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Reporting and Analyzing Stockholders’ Equity

Reporting and Analyzing Stockholders’ Equity. Financial Accounting, Fifth Edition. The Corporate Form of Organization. An entity separate and distinct from its owners. Classified by Ownership Publicly held Privately held. Classified by Purpose Not-for-Profit For Profit. Salvation Army

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Reporting and Analyzing Stockholders’ Equity

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  1. Reporting and Analyzing Stockholders’ Equity Financial Accounting, Fifth Edition

  2. The Corporate Form of Organization An entity separate and distinct from its owners. • Classified by Ownership • Publicly held • Privately held • Classified by Purpose • Not-for-Profit • For Profit • Salvation Army • American Cancer Society • Gates Foundation • Nike • General Motors • IBM • General Electric • Cargill Inc.

  3. The Corporate Form of Organization Characteristics of a Corporation • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Corporate Management • Government Regulations • Additional Taxes Advantages Disadvantages SO 1 Identify and discuss the major characteristics of a corporation.

  4. The Corporate Form of Organization Characteristics of a Corporation Corporation acts under its own name rather than in the name of its stockholders. • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management SO 1 Identify and discuss the major characteristics of a corporation.

  5. The Corporate Form of Organization Characteristics of a Corporation • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Limited to their investment. SO 1 Identify and discuss the major characteristics of a corporation.

  6. The Corporate Form of Organization Characteristics of a Corporation • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Shareholders may sell their stock. SO 1 Identify and discuss the major characteristics of a corporation.

  7. The Corporate Form of Organization Characteristics of a Corporation • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Corporation can obtain capital through the issuance of stock. SO 1 Identify and discuss the major characteristics of a corporation.

  8. The Corporate Form of Organization Characteristics of a Corporation • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. SO 1 Identify and discuss the major characteristics of a corporation.

  9. The Corporate Form of Organization Characteristics of a Corporation • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management SO 1 Identify and discuss the major characteristics of a corporation.

  10. The Corporate Form of Organization Characteristics of a Corporation • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management • Corporations pay income taxes as • a separate legal entity and • stockholders pay taxes on cash dividends. SO 1 Identify and discuss the major characteristics of a corporation.

  11. The Corporate Form of Organization Characteristics of a Corporation • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital • Continuous Life • Government Regulations • Additional Taxes • Corporate Management Separation of ownership and management prevents owners from having an active role in managing the company. SO 1 Identify and discuss the major characteristics of a corporation.

  12. The Corporate Form of Organization Stockholders Illustration 11-1Corporation organization chart Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources Treasurer Controller SO 1 Identify and discuss the major characteristics of a corporation.

  13. The Corporate Form of Organization Characteristics of a Corporation • Other Forms of Business Organization • Limited partnerships • Limited liability partnerships (LLPs) • Limited liability companies (LLCs) • S Corporation • no double taxation • cannot have more than 75 shareholders SO 1 Identify and discuss the major characteristics of a corporation.

  14. The Corporate Form of Organization Forming a Corporation Initial Steps: • File application with the Secretary of State. • State grants charter. • Corporation develops by-laws. Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Corporations engaged in interstate commerce must obtain a license from each state in which they do business. SO 1 Identify and discuss the major characteristics of a corporation.

  15. The Corporate Form of Organization Stockholders Rights Illustration 11-3 • Vote • Dividends (if declared) • Keep the same percentage ownership when new shares of stock are issued (preemptive right). • Residual interest, or claim, at liquidation SO 1 Identify and discuss the major characteristics of a corporation.

  16. Stock Issue Considerations Authorized Stock • Charter indicates the amount of stock that a corporation is authorized to sell. • Number of authorized shares is often reported in the stockholders’ equity section. SO 1 Identify and discuss the major characteristics of a corporation.

  17. Stock Issue Considerations Shares Prenumbered Illustration 11-4 Name of corporation Stockholder’s name Signature of corporate official SO 1 Identify and discuss the major characteristics of a corporation.

  18. Stock Issue Considerations Issuance of Stock • Corporation can issue common stock • directly to investors or • indirectly through an investment banking firm. • U.S. securities exchanges • New York Stock Exchange • American Stock Exchange • 13 regional exchanges • NASDAQ national market SO 1 Identify and discuss the major characteristics of a corporation.

  19. Stock issuance definitions • Authorized- (can sell) • Issued- (has sold) • Outstanding (has sold and has not bought back)

  20. Stock Issue Considerations Par and No-Par Value Stocks • Capital stock that has been assigned a value per share. • Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors. • Today many states do not require a par value. • No-par value stock is quite common today. • In many states the board of directors assigns a stated valueto no-par shares. SO 1 Identify and discuss the major characteristics of a corporation.

  21. 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). Stockholders’ Equity

  22. Components of Paid-in-Capital

  23. P&G’s Stockholders’ Equity

  24. 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. Types of Stock

  25. Stock Issue Considerations Common Stock Account Paid-in Capital Paid-in Capital in Excess of Par Account Preferred Stock Account Two Primary Sources of Equity Retained Earnings Account Paid-in capitalis the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. SO 2 Record the issuance of common stock.

