Reporting Stockholders Equity

ckChapter 11 Reporting and Analyzing investment firmholders Equity I. Characteristics of a pile (Publicly held (closely held)) * recognize legal existence * Limited liability of shootholders limited to investment * conveyable ownership advanceds * Ability to acquire capital * Continuous life * Corporation management Sh atomic number 18holders Shareholders * Voting rights * Profit sharing * Preemptive right * symmetricalness claim Board of Directors Board of Directors CEO(PRESIDENT) CEO(PRESIDENT) . other vps . other vps CIO CIO chief financial officer CFO COO COO Treasurer Treasurer ControllerController * Goernment regulations file finish with state government-> corportate charter by-law * excess taxes. Double taxation II. line of credit getting even 1. Basics of Stock Issue (1) Authorized Stock The maximum hail of downslope that a dope is authorized to sell by bodily charter. (2) Outstanding Stock Capital strain that has been issued and is being held by melodic li neholders. profound capital= of issued look ats x score take to be per share (3) Par protect Stock Capital inventory that has been assigned an arbitrary value per share in the corporate charter. 4) No-equation value Stock Capital armoury(a) that has non been assigned a value in the corporate charter. (5) Stated measure of No-par value Stock Value per share assigned by the control panel of directors to no-par value declension. Authorized Issued Outstanding (6) pay-in Capital Amount paid to corporation by stockholders for shares of ownership. (7) retain Earnings Earned capital held for future affair in the business. 2. Accounting for rough-cut Stock Issues (1) Issuing Stock at Par congresswoman 1 On March 1, 2002, XYZ participation issued 10,000 shares of $10 par value habitual stock at par. (2) Issuing Stock above ParExample 2 On June 10, XYZ Company issued 5,000 shares of $10 par value popular stock at $12 per share. coin 60,000(=5,000&21512) Common Stock50,000 Additional paid in capital14,000 (Paid in capital in excess of par) What if the common 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 reacquired by the corporation plainly non retired. * Issued but not outstanding (1) Corporations acquire treasury stock to reissue shares to employees infra bonus and stock compensation plans * increase trading of companys stock in securities market to enhance market value * depress number of shares outstanding , and therefore increase bread per share (EPS) * preserve a hostile takeover. (2) Purchasing Treasury Stock * Cost method Treasury stock is increased 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 match sheet Stockholders justness Paid in capital Common stock (par) Additional paid in capital retained earnings Less Treasury stock (a contra righteousness account) * Effect of purchasing treasury stock on common stock * Effect of purchasing treasury stock on stockholders equity III. favourite(a) Stock * favourite(a) 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 voting rights. Example 4 On November 5, 2002, XYZ Company issued 5,000 shares of $10 par value prefer 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 dispersal of corporate income before common stockholders * The graduation claim to dividends does not guarantee dividends * Cumulative Dividends Preferred stockholders receive accepted and unpaid prior-ye ar dividends before common stockholders receive any dividends. When dividends are cumulative, preferred dividends that were not declare 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 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 get a line the date the board of directors formally authorizes the cash dividends and announces it to stockholde rs. Retained earnings Dividends account payable * Record date The date ownership of outstanding shares is determined for dividend purposes. * recompense date The date dividends are paid. Dividends payable Cash * Cumulative take of declaration and stipend of cash dividends on accounting equation 2. Stock Dividends Companies pay stock dividends to * Satisfy stockholders dividend expectations without paying cash * Increase the marketability of its stock * Emphasize that a portion of stockholders equity has been permanently reinvested in the business. * miniscule Stock Dividend If the stock dividend is less than 20%-25% of the corporations issued stock, it is put down 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 divid end on its 100,000 shares of $10 par value common stock. The current fair market value of XYZ Companys stock 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) clear EFFECT No change 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 admission * 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 Earnings VI. Retained Earnings * Net income that is retained in the business. Revenues (Credit, transfer to cre dit of income)Income Summary(Transfer N. I to retained earnings credit) Retained Earnings Expenses (Transfer debit to debid of income summary) * Deficit a debit balance in retained earnings. Deficit is reported as a deduction in stockholders equity on the balance sheet. * Retained earnings restrictions- Debt covenants VII. Financial mastery Presentation 1. Balance Sheet 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 abridgment 1. Dividend Record * Payout Ratio Cash dividends declared on common stock/ Net income 2. Earnings Performance * Return on common stockholders equity ratio (NI-Prefered stockholders dividends)/Average common stockholders equity 3. Debt versus Equity Decision get Common Stock Owners Control Not affected Diluted assess Benefit Bond interests are tax deductible Dividends are not deductible Financial Ratio(EPS) Not affected Lower Fixed payment Yes No