Accounting for Corporations

1. Chapter 13 Accounting for Corporations

2. Ownership can be Corporate Form of Organization C 1 An entity created by law Privately Held Existence is separate from owners Has rights and privileges Publicly Held

3. Advantages Separate legal entity Limited liability of shareholders Transferable ownership rights Continuous life Lack of mutual agency for shareholders Ease of capital accumulation Disadvantages Governmental regulation Corporate taxation Characteristics of Corporations C 1

4. Corporate Organization and Management C 1 Shareholders Board of Directors President, Vice-President, and Other Officers Employees of the Corporation

5. Vote at shareholders’ meetings Sell shares Purchase additional shares Receive dividends, if any Share equally in any assets remaining after creditors are paid in a liquidation Rights of Shareholders C 1

6. Total number of shares that has been sold or issued to shareholders. Basics of Share Capital C 1 Total number of shares that a corporation is authorized to sell or issue.

7. Basics of Share Capital C 1  Par valueis an arbitrary amount assigned to each share when it is authorized. Market priceis the amount that each share will sell for in the market. • Classes of Shares • Par Value • No-Par Value • Stated Value

8. Issuing Par Value Shares at Par P 1 On June 5, DillionSnowboards issued 30,000 shares of $10 par value for $300,000. Let’s record this transaction.

9. Issuing Par Value Shares at Par P 1 The shareholders’ equity section of Dillon Snowboards’ statement of financial position at year-end 2015 (its first year of operations) after profit of $65,000 and no dividend payments.

10. P 1 Issuing Par Value Shares at a Premium On June 5, DillionSnowboards issued 30,000 shares of $10 par value at $12 per share. Let’s record this transaction.

11. Issuing Par Value Shares at a Premium P 1 The shareholders’ equity section of Dillon Snowboards’ statement of financial position at year-end 2015 (its first year of operations) after profit of $65,000 and no dividend payments.

12. Issuing No-Par Value Shares P 1 On October 20, a corporation issued 1,000 shares of no-par value for $40 per share. Let’s record this transaction.

13. Issuing Stated Value Shares P 1 On October 20, a corporation issued 1,000 no-par value shares having a stated value of $40 per share for $50 per share. Let’s record this transaction.

14. Issuing Shares for Noncash Assets P 1 On June 10, a corporation issued 4,000 shares of $20 par value for land valued at $105,000. Let’s record this transaction.

15. Dividends Shareholders Cash Dividends P 2 Regular cash dividends provide a return to investors and almost always affect the share’s market value. Corporation To pay a cash dividend, the corporation must have: • A sufficient balance in retained earnings; and • The cash necessary to pay the dividend.

16. Three important dates Accounting for Cash Dividends P 2 Dividends Date of Declaration Date of Record Date of Payment Record liability for dividend. No entry required. Record payment of cash to shareholders.

17. Accounting for Cash Dividends P 2 On January 19, a $1 per share cash dividend is declaredon Dana, Inc.’s 10,000 ordinary shares outstanding. Thedividend will be paid on March 19 to shareholders ofrecord on February 19. Dividends Date of Declaration Record liability for dividend.

18. Accounting for Cash Dividends P 2 On January 19, a $1 per share cash dividend is declaredon Dana, Inc.’s 10,000 ordinary shares outstanding. Thedividend will be paid on March 19 to shareholders ofrecord on February 19. No entry required on February 19, the date of record. Date of Payment Record payment of cash to shareholders.

19. Bonus Issues or Share Dividends P 2 A distribution of a corporation’s own shares to its shareholders without receiving any cash payment in return. • Why a share dividend? • Can be used to keep the market price on the shares affordable. • Can provide evidence of management’s confidence that the company is doing well. Capitalization: Transferring a portion of equity from Retained Earnings to Share Capital.

20. Share Splits P 2 A distribution of additional shares to shareholders according to their percent ownership. $10 par value Old Shares Ordinary Shares 100 shares $5 par value New Shares Ordinary Shares 200 shares

21. A separate class of shares, typically having priority over ordinary shares in . . . Dividend distributions Distribution of assets in case of liquidation Preference Shares C 2 Usually has a stated dividend rate Normally has novoting rights

22. Cumulative vs. Noncumulative Preference Shares C2 Undeclared dividends from current and prior years do not have to be paid in future years. Dividends in arrears must be paid before dividends may be paid on ordinary shares. (Normal case) Consider the following Shareholders’ Equity section of the Statement of Financial Position. The Board of Directors did not declare or pay dividends in 2014. In 2015, the Board declared and paid cash dividends of $42,000.

23. Preference Shares C2

24. Participating vs. Nonparticipating Preference Shares C2 Dividends may exceed a stated amount once ordinary shareholders receive a dividend equal to the preference stated rate. Dividends are limited to a maximum amount each year. The maximum is usually the stated dividend rate.(Normal case) • Reasons for Issuing Preference Shares • To raise capital without sacrificing control • To boost the return earned by ordinary shareholders through financial leverage • To appeal to investors who may believe the ordinary shares are too risky or that the expected return on ordinary shares is too low

25. Treasury Shares P 3 Treasury shares are a company’s own shares that have been acquired. Corporations might acquire its own shares to: Use their shares to buy other companies. Avoid a hostile takeover. Reissue to employees as compensation. Support the market price.

26. Purchasing Treasury Shares P 3 On May 8, Whitt, Inc. purchased 2,000 of its ownshares in the open market for $4 per share. Treasury shares are shown as a reduction in total shareholders’ equity on the statement of financial position.

27. Selling Treasury Shares at Cost P 3 On June 30, Whitt sold 100 shares ofits treasury shares for $4 per share.

28. Selling Treasury SharesAbove Cost P 3 On July 19, Whitt, Inc. sold an additional 500treasury shares for $8 per share.

29. Selling Treasury Shares Below Cost P 3 On August 27, Whitt sold an additional 400 treasury shares for $1.50 per share.

30. Statement of Profit or Loss and Other Comprehensive Income C3

31. Statement of Profit or Loss and Other Comprehensive Income C3

32. Statement of Changes in Equity C3

33. Statement of Changes in Equity C3

34. Reserves C3 • Most reserves result from accounting standards to reflect certain measurement changes in equity rather than the income statement, e.g. asset revaluation reserve, foreign currency translation reserve and other statutory reserves. • Retained earnings are also called revenue reserves. Ending Retained Earnings = Beginning Retained Earnings + Net Profit – DividendsA company’s cumulative net profit less any net losses and dividends declared since its inception.

35. Earnings Per Share A 1 Earnings per share is one of the most widely cited accounting statistics. Basicearnings per share Net profit - Preference dividends Weighted-average ordinary shares outstanding =

36. PRICE–EARNINGS RATIO A 2 This ratio reveals information about the stock market’s expectations for a company’s future growth in earnings, dividends, and opportunities. Price– EarningsRatio Market value (price) per share Earnings per share =

37. Dividend Yield A 3 Tells us the annual amount of cash dividends distributed to ordinary shareholders relative tothe share’s market price. Annual cash dividends per share Market value per share Dividend Yield =

38. A 4 BOOK VALUE PER SHARE–ORDINARY Reflects the amount of shareholders’ equityapplicable to ordinary shares on a per share basis. Shareholders’ equity applicable to ordinary shares Number of ordinaryshares outstanding Book value perordinary share =

39. End of Chapter 13