Welcome to Accounting 212! Chapter 14: An Introduction Your Instructor: Larry Stout Hours: See syllabus

1. Welcome to Accounting 212!Chapter 14: An IntroductionYour Instructor: Larry StoutHours: See syllabus

2. How to succeed in this course: Don’t Fall Behind. Do the homeworkON TIME. Attend Class! Participate! Don’t try to memorize – most of the time, it won’t work! Use all available resources. Bring lecture notes to class. Use all available resources. Don’t Fall Behind.

3. Why Study Accounting? • Manage your own business. • Understand financial information. • Get a job! Applications include: Management, marketing, finance, real estate and government. This course provides information which will be useful to you through your career and your life.

4. What you will learn in Chapter 14: Form and Structure of Corporations • How to account for common stock issues • How to account for treasury stock • How to account for preferred stock • How to present and analyze statements

5. Form and Structure of Corporations Legal entity separate and distinct from owners Profit vs. non-profit (GM vs. Salvation Army) Publicly held vs. privately held (Ford vs. Mars Co.)

6. Characteristics of Corporations • Separate Legal Existence • Limited Liability of Stockholders (owners) • Transfer of Ownership Rights • Can Acquire Capital By Issuing Stock • Continuous Life

7. Management Issues Controller – chief accounting officer • Maintains accounting records • Ensures adequate internal control • Prepares financial statements, tax returns and internal reports Treasurer – has custody of funds • Maintains cash position • May be responsible for investing funds

8. Government Regulations • State laws dictate rules for issuing and retiring stock as well as distribution of earnings • Federal law dictates rules for selling stock to the public • SEC requires extensive disclosures by companies to protect stockholders who normally are not involved in day-to-day management

9. Additional Taxes • Corporations pay income taxes (unlike proprietorships and proprietorships) • Shareholders also pay income tax on dividends (cash distributions) • Thus, the result has been described as double taxation.

10. Advantages Separate legal entity Limited liability Transfer ownership Acquire capital via stock Continuous life Professional management Disadvantages Separation of ownership and management Government regulation Double taxation effect Advantages and Disadvantages

11. Rights of Stockholders • Vote at stockholders’ meetings. • Sell stock. • Purchase additional shares of stock. • Receive dividends, if any. • Share equally in any assets remaining after creditors are paid in a liquidation.

12. Stock Certificates and Transfer Each unit of ownership is called a share of stock. A stock certificate serves as proof that a stockholder has purchasedshares. When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.

13. Rights of Stockholders • Vote at stockholders’ meetings • Sell stock. • Purchase additional shares of stock. • Receive dividends, if any • Share equally in any assets remaining after creditors are paid in a liquidation Importantly, they have the right to maintain ownership % after new stock is issues (preemptive right)

14. Issuance of Stock • Stock can be issued only up to amount authorized in charter • Stock can be issued by directly to investors, or through an underwriter • Price is determined by many variables, including earnings expectations, the economy and the stock market, and the company’s financial strength

15. Basics of Capital Stock Total amount of stock that a corporation’s charter authorizes it to sell. Authorizing capital stock is not an accounting event!

16. Market Value of Stock The valuation of publicly traded stock depends on economic conditions which are often beyond the company’s control, as well as the company’s financial position.

17. Two Types of Corporate Capital • Paid-in capital is cash and other assets paid by stockholders in exchange for stock (when there is only one type of stock, it’s called “common stock”) • Retained earnings is that part of net earnings (or accumulated income) that is not distributed (as dividends)

18. Illustration If Delta Robotics had net income of $130,000 in 2005, what would be the closing entry to transfer this amount to the equity accounts?

19. Answer: Close Retained Earnings to Income Summary: Income Summary $130,000 Retained Earnings $130,000 To close income summary and transfer net income to retained earnings.

20. Classes of Stock • Par Value • No-Par Value • Stated Value

21. Issuing Par Value Stock Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 per share. What do we need to record this transaction? • Record: • The cash received. • The number of shares issued × the par value per share in theCommon Stockaccount. • The remainder is assigned toContributed Capital in Excess of Par.

22. Issuing Par Value Stock Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 per share. Let’s record this transaction. Par Value Has No Relation to Actual Mkt. Value! What if there is no par value?

23. Answer: The transaction is the same, only no reference is made to par value: Cash $2,500,000 Common Stock $ 200,000 Paid capital in excess of par value $2,300,000

24. Issuing Par Value Stock

25. Issuing Stock for Noncash Assets Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for land valued at $2,500,000. Let’s record this transaction. How? • Record: • The asset received at its market value. • The number of shares issued × the par valueper share in theCommon Stockaccount. • The remainder is assigned toContributed Capital in Excess of Par.

26. Issuing Stock for Noncash Assets Par Value Stock On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for land valued at $2,500,000. Let’s record this transaction.

27. Treasury Stock Corporations acquire shares of their own stock. • Use the shares to acquirecontrol of another corporation. • To avoid a hostile takeover. • Use the shares foremployee stock options. • To maintain a strong market forits stock or show managementconfidence in the current price. Why would a company do that?

28. Treasury Stock

29. Purchasing Treasury Stock On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000. What is the accounting entry to record this transaction? Treasury stock is not an asset! It is shown as a reduction in total stockholders’ equity on the balance sheet.

30. Selling Treasury Stock at Cost On June 30, Whitt sold 100 shares of its treasury stock for $4 per share. How do we record the transaction? $8,000 ÷ 2,000 shares = $4 cost per treasury share

31. Selling Treasury Stock Above Cost On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share.

32. Selling Treasury Stock Below Cost On August 27, Whitt sold an additional 400 shares of its treasury stock for $1.50 per share. What is the accounting entry to record this event?

33. Preferred Stock A separate class of stock, typically having priority over common shares in . . . • Dividend distributions. • Distribution of assets in case of liquidation. Usually has a stated dividend rate. Normally has no voting rights.

34. Reasons for Issuing Preferred Stock • To raise capital without sacrificing control. • To boost the return earned by common stockholders through financial leverage. • To appeal to investors who may believe the common stock is too risky or that the expected return on common stock is too low.

35. Cumulative Vs. Noncumulative Cumulative or Noncumulative Dividend Dividends in arrears must be paid before dividends may be paid on common stock. Undeclared dividends from current and prior years do not have to be paid in future years. Dividends in arrears are not a liability, but should be disclosed in the notes to the financial statements. Most preferred stock is cumulative- see p. 577

36. Statement Presentation • Stockholders’ equity • Paid-in capital • Capital stock • Preferred • Common • Additional paid-in capital • In excess of par – preferred • In excess of stated value – common • Treasury Stock • Retained earnings • Total paid-in capital and retained earnings • Less treasury stock • Total stockholders’ equity

37. Book Value per Share Based on the recorded cost of selling the stock. Formula: Total stockholder’s equity Number of common shares outstanding

38. Example Comfort Air, Inc. has the following information: Retained earnings $1,000,000 Total Stockholders’ Equity 2,000,000 Common Stock Authorized 100,000 of which outstanding 50,000 What is the book value per share? $2,000,000/50,000= $40 per share Book value is based on recorded costs - market value is based on many variables in the marketplace – these values may not be equal!

39. Wow, this is a lot of stuff to remember!

40. Homework for Chapter 14 Register on Wiley Plus! Use the code provided with the new book or buy a code using the web address in the syllabus! Enter your information on the correct web site, then locate homework assignments!