Reporting Stockholders Equity

ckChapter 11 coverage and Analyzing phone lineholders Equity I. Characteristics of a Corporation (Publicly held (closely held)) * Se hitate legal existence * particular(a) liability of line of work upholders limited to investment * Transferable ownership rights * Ability to father capital * Continuous life * Corporation management Sh atomic number 18holders Sh beholders * Voting rights * lucre sharing * Preemptive right * Residual claim dialog box of Directors Board of Directors CEO(PRESIDENT) CEO(PRESIDENT) . other vps . other vps CIO CIO CFO CFO COO COO treasurer Treasurer givelerController * Government regulations file application with state government- corportate charter by-law * additive taxes. Double taxation II. acquit bribe 1. Basics of Stock Issue (1) Authorized Stock The maximum inwardness of nisus that a good deal is authorized to sell by corporate charter. (2) corking Stock heavy(p) express that has been issued and is being held by stockholders. Legal capital= of issued pieces x par time comfort per share (3) Par treasure Stock Capital stock that has been assigned an arbitrary appraise per share in the corporate charter. 4) No-par rank Stock Capital stock that has not been assigned a value in the corporate charter. (5) Stated Value of No-par value Stock Value per share assigned by the board of directors to no-par value stock. Authorized Issued Outstanding (6) Paid-in Capital Amount paid to union by stockholders for shares of ownership. (7) Retained dough Earned capital held for future use in the business. 2. Accounting for normal Stock Issues (1) Issuing Stock at Par Example 1 On March 1, 2002, XYZ Company issued 10,000 shares of $10 par value honey oil stock at par. (2) Issuing Stock above ParExample 2 On June 10, XYZ Company issued 5,000 shares of $10 par value coarse stock at $12 per share. gold 60,000(=5,00012) super C Stock50,000 spare paid in capital14,000 (Paid in capital in excess of par) What if the ordin ary stock issued on June 10 is no par stock with a stated value of $10? Cash60,000 Common Stock50,000 Additional Paid in capital10,000 3. treasury Stock * A corporations own stock that has been issued, fully paid for, and re formulated by the corporation but not retired. * Issued but not outstanding (1) Corporations acquire exchequer stock to reissue shares to employees under bonus and stock payment plans * ontogeny trading of confederacys stock in securities food foodstuff to enhance foodstuff value * reduce number of shares outstanding , and so increase stipend per share (EPS) * prevent a hostile takeover. (2) buying Treasury Stock * Cost method Treasury stock is increase by the amount paid to reacquire the shares, and is decreased by the same amount when the shares are later sold. Example 3 On October 15, 2002, XYZ Company acquired 2,000 shares of the stock issued on June 10 in Example 2 at $9 per share.On the proportionateness sheet Stockholders equity Paid in capital Common stock (par) Additional paid in capital Retained earnings Less Treasury stock (a contra equity account) * Effect of purchasing exchequer stock on common stock * Effect of purchasing treasury stock on stockholders equity III. Preferred Stock * Preferred stock has contractual provisions that give it preferences over common stock in dividends and assets in the event of liquidation. * Preferred stockholders do not have suffrage rights. Example 4 On November 5, 2002, XYZ Company issued 5,000 shares of $10 par value preferable stock for $13 per share.Cash65,000 Preferred Stock50,000 Additional Paid in capital15,000 1. Dividend Preference * Preferred stockholders have the right to share in the diffusion of corporate income before common stockholders * The first claim to dividends does not endorsement dividends * Cumulative Dividends Preferred stockholders receive current and unpaid prior-year dividends before common stockholders receive any dividends. When dividends are cumulativ e, preferred dividends that were not stated in a given period are called dividends in arrears. Example 5XYZ Company issued 10,000 shares of 10%, $5 par value cumulative preferred stock On January 1, 1999. XYZ had not declared any dividends until December 31, 2002. 1999 10,000x 5 x 10% = 5,000 2000 5,000 2001 5,000 20025,000 Dec 31, 02 $20,000 in hard cash * Dividends in arrears are not liability. They should be disclosed in the notes to financial statements. 2. Liquidation Preference- Creditors Prefered stock holders common stock holders IV. Dividends * A distribution by the corporation to the stockholders on a pro rata basis. 1.Cash Dividends (1) To pay a cash dividend, a company must have * contain earnings * adequate cash * declared dividends (2) Some Important Dates * Declaration attend the date the board of directors formally authorizes the cash dividends and announces it to stockholders. Retained earnings Dividends payable * Record date The date ownership of outstanding sha res is determined for dividend purposes. * Payment date The date dividends are paid. Dividends payable Cash * Cumulative effect of declaration and payment of cash dividends on accounting equation 2. Stock Dividends Companies pay stock dividends to * pander stockholders dividend expectations without paying cash * Increase the marketability of its stock * Emphasize that a accord of stockholders equity has been permanently reinvested in the business. * Small Stock Dividend If the stock dividend is little than 20%-25% of the corporations issued stock, it is recorded at the fair market value per share. * Large Stock Dividend If the stock dividend is greater than 20%-25% of the corporations issued stock, it is recorded at par or stated value per share. Example 6On February 1, 2003, the balance of XYZ Companys retained earnings was $2,500,000. XYZ Company declared a 15% stock dividend on its 100,000 shares of $10 par value common stock. The current fair market value of XYZ Companys sto ck is $13 per share. Retained earnings195,000 Stock dividend Distributable150,000 Additional paid in capital45,000 On March 1, 2003, XYZ Company issued the dividend shares. Stock dividend distributable 150,000 Common Stock150,000 Effect of stock dividends on stockholders equity and its components S/E Retained earnings195,000 (Decrease)Common Stock150,000 (Increase) Additonal paid in capital45,000 (Increase) NET EFFECT No remove V. Stock Splits * 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. No entry * Effect of stock splits on stockholders equity and its components S/E Common Stock (Par value per share x total of issued shares) Add. Paid in capital Retained compensation VI. Retained Earnings * Net income that is retained in the business. Revenues (Credit, transfer to deferred payment of income)Income Summary(Transfer N. I to retained earnings credit) Retained Earnings Expense s (Transfer debit to debid of income summary) * shortfall a debit balance in retained earnings. Deficit is account as a deduction in stockholders equity on the balance sheet. * Retained earnings restrictions- Debt covenants VII. Financial Statement Presentation 1. Balance carpenters plane S/E Paid-in-capital Common stock (par value) Preferred stock (par value) Additional paid in capital Retained earnings Less Treasury Stock 2. Statement of Cash Flows Cash Flows from Financing ActivitiesIssuance of stock (cash inflows) repurchase of stock (cash outflows) Dividend payment (cash outflows) VIII. Ratio Analysis 1. Dividend Record * Payout Ratio Cash dividends declared on common stock/ Net income 2. Earnings movement * Return on common stockholders equity ratio (NI-Prefered stockholders dividends)/Average common stockholders equity 3. Debt versus Equity Decision Bond Common Stock Owners Control not affected Diluted Tax Benefit Bond interests are tax deductible Dividends are not deduct ible Financial Ratio(EPS) Not affected Lower Fixed payment Yes No