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Accounting & Financial Reporting. BUSG 503 Michael Dimond. Stockholders’ Equity. Total stockholders’ equity is divided into two components:
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Accounting & Financial Reporting BUSG 503Michael Dimond
Stockholders’ Equity Total stockholders’ equity is divided into two components: • Contributed capital - proceeds received by the issuing company from original stock issuances, net of the amounts paid to repurchase shares of the issuer’s stock from its investors. • Earned capital - Retained earnings and accumulated other comprehensive income (AOCI). • In addition, many companies report an equity account called noncontrolling interest, which reflects the equity of minority shareholders.
Types of Stock • There are two classes of stock: • Preferred Stock • Common Stock • Preferred stock preferences: • Dividend preference – preferred shareholders receive dividends on their shares before common shareholders do. • Liquidation preference –preferred shareholders receive payment in full before common shareholders in liquidation.
Preferred Stock Privileges • Conversion privileges – a conversion privilege allows preferred stockholders to convert their shares into common shares at a predetermined conversion ratio. • Participation feature – allows preferred shareholders to share ratably with common stockholders in dividends.
Fortune Brands’ Convertible Preferred Stock • Holders of convertible preferred are entitled to $2.67 dividends per share. • Each share of convertible preferred stock is entitled to 3/10 of a vote per share. • Holders of convertible preferred have a preference in liquidation over common shareholders amounting to $30.50. • Each share of convertible preferred is convertible into 6.601 shares of common stock. • Fortune Brands has an option to redeem each share at a price of $30.50; upon redemption, the preferred shareholder will receive that cash amount and will surrender that share to the company.
Aon’s Common Stock • Par value of $1 per share. • Aon has authorized the issuance of 750 million shares. • To date, Aon’s management has issued (sold) 385.9 million shares of stock. • Aon has repurchased 53.6 million shares from its shareholders. • The number of outstanding shares is equal to the issued shares less treasury shares. There were 332.3 million (385.9 million – 53.6 million) shares outstanding at the end of 2010.
Sale of Stock • To illustrate, assume that AON issues 100,000 shares of its $1 par value common stock at a market price of $43 cash per share: • Cash increases by $4,300,000 (100,000 shares 3 $43 per share) • Common stock increases by the par value of shares sold (100,000 shares 3 $1 par value = $100,000) • Additional paid-in capital increases by the $4,200,000 difference between the issue proceeds and par value ($4,300,000 2 $100,000)
Repurchase of Stock • To illustrate, assume that 3,000 common shares of AON previously issued for $43 are repurchased for $40:
Repurchase of Stock cont’d • Now assume that these 3,000 shares are subsequently resold for $42 cash per share:
Accounting for Dividends: Cash Dividends • Aon declares and pays a cash dividend of $10 million:
Preferred and Common Dividends • Assume that a company has 15,000 shares of $50 par value, 8% preferred stock outstanding and 50,000 shares of $5 par value common stock outstanding. • During its first three years in business, the company declares $20,000 dividends in the first year, $260,000 of dividends in the second year, and $60,000 of dividends in the third year. • If the preferred stock is cumulative, the total amount of dividends paid to each class of stock in each of the three years follows:
Small Stock Dividends • Assume that a company has 1 million shares of $5 par common stock outstanding. It then declares a small stock dividend of 15% of the outstanding shares when the market price of the stock is $30 per share. This small stock dividend has the following financial statement effects:
Large Stock Dividends • To illustrate the effect of a large stock dividend, assume that the company now declares a large stock dividend of 70% of the outstanding shares when the market price of the stock is $30 per share ($5 par value). The large stock dividend will have the following effects on the balance sheet:
Noncontrolling Interest • Noncontrolling interest represents the equity of noncontrolling (minority) shareholders who only have a claim on the net assets of one or more of the subsidiaries in the consolidated entity. • If the company acquires less than 100% of the subsidiary, it must include 100% of the subsidiary’s assets, liabilities, revenues and expenses in its consolidated balance sheet and income statement, but now there are two groups of shareholders that have a claim on the net assets and earnings of the subsidiary company: • The parent company, and • The noncontrolling shareholders (those shareholders who continue to own shares of the subsidiary company).
