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Stockholders' equity Paid-in capital Common stock,$5par value,

Mead, Inc. Balance Sheet (partial). Stockholders' equity Paid-in capital Common stock,$5par value, 100,000 shares issued and 96,000 outstanding $ 500,000 Retained Earnings 200,000

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Stockholders' equity Paid-in capital Common stock,$5par value,

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  1. Mead, Inc. Balance Sheet (partial) Stockholders' equity Paid-in capital Common stock,$5par value, 100,000 shares issued and 96,000 outstanding $ 500,000 Retained Earnings 200,000 Total stockholders’ equity 700,000 Less: Treasury Stock 32,000 Total stockholders’ equity $ 668,000 AFTER TREASURY STOCK TRANSACTION

  2. Review In the stockholders’ equity section, the cost of treasury stock is deducted from: • total paid-in capital and retained earnings • retained earnings • total stockholders’ equity • common stock in paid-in-capital

  3. Review In the stockholders’ equity section, the cost of treasury stock is deducted from: • total paid-in capital and retained earnings • retained earnings • total stockholders’ equity • common stock in paid-in-capital

  4. 11 Preferred Stock... 4 Capital stock that has contractual preferences over common stock in certain areas. • Dividends • Assets in the event of liquidation Preferred stockholders do not have voting rights.

  5. Preferred Stock • Assume Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Cash 120,000 Preferred Stock 100,000 Paid-in Capital in Excess 20,000 of Par Value--Preferred Stock (Preferred stock may have either a par value or no-par value.)

  6. Dividend Preferences • Preferred stockholders have the right to share in the distribution of corporate income before common stockholders. • The first claim to dividends does not guarantee dividends.

  7. Cumulative Dividend... Is a feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends.

  8. Dividends in Arrears... • Are preferred dividends that were scheduled to be declared but were not declared during a given period. • Are not a liability. No obligation exists until a dividend is declared by the board of directors. • Must be disclosed in the notes to the financial statements.

  9. Dividends in Arrears Scientific-Leasing has 5,000 shares of 7%, $100 par value cumulative preferred stock outstanding. The annual dividend is $35,000 (5,000 x $7 per share). Dividends are 2 years in arrears Dividends in arrears ($35,000 x 2 years) $ 70,000 Current-year dividends 35,000 Total preferred dividends $105,000

  10. Liquidation Preference Is a feature that gives preferred stockholders preference to corporate assets in the event of liquidation.

  11. 11 Dividend... 5 • Is a distribution by a corporation to its stockholders on a pro rata basis. • Pro rata means that if you own 10% of the common shares, you will receive 10% of the dividend. • Dividend forms: • cash • property • script (promissory note to pay cash) • stock

  12. Cash Dividend • Is a pro rata distribution of cash to stockholders. • A corporation must have 3 things to pay cash dividends: • Retained earnings • Adequate cash • Declared dividends

  13. Cash Dividend • In many states, payment of dividends from legal capital is prohibited. • Payment of dividends from paid-in capital in excess of par is legal in some states. • Payment of dividends from retained earnings is legal in all states. • Companies are frequently constrained by agreements with lenders to pay dividends only from retained earnings.

  14. Entries for Cash Dividends Three dates are important in connection with dividends: • the declaration date • the record date • the payment date

  15. TheDeclaration Date... On December 1, 2007, the directors of Media General declare a $.50 per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is $50,000 (100,000 x $.50). 12/1 Retained Earnings 50,000 Dividends Payable 50,000 • Is the date the board of directors declares the cash dividend. • Commits the corporation to a binding legal obligation that cannot be rescinded.

  16. The Record Date... The Payment Date... • The date dividend checks are mailed. • January 20 is the payment date for Media General. • Jan 20 Dividends Payable 50,000 • Cash 50,000 The date ownership of the outstanding shares is determined for dividend purposes. Dec 20 No Entry Necessary.

  17. A Stock Dividend... • Is a pro rata distribution of the corporation's own stock to stockholders. • Is paid in stock. • Results in a decrease in retained earnings and an increase in paid-in capital. • Does not decrease total stockholders' equity or total assets. • Is often issued by companies that do not have adequate cash to issue a cash dividend.

  18. Stock Dividends • You have a 2% ownership interest in Cetus Inc., owning 20 of its 1,000 shares of common stock. • In a 10% stock dividend, 100 shares (1,000 x 10%) of stock would be issued. You would receive two shares (2% x 100), but your ownership interest would remain at 2% (22 /1,100). • You now own more shares of stock, but your ownership interest has not changed.

  19. Reasons for Stock Dividends • To satisfy stockholders' dividend expectations without spending cash. • To increase marketability of its stock by increasing number of shares outstanding and decreasing market price per share. • To emphasize that a portion of stockholders' equity has been permanently reinvested in business and is unavailable for cash dividends.

  20. Stock Dividends • A small stock dividend (less than 20%-25% of the corporation's issued stock) is recorded at the fair market value per share. • A large stock dividend (greater than 20%-25% of the corporation's issued stock) is recorded at par or stated value per share.

  21. Stock Split Because a stock split does not affect the balances in stockholders' equity accounts, it is not necessary to journalize a stock split.

  22. Stock Split... • Is the issuance of additional shares of stock to stockholders accompanied by: • A reduction in the par or stated value. • An increase in number of shares. • A stock split does not have any effect on total paid-in capital, retained earnings, and total stockholders' equity.

  23. Review Vista, Inc. had 300,000 shares of common stock outstanding when a 30% stock dividend was declared and issued. How many shares were outstanding after the stock dividend? • 390,000 • 330,000 • 300,000 • 309,000

  24. Review Vista, Inc. had 300,000 shares of common stock outstanding when a 30% stock dividend was declared and issued. How many shares were outstanding after the stock dividend? • 390,000 • 330,000 • 300,000 • 309,000

  25. 11 Retained Earnings... 6 • Is net income that is retained in the business. • The balance in retained earnings is part of the stockholders' claim on the total assets of the corporation. • Retained earnings does not represent a claim on any specific asset.

  26. Deficit Is a debit balance in retained earnings and is reported as a deduction in the stockholders' equity section of the balance sheet.

  27. Retained Earnings Restrictions... Are legal, contractual or voluntary circumstances that make a portion of retained earnings currently unavailable for dividends.

  28. Stockholders’ Equity with Deficit

  29. 11 7

  30. 11 The Payout Ratio = 8 CASH DIVIDENDS DECLARED ON COMMON STOCK NET INCOME … measures the percentage of earnings distributed in the form of cash dividends to common stockholders.

  31. Return on Common Stockholders’ Equity Ratio = ...measures the profitability from the stockholders’ point of view. NET INCOME - PREFERRED STOCK DIVIDENDS AVERAGE COMMON STOCKHOLDERS’ EQUITY

  32. Advantages of Bond Financing Over Common Stock

  33. Relationship of Par and No-Par Value to Legal Capital

  34. Stock Dividends • Medland Corporation has $300,000 in retained earnings and declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. • The current fair market value of the stock is $15 per share. • Retained Earnings 75,000 • Common Stock Dividends 50,000 DistributablePaid-in Capital in Excess 25,000 of Par Value

  35. Review Roger is nearing retirement and would like to invest in a stock that will provide a good steady income supply. Roger should choose a stock with a: a) high current ratio. b) high dividend payout. c) high earnings per share. d) high price-earnings ratio.

  36. Review Roger is nearing retirement and would like to invest in a stock that will provide a good steady income supply. Roger should choose a stock with a: a) high current ratio. b) high dividend payout. c) high earnings per share. d) high price-earnings ratio.

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