  26. Stock Issue Considerations Common Stock Account Paid-in Capital Additional Paid-in Capital Account Preferred Stock Account Two Primary Sources of Equity Retained Earnings Account Retained earningsis net income that a corporation retains for future use. SO 2 Record the issuance of common stock.

  27. Stock Issue Considerations Accounting for Common Stock Issues • Primary objectives: • Identify the specific sources of paid-in capital. • Maintain the distinction between paid-in capital and retained earnings. Other than consideration received, the issuance of common stock affects only paid-in capital accounts. SO 2 Record the issuance of common stock.

  28. Stock Issue Considerations Accounting for Common Stock Issues Illustration:Assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par. Prepare the journal entry. Cash 1,000 Common stock (1,000 x $1) 1,000 SO 2 Record the issuance of common stock.

  29. Stock Issue Considerations Accounting for Common Stock Issues Illustration:Now assume Hydro-Slide, Inc. issues an additional 1,000 shares of the $1 par value common stock for cash at $5 per share. Prepare Hydro-Slide’s journal entry. Cash 5,000 Common stock (1,000 x $1) 1,000 Paid-in capital in excess of par value 4,000 SO 2 Record the issuance of common stock.

  30. Stock Issue Considerations Stockholders’ equity section assuming Hydro-Slide, Inc. has retained earnings of $27,000. Illustration 11-5 SO 2 Record the issuance of common stock.

  31. Sale of Stock Illustrated • To illustrate, assume that Hewitt issues 100,000 shares of its $0.01 par value common stock at a market price of $43 cash per share:

  32. Accounting for Treasury Stock Common Stock Account Paid-in Capital Paid-in Capital in Excess of Par Account Preferred Stock Account Two Primary Sources of Equity Retained Earnings Account Less: Treasury Stock Account SO 3 Explain the accounting for the purchase of treasury stock.

  33. Accounting for Treasury Stock Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. • Corporations purchase their outstanding stock: • To reissue the shares to officers and employees under bonus and stock compensation plans. • To increase trading of the company’s stock in the securities market. • To have additional shares available for use in acquiring other companies. • To increase earnings per share. • Another infrequent reason is to eliminate hostile shareholders. SO 3 Explain the accounting for the purchase of treasury stock.

  34. Accounting for Treasury Stock Purchase of Treasury Stock Generally accounted for by the cost method. Debit Treasury Stock for the price paid. Treasury stock is a contra stockholders’ equity account, not an asset. Purchase of treasury stock reduces stockholders’ equity. SO 3 Explain the accounting for the purchase of treasury stock.

  35. Accounting for Treasury Stock Illustration 11-6 Illustration:On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry. Treasury stock (4,000 x $8) 32,000 Cash 32,000 SO 3 Explain the accounting for the purchase of treasury stock.

  36. Accounting for Treasury Stock Stockholders’ Equity with Treasury stock Illustration 13-7 Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed. SO 3 Explain the accounting for the purchase of treasury stock.

  37. Sale of Stock Illustrated • To illustrate, assume that Hewitt issues 100,000 shares of its $0.01 par value common stock at a market price of $43 cash per share:

  38. Repurchase of Stock Illustrated • To illustrate, assume that 3,000 common shares of Hewitt previously issued for $43 are repurchased for $40:

  39. Repurchase of Stock Illustrated • Now assume that these 3,000 shares are subsequently resold for $42 cash per share.:

  40. Hewitt’s Stock Repurchase Program

  41. Hewitt’s Treasury Stock Section of 2008 Balance Sheet

  42. Cisco’s Stock Purchase Program

  43. Preferred Stock • Features often associated with preferred stock. • Preference as to dividends. • Preference as to assets in liquidation. • Nonvoting. • Each paid-in capital account title should identify the stock to which it relates: • Paid-in Capital in Excess of Par Value—Preferred Stock • Paid-in Capital in Excess of Par Value—Common Stock SO 4 Differentiate preferred stock from common stock.

  44. Preferred Stock Illustration:Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock. Cash 120,000 Preferred stock (10,000 x $10) 100,000 Paid-in capital in excess of par – Preferred stock 20,000 Preferred stock may have a par value or no-par value. SO 4 Differentiate preferred stock from common stock.

  45. Dividend Preferences Right to receive dividends before common stockholders. Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount. Cumulative dividend– holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends. Preferred Stock SO 4 Differentiate preferred stock from common stock.

  46. Liquidation Preference Preference on corporate assets if the corporation fails. Preference may be for the par value of the shares or for a specified liquidating value. Preferred Stock SO 4 Differentiate preferred stock from common stock.

  47. Fortune Brands’ Convertible Preferred Stock

  48. 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. Fortune Brands’ Convertible Preferred Stock

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