, but par value is decreased proportionately. Ice Cream Parlor Stock SplitsNowAvailable Stock Splits

34. Increase Decrease No Change Stock Split Assume a corporation has 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

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

36. Recording Purchases of Treasury Stock Riley Corporation reacquires 3,000 of its common shares in the open market at $55 per share. Prepare the journal entry to record the purchase of treasury stock.

37. 1,000 shares × $75 = $75,000 1,000 shares × $55 cost = $55,000 Recording Purchases of Treasury Stock Riley Corporation reissued 1,000 shares of the treasury stock originally purchased for $55 per share. The shares were reissued at $75 per share.

38. Stockholders’ Equity Presentation

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

40. Financial Analysis andDecision Making Return on Total Assets Net Income Average Total Assets = Return on Common Stockholders’ Equity Net Income Average Common Stockholders’ Equity =

41. End of Chapter 11