Financial Statement Analysis

1. Financial Statement Analysis Corporate Equity & Accounting Qualitative Characteristics A. Elshahat

2. Corporate Equity • Corporate Equity section in Balance Sheet • Equity Concept • Par Value • Issuance of stock • Dividends • Treasury stock A. Elshahat

3. Corporate Equity Section of B/S *Uncorrelated No par, No APIC A. Elshahat

4. Equity Concepts • Par (stated) value: a designated amount per share established in the corporate charter. • Legal Capital: (par value X issued shares) is the part of capital that can’t be distributed as dividends. • Contributed Capital: amount invested by owners in exchange for stocks. • Treasury stock: the entity’s own stocks reacquired and held for future use. • Accumulated Other Comprehensive Income: income items excluded from net income A. Elshahat

5. Par Value • Par value is a nominal value of a security which is determined by an issuer company as a minimum price. • The par value of a stock was the share price upon initial offering; the issuing company promised not to issue further shares below par value, so investors could be confident that no one else was receiving a more favorable issue price. A. Elshahat

6. Par Value • This was far more important in unregulated equity markets than in the regulated markets that exist today. • Most common stocks issued today do not have par values; • No-par stocks have no par value printed on its certificates. A. Elshahat

7. Par Value Relevance • Preferred stock par value remains relevant, and tends to reflect issue price. Dividends on preferred stocks are calculated as a percentage of par value. • par value still matters for a callable common stock A. Elshahat

8. Issuance of stock • Upon issuance of stocks, cash is debited, and common (preferred) stock is credited for the par (stated) value. The difference is credited to additional paid-in-capital • Stock Subscription: the corporation recognize an obligation to issue stock and subscribers undertake the obligation to pay for the shares. A. Elshahat

9. Stock issuance * Could be any other form of assets or service. A. Elshahat

10. Preferred Stock • Preferred with respect to income & Assets. • P. dividends are fixed ($/Share or %par) • Cumulative: leading to Dividends in arrears, which has a priority. • Participative: participate in profits. • Convertible or callable. A. Elshahat

11. Dividends • Cash • Property • Scrip • Liquidating • Stock Dividends Vs. Splits A. Elshahat

12. Cash Dividends (D) • Cash dividends are paid out of the R.E. If the D>RE, then it is called liquidating D. (Remember: Beg. RE +NI-D=End RE) • Dates; • Declaration: a liability is created (D/P) & RE decreased. • Payment: cash is decreased. A. Elshahat

13. Liquidating Dividends • Liquidating Dividends are repayments of capital. Thus, they result in decrease in the contributed capital. • It is a distribution in excess of RE. • Distribution process; • Dr. RE • R. APIC • Dr. other contributed capital accounts (not the legal capital) A. Elshahat

14. Treasury Stock (TS) • Example: Rhone Corp. has the following balances in its equity section on Dec.31; • C Stock, $20 par, 300,000 shares outstanding …6,000,000 • APIC ($2/share)………………………………..600,000 • Retained Earnings………….…………….....2,000,000 • The following transactions occurred in the following year (assuming no prior treasury stock transactions) • Reacquired 50,000 shares for $2 M ($40/share) • Reissue 10,000 shares of TS for $30/share. • Retired the 40,000 shares remaining in TS. A. Elshahat

15. Solution: A. Elshahat

16. Accounting Qualitative Characteristics • Decision Making • Relevance • Reliability • Conservatism • Comparability • Materiality A. Elshahat

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