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15. CORPORATIONS: DIVIDENDS & RETAINED EARNINGS. Dividends. a distribution of earnings to stockholders proportional to ownership cash, stock, or property. Dividends & the Balance Sheet. Cash. Accts Receiv. Equipment. Common Stock. Retained Earnings. 500. 1,200. 7,400. 6,000.
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15 CORPORATIONS: DIVIDENDS & RETAINED EARNINGS Dividends • a distribution of earnings to stockholders • proportional to ownership • cash, stock, or property
Dividends & the Balance Sheet Cash Accts Receiv Equipment Common Stock Retained Earnings 500 1,200 7,400 6,000 3,100 9,100 9,100 What does a company need to declare a dividend? Must be paid from R/E. A cash dividend requires cash!
Entries for Cash Dividends Assets Liab. Stckhlds Equity Net Income 12-1-02 Declared a 50¢ per share cash dividend to stockholders of record on 12-22-02. (100,000 shares of stock are outstanding.) Retained Earnings 50,000 Dividends Payable 50,000
Assets Liab. Stckhlds Equity Net Income 1-20-03 Paid the dividend. Dividends Payable 50,000 Cash 50,000
Stock Dividends Shares Owned 3% Stock Before Dividend After Buffet 500 15 515 Turner 200 6 206 Gates 300 9 309 Total 1,000 30 1,030 Why? 50% 30% • stockholder expectations • reinvest R/E in the business 20%
Stock Dividend Entries Assets Liab. Stckhlds Equity Net Income 6-1-03 Declared a 1% stock dividend on 50,000 shares of $5 par stock (market value = $30). Retained Earnings 15,000 Com Stock Divid Distributable 2,500 Pd in Capital in Excess of Par 12,500
7-1-03 Paid the dividend. Com Stk Divid Distributable 2,500 Common Stock 2,500
Common Stock Pd-in Cap Excess Retained Earnings 250,000 750,000 120,000 Total Equity (before stock dividend) $1,120,000 2,500 252,500 12,500 762,500 Total Equity (after) $1,120,000 15,000 . 105,000
Stock Splits Par Value: $30 Par Value: $15 Issuing new shares of stock to shareholders. • double or triple number of shares outstanding • reduce the par value of each share • no effect on paid-in capital or R/E
Retained Earnings Retained Earnings The start of business. 0 5,200 Net loss. Net income. 3,400 2,300 Dividend. 1,000 3,100
Retained Earnings Restrictions Cash Retained Earnings 500 3,100 • restricted = unavailable for dividends • keeping assets in the company • reasons: • legal (e.g. treasury stock) • contractual • voluntary (e.g. expansion) • Note: restricting retained earnings is not the same as setting aside cash
Prior Period Adjustments Retained Earnings 0 5,200 3,400 2,300 1,000 3,100 250 3,350 • General rule: • transactions are not recorded directly to R/E • everything goes through Income Summary • Exception • corrections of errors in previous years are recorded directly to R/E Accrued revenue was understated by $250 in 2002. Record correction.
Common stock divid distributable Note any restrictions in the footnotes. Stockholders’ Equity Total Total Stockholders’ Equity Paid-in Capital Total Capital Stock • included as part of common stock Additional Pd-in Capital Retained Earnings Less: Treasury stock
Analysis of S/E Net Income – Preferred Dividends Return on Common S/E = Average Common S/E = $2,300 - $1,000 ($7,800 + $9,100) / 2 = 15.4% Average of the beginning and ending Common S/E
Net Income – Preferred Dividends Earnings per share (EPS) = Average Common Shares Outstanding = $2,300 - $1,000 2,000 = $0.65